FCDO PSD Technical Competency Framework: Reading List PSD2

Donor agencies now agree that government budgets and capabilities are not sufficient to achieve the Sustainable Development Goals (SDGs). Donors therefore need to tap into the private sector to achieve the SDGs. In practice, partnering with the private sector, or Private Sector Engagement (PSE), has become a strategic priority across most donor agencies and sectoral departments: It is about an ‘agency-wide call to action, and a mandate to work hand-in-hand with the private sector’ to design and deliver development programs ‘across all sectors’ (USAID, 2019). As a result, donors  increasingly play a catalytic role in achieving results, rather than fully designing, funding, and managing short-term projects with the private sector.

Partnering, or engaging with the private sector, involves two broader sets of strategies (DCED, 2019):

1. Engaging with private investors, funds and financial institutions, to mobilise additional private finance, through different blended finance approaches, or to encourage its use towards SDG-relevant projects, through results-based finance.

• For an introduction to these ‘innovative finance’ strategies, and options for appropriate donor engagement, see DCED (2019) or the associated 2-page summary.
• For more detailed resources on different approaches to mobilising private finance and reviews of effective practice (e.g. regarding the design of blended finance vehicles) see the dedicated section on the DCED PSE knowledge page.
• DFID’s resource guide on financial instruments for PSD (DFID, 2014) explains instruments and appropriate risk management in detail.
• The FCDO-funded Impact Programme website also offers a range of relevant resources and case studies.

2. Engaging large companies (often from donor countries) to enhance the contribution of their core business to the SDGs. Most of these partnership approaches are based on grants or in-kind contributions by donors and may include participation in, or co-funding of, sectoral roundtables, or direct co-financing of innovative business models (e.g. through challenge funds).

• Resources on effective practice can be accessed in this dedicated section of the DCED’s PSE knowledge page.
• Evaluations of challenge funds can be found here. Typically, donor grants do not exceed 50% of the project costs to ensure private sector ownership. The DCED’s Additionality Guidelines explore how to demonstrate that the private sector partner would not have invested in a project without donor support.
• A key evolution in donor agencies’ approach to manage risks is an increased focus on effective relationship management with businesses. Success factors include building relationships before entering partnerships; joint design of partnership projects; clear management and governance structures in partnerships; results-based management’ and the flexibility to adjust approaches over the course of engagement  (e.g. USAID, 2019, DCED, 2017)

Responsible business practices, or Responsible Business Conduct (RBC), are defined by the OECD as a set of principles and standards (that) set out an expectation that businesses avoid and address negative impacts of their operations, including throughout their supply chains, while contributing to sustainable development where they operate. RBC means considering and integrating environmental and social issues within core business activities (OECD, 2017; OECD, 2019). 

The basis for both voluntary and mandatory RBC standards is a number of leading international guidelines and principles – some of which are linked to international or domestic legislative instruments or policy. Most importantly, these include:

• The UN Guiding Principles on Business and Human Rights;
• ILO work on RBC with respect to labour rights (e.g. the ILO Resolution concerning decent work in global supply chains and the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy);
• The OECD Guidelines on Multinational Enterprises; and
• The UN Global Compact principles

Key overview documents on promoting RBC include:

• Corporate Social Responsibility, Responsible Business Conduct, and Business & Human Rights. Overview of Progress, European Commission, 2019
• Study on due diligence requirements through the supply chain, 2020, EC.

In the past decade, national governments and the EU have made increased efforts to integrate core elements of international guidelines and principles (see the Introduction above) into legislative instruments targeting companies registered in their territories and their international supply chains.

Recent legislative due diligence and reporting initiatives (as mapped for example by PWC, 2018) fall into two broad categories:

• Sector or issue-specific legislative instruments, such as the ‘Conflict Minerals’ regulations in the US and the EU, the EU Timber Regulation, Modern Slavery Acts in Australia and the UK and the Dutch Child Labour Due Diligence Act.
• Horizontal legislative instruments covering the entire economy and multiple OECD risks, such as the French Duty of Vigilance Law, the proposed German Supply Chain Due Diligence Act and the proposed  supply chain due diligence legislation at EU-level.

Beyond their sectoral scope, examples of other variations between legislative initiatives include of the scope of companies affected; due diligence reach in supply chains; the scope of implementation mechanisms, including self-reporting obligations and necessity of third-party audits.

As explored in more detail in a forthcoming DCED scoping paper on RBC, the need for, and effectiveness of legislation is much debated. While voluntary RBC initiatives have been found to be insufficient to achieve change (e.g. German government data reported on business-humanrights.org), early evidence on whether legislation leads to better company performance against RBC criteria is still inconclusive (Savourey and Brabant, 2021). A lack of support to compliance to developing country suppliers also risks leading to their exclusion from European markets.

Legislation is therefore only one element of what is often described as a ‘smart mix’ of measures to promote RBC (see for example the RBC policy of the Netherlands Ministry of Foreign Affairs).  Governments can also support responsible business practices in other, complementary ways (OECD, 2018), including by

• facilitating and encouraging RBC, e.g. by providing information and guidance, and funding or participating in sectoral platforms encouraging the adoption of RBC standards
• partnering with companies, e.g. by cost-sharing new initiatives by companies to achieve higher standards of RBC in their supply chains
• endorsing or highlighting good examples of RBC.

In addition the private sector and industry bodies, as well as civil society play a key role in advancing RBC, as further outlined below.

Industry bodies can play an important role in representing private sector interests in discussions on RBC standards and in providing information, guidance and training to their member companies.

For example, legislative initiatives at EU and country-level have involved close consultations with industry bodies on the need for, and appropriate type of, legislation. Industry bodies have also actively raised awareness of international RBC standards among their constituents (e.g. BIAC, on the OECD guidelines).

Several industry bodies also provide guidance to their members on how to realise a positive impact on sustainable development (e.g. Luxemburg Union of Enterprises). Some private-sector organisations (e.g. Swedish Investors for Sustainable Development) bring together financial sector actors to enhance investor’s ability to assess aspects of RBC in their investment decisions.

Civil society plays an important role in promoting RBC by

• raising public awareness of business practices and advocating for RBC standards (e.g. business-humanrights.org)
• monitoring and benchmarking company performance (e.g. World Benchmarking Alliance)
• assisting companies in measuring and reporting their sustainability impact by developing standards (e.g. GRI) or certificates (e.g. Fair Trade)
• facilitating or participating in voluntary private sector platforms and multi-stakeholder initiatives to develop good practice principles (e.g. Better Cotton Initiative)

 The OECD defines corporate governance as ‘a set of relationships between the company’s management, it’s board, its shareholders and other stakeholders’ and ‘the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined’. (OECD, 2015).

Detailed guidance for corporate governance has been published by a variety of public and private sector bodies, for example:

The UK Corporate Governance Code, Financial Reporting Council, 2018

Principles of Corporate Governance, Business Roundtable, 2016

G20/OECD Principles of Corporate Governance, OECD, 2015

Governance for SME Sustainability and Growth, IFC, 2019

The responsibility of company boards to oversee corporate risk is widely recognised as a core principle of corporate governance.  The global financial crisis graphically exposed the failures of risk management in many leading financial institutions.  Many boards were found to be ignorant of the magnitude of risk many companies were exposed to. Prior to the crisis, risk management had frequently been regarded as a limited function and not been properly integrated into senior management planning and decision-making (OECD, 2009).  Recent events such as the diesel emission scandal and several large-scale cybersecurity breaches have highlighted that poor risk management is not limited to the financial sector.

Practical steps to improve corporate risk management include implementing board risk committees and chief risk officer functions as part of senior management.  Emerging areas of risk may also be integrated into existing structures, e.g. supply chain risks into sustainability committees.  Beyond these structural changes it is increasingly recognised that the organisational or corporate culture is a key factor in driving risk.  This cannot be understood or managed through traditional control and compliance mechanisms.  Instead, culture is affected by multiple factors such as the examples set by senior leaders, the company’s business model and principles for motivating employees and rewarding performance.  As companies increase in size, complexity and reach, gathering information for effective risk management is increasingly challenging and can to a significant extent be driven by external actors, e.g. regulators, NGOs and the media (Harvard Business Review, 2019).  For more detailed analysis and guidance on corporate risk management please refer to:

Risk management and corporate governance, OECD 2014

Global Risk Report, WEF, 2021

The global financial crisis triggered profound reflections on the role of companies in society.  Since then, new global challenges such as climate change, rising inequalities and political uncertainty are adding to the demands for businesses and their leaders to look beyond short-term financial gain.  The implications for corporate governance of a more challenging and uncertain global operating environment are increasingly reflected in industry guidance and regulation. For example, the UK, the 2018 Corporate Governance Code states that ‘the board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned.  All directors must act with integrity, lead by example and promote the desired culture’ (UK FCR, 2018).

The shift from shareholder to stakeholder governance appears to be accelerating in light of corporate vulnerabilities exposed by the COVID-19 pandemic and the growing climate emergency.  Environmental, social and governance (ESG) issues have moved to the top of the corporate agenda in several sectors.  A recent survey of 170 board members in more than 20 countries commissioned by the World Economic Forum highlighted increased commitment to ESG issues as well as to diversity, equity and inclusion (DEI). It also found that board members want to see greater alignment of executive pay with company ESG performance and a move away from short-term shareholder-return-maximisation to long-term sustainable value creation (WEF, 2021). For further insights into recent corporate governance trends please consult:

Thoughts for Boards of Directors 2020, Harvard Law School Forum on Corporate Governance, 2019

A guide to the big ideas and debates in corporate governance, Harvard Business Review, 2019

5 ESF concerns for corporate boards with a social conscience, WEF, 2021

Bringing public and private actors together in (semi-)formal entities to address sustainable development challenges has become increasingly popular, in particular through multi-stakeholder initiatives (MSIs).  Evaluations have highlighted a range of success factors for effective MSIs, including shared definitions of the problem(s) to be addressed and what success looks like; awareness of how partner expectations and dynamics may affect collaboration, trust-building, and relationship management; and the importance of sufficient secretariat support to ensure operational effectiveness.  For reviews of experiences with MSI mechanisms please review the dedicated DCED resources.  The DCED page on Private Sector Engagement has additional guidance and knowledge products for a variety of partnership models.

While the vast majority of companies operate in order the generate profits, the behaviours, values and priorities that make up the local business culture tend to vary significantly between countries and regions.  Engaging positively with how local businesses operate is essential to understand their incentives and priorities which in turn forms the basis for successful relationships. As a basis for this, understanding the political economy in which businesses operate is key.

• The Beginner’s Guide to Political Economy Analysis, UKAID, 2017
• Culture and Business, Saylor Academy, 2012
• Understand the local business culture, Department for International Trade, 2020
• How to build trust with business partners from other cultures, Harvard Business Review, 2020

Collaboration between private and public actors can be challenging.  Bridging cultural barriers as part of the process adds further complexity.  While mutual understanding and a shared vision are likely to be essential starting points, it may be advisable to seek additional guidance on principles and processes for building successful partnerships.

• The Partnership culture navigator, The Partnering Initiative, 2016
• Improving the management of complex business partnerships, McKinsey & Company, 2019
• Partnership toolkit, NESTA, 2019