Promoting inclusive business through responsible business

By  Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr).

This article was originally published in two parts on the OECD Insights website  on September 9th, 2015 and September 10th, 2015.

Inclusive business and inclusive growth have of late become powerful buzz words in the realm of international policy. Inclusive business is a private sector approach to providing goods, services, and livelihoods on a commercially viable basis to people at the base of the pyramid by making them part of the value chain of companies’ core business as suppliers, distributors, retailers, or customers.[1] Several years ago the G20 launched a challenge to find the best examples of inclusive business in developing countries which resulted in the identification of various innovative and effective business schemes. While some business models are purposefully ‘inclusive’, i.e. they specifically target poorer populations, the nature of global commerce today has also resulted in inclusivity without necessarily intending to do so. For example in Bangladesh the apparel sector has been credited in lowering the official poverty rate from 70% to less than 40%. Today the sector employs tens of millions of workers globally, predominantly women, which has contributed to empowering women from poor communities.

It is undeniable that the private sector has an important role to play in economic development and that the globalization of supply chains has provided important growth opportunities for developing countries. However in order to be beneficial to local populations, particularly those at the base of the pyramid, business must act responsibly. For example, workers employed by apparel factories in developing countries are notoriously paid below a living wage, forcing them to work excessive hours and limiting their agency in refusing to work in unsafe conditions. Indeed the link between wages and working conditions was put in stark relief in the wake of Rana Plaza. However payment of living wages contributes to raising populations out of poverty, can result in increased retention of staff and productivity and can lead to improved workplace health and safety by increasing worker agency.

The OECD Guidelines on Multinational Enterprises represent the most comprehensive set of recommendations by governments to companies on responsible business conduct. Under the OECD Guidelines business are expected to make a positive contribution to economic, environmental and social progress with a view to achieving sustainable development. They are also expected to avoid and address adverse impacts through their own activities and prevent or mitigate adverse impacts directly linked to their operations, products or services by a business relationship. In other words businesses are not only responsible for the impacts and conditions of their direct operations but throughout their supply chains. Under the framework of the Guidelines companies can outsource their production but not their responsibility. The OECD Guidelines are accompanied by a unique grievance mechanism – the National Contact Points – that contributes to their effectiveness and implementation. This system exists in 46 countries and recently received prominent support from G7 Heads of State.

Staying Engaged and Continuous Improvement

This two fold obligation of doing good in addition to doing no harm has important implications with regards to promoting inclusive growth. Most importantly, this expectation means that business are encouraged not to simply disengage at the first sign of potential environmental or social risks within their supply chain but are rather urged to engage in risk mitigation efforts and to take into account the potential social and economic adverse impacts related to a decision to disengage from a certain business relationship.[2] This is important because industries which feature the most severe risks are often also those which the poorest and most vulnerable segments of the population rely on for their livelihoods. One area where the benefits of continued engagement have clearly been demonstrated is in the context of responsible mineral sourcing.

Since 2011, the OECD has helped lead a global movement to prevent the production and trade of minerals used in everyday products from benefiting armed groups and perpetrators of serious human rights abuses. The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict Affected and High-Risk Areas was developed in response to the ongoing humanitarian crisis in the great lakes region of central Africa where illegal mineral exploitation has been linked to support of armed groups engaging in human rights abuses in the region. The Guidance however is more broad-based than that, applying to any minerals being sourced from any high-risk or conflict affected areas globally.

Related legislative efforts, most famously the US Dodd-Frank Act, Section 1502 have also been developed to address this problem but have faced criticism suggesting that such initiatives result in de facto trade embargos, further harming local populations that rely on the mining sector for their livelihoods. The OECD Guidance for Responsible Mineral Sourcing however rejects the suggestion of disengagement except in extreme circumstances and provides strategies to create economic and development opportunities in high-risk contexts.

For example, in the context of artisanal and small scale mining (ASM), initiatives to promote formalization and legalisation efforts of ASM activity are encouraged, in the DRC this has resulted in special legal zones for ASM activity. The implementation programme also encourages finding solutions for workable cohabitation of ASM and large scale mining activities. Such efforts have resulted in impressive results. In the three years since the implementation program for the OECD Guidance for Responsible Mineral Sourcing was launched, market access has been achieved for approximately 70,000 artisanal miners in the DRC and Rwanda, which in turn support approximately 350,000 dependants, with better prices, better conditions, and secure long-term opportunities.

The apparel sector also provides a good example of the strong relationship between inclusive business and responsible business. As noted, the apparel sector has served as an important economic driver for Bangladesh as well as other developing countries. However, in the wake tragedies such as Rana Plaza and the Tazreen factory fires many global brands were put under fire for not adequately managing risks at the manufacturer level of their supply chains. Many of the risks of the textile sector are systemic— they are imbedded in the nature of the industry and exacerbated by the development challenges and weak rule of law in the countries where production is often based. Thus these risks cannot be addressed overnight and an approach of continuous improvement in which buyers encourage improved standards within supplier factories over time is preferable to those which recommended cutting off business relationships or boycotts. Under an approach of continuous improvement sourcing from countries with weak regulatory frameworks, where often populations are most in need of employment opportunities, is not discouraged but rather strengthened.

Aside from promoting engagement with suppliers and communities that often include vulnerable populations the OECD Guidelines for Multinational Enterprises also encourage local capacity building through close co-operation with the local community and human capital formation, in particular by creating employment opportunities and facilitating training opportunities for employees.[3] While such recommendations do not specifically target base of the pyramid populations, they do promote economic advancement, particularly in the context of industries relying on unskilled labour.

Technology transfer is another important way of creating value and encouraging economic growth. The OECD Guidelines recommend that companies adopt, where practicable, practices that permit the transfer and rapid diffusion of technologies and know-how[4] and that when granting licenses for the use of intellectual property rights enterprises should do so on reasonable terms and conditions and in a manner that contributes to the long term sustainable development of the host country.[5] With regard to technologies that could provide substantial benefits to poor populations (for example medical or agricultural technologies) the expectations of responsible business conduct can have important implications for inclusive growth.

The OECD Guidelines likewise promote community engagement with relevant stakeholders in relation to planning and decision making for projects or other activities that may significantly impact local communities. In the context of large scale agricultural investments and the extractive sector, industries which notoriously posed risks to poor communities in developing countries, the OECD has developed guidance on how to best engage with stakeholders to avoid adverse impacts from operations and to ensure that such activity produces shared value at the level of local communities. [6]

The extractive sector is often pointed to as a sector with limited positive linkages as it is an enclave industry and generally generates minimal direct employment opportunities. However a focus on shared value can ensure that indirect benefits are maximized and that extractive operations are as inclusive as possible. For example an extractive operation could support local enterprises to become competitive, efficient suppliers to the extractive project resulting in a win-win local procurement strategy. Likewise investment in infrastructure that is dual purpose and benefits both the enterprise and local communities can be an important resource for economic growth beyond the lifetime of an extractive operation. Furthermore, as extractive operations usually involve long life-cycles and fixed locations fostering economic opportunities locally can be an important factor in reducing risks and lowering the costs of production.

In the agricultural sector, large agri-food enterprises can benefit from establishing long-term relationships with small-scale farmers thereby supporting their integration into global supply chains. Globally there are around 500 million smallholder farms and agriculture provides income to approximately 70% of the worlds rural poor populations. Stable relationships can improve transparency and traceability and help large enterprises secure access to a reliable supply of agricultural commodities. Such sourcing relationship can also work to enhance capacities of small-scale agricultural producers, share technology and resources, and promote responsible business practices at the base of the supply chain. This is quite important in the case of cocoa whose production is done by numerous smallholders that lack access to finance and technology and for which land productivity should be enhanced to respond to international demand.

No matter what the sector, the link between responsible business practices and inclusive growth is clear. Responsible business conduct encourages continued engagement to improve conditions in high-risk industries which often are the primary employers of populations at the bottom of the pyramid. It encourages capacity development and training which can build skills and encourage advancement of low-skilled workers, technology transfer, and meaningful stakeholder engagement with local communities which may otherwise be disenfranchised. Such approaches not only result in positive impacts for poor communities and workers but also often result in valuable commercial gains. In this regard as inclusive business or inclusive growth continues to be labeled as a policy priority by global leaders, the role of responsible business practices will merit special attention.

[1] See Concept Note of the Turkey hosted G20-B20 Workshop on “Inclusive Business” https://g20.org/turkey-hosted-g20-b20-workshop-on-inclusive-business/

[2] OECD Guidelines for Multinational Enterprises, Chapter II: Commentary, para. 22

[3] OECD Guidelines for Multinational Enterprises (2011), Chapter II, A.3-4

[4]OECD Guidelines for Multinational Enterprises (2011), Chapter IX. para. 2

[5] OECD Guidelines for Multinational Enterprises (2011), Chapter IX. para. 4

[6] See Due Diligence Guidance for Meaningful Stakeholder Engagement in the Extractives Sector, p. 48 (forthcoming, winter, 2016).

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