The Global Construction Sector Needs a Big Push on Corporate Responsibility

The Global Construction Sector Needs a Big Push on Corporate Responsibility

This article was originally published by OECD Insights on 22 August, 2016

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

The construction industry employs approximately 7% of the global work force and it is predicted to account for approximately 13% of GDP by 2020. The sector is a major positive force for development. However, large scale construction projects, such as those involving development of infrastructure, can come with significant impacts on local communities such as displacement and environmental damage.  Furthermore, labour rights issues are particularly salient in this sector as it relies strongly on migrant labour and workers are predominantly unskilled and earn low-wages.

Recent high profile events, such as the preparations for the 2022 World Cup in Qatar, have showcased some of the most troubling labour issues related to large scale construction projects, including forced labour, dangerous working conditions, excessive overtime, and inhuman living conditions. Particularly, the kafala system, a system of sponsorship-based employment common in the construction sector in the Gulf, has been heavily documented and criticised. Under the system, migrant labourers are sponsored by employers to come and work in Gulf countries  and their legal residency is tied to their employer, giving employer’s power over working conditions and whether worker’s can change jobs, quit jobs, or leave the country. Additionally workers often arrive in the Gulf significantly indebted due to fees paid to recruitment agencies which employ various middle men.

Certain characteristics of the construction sector make it more vulnerable to abuses. The industry is very competitive and characterised by low profit margins (about 2%); it relies heavily on sub-contracting which can go nine layers deep in certain contexts; and is subject to tight fixed deadlines, such as those related to preparation of global sporting events. It is also often under-regulated by local governments and is recognised as a high-risk sector for corruption.

The construction sector is clearly an area where there is urgent need for global initiatives to promote responsible business conduct and industry actors are feeling increasing pressure in this regard. Widely documented cases of labour abuses related to global sporting events have attracted significant public scrutiny.   For example, Human Rights Watch has carried out detailed investigations of human rights issues in the construction sector in the Gulf region. In December of last year they released a report entitled Guidelines for a Better Construction Sector in GCC, which both describes the human rights impacts associated with this sector and provides recommendations on how companies can avoid and address these risks.   Beyond reputational harms there are increasing legal consequences for construction enterprises that do not behave responsibly.  Recently for example, Sherpa, a French human rights organisation, filed a complaint against Vinci, a large French infrastructure company, in regard to their operations in Qatar and associated labour abuses.[1]

Governments are making efforts to regulate these issues through stronger reporting laws. Under the recent EU Directive on non-financial disclosure, companies incorporated in the EU or listed on EU stock exchanges must report on principle risks and due diligence processes with regard to environment, labour, human rights and corruption.  Under the UK Modern Slavery Act enacted in 2015, companies registered or operating in the UK will have to report annually on their due diligence processes to manage risks of slavery and human trafficking within their operations and supply chains.  The implementation guidance to the UK Modern Slavery Act references the OECD Guidelines for Multinational Enterprises noting that “whilst not specifically focused on modern slavery, they provide principles and standards for responsible business conduct in areas such as employment and industrial relations and human rights which may help organisations when seeking to respond to or prevent modern slavery.”

The OECD Guidelines are the multilateral agreement of 46 governments defining corporate responsibility. They form the most comprehensive set of guidelines for responsible business conduct (RBC) covering all areas of corporate responsibility, ranging from labor and human rights to environment and corruption.  The Guidelines are equipped with a unique globally active grievance mechanism, known as the National Contact Points, where parties can submit complaints regarding non-observance of the Guidelines by companies.

Under the NCP mechanism there have been 12 cases reported involving the construction sector, representing approximately 3% of all cases brought to NCPs. These cases most frequently involved impacts of large scale construction projects on local communities. For example, two cases brought to the Norwegian and Austrian NCPs, respectively, dealt with human rights impacts associated with construction of a large dam in Malaysia and Laos.  Labour issues are also a common theme. A case brought to the German NCP involving labour rights issues at Heidelberg Cement Co in Indonesia ended in a mediated agreement.  Recently a case was brought to the Swiss NCP by Building and Wood Workers’ International (BWI) regarding alleged human rights violations of migrant workers by the Fédération Internationale de Football Association (FIFA) in Qatar. According to the complaint the human rights violations of migrant workers in Qatar were widely documented in 2010 when FIFA appointed Qatar as the host state for the 2022 World Cup and FIFA failed to conduct adequate and ongoing human rights due diligence after the appointment. The case was accepted for further examination and is currently under mediation at the Swiss NCP.

Several months back the UK NCP and the Institute for Human Rights and Business (IHRB) organised a workshop on responsible business conduct in the construction sector.  My take away from the event was that it is high time for the sector to come together to address ongoing issues in this sector.  Many high-impact, high-risk sectors have engaged internationally to launch initiatives to promote responsible business conduct, including development of standards or sectoral codes of conduct. While there are some promising initiatives seeking to improve conditions in the construction sector, there is currently no global corporate responsibility effort underway.  However, given the serious risks associated with this sector as well as the amount of unskilled workers it employs globally, improving standards and performance in this sector will be crucial to advancing the Sustainable Development Goals (SDGs).

A large portion of global construction projects are publically financed. As such, government agencies and public finance institutions such as the World Bank have a significant opportunity to promote better conduct in this sector. Many governments already promote the recommendations of the Guidelines through export credit agencies, which are a significant source of global financing and insurance, specifically with regard to financing of large scale infrastructure projects in developing countries. The 2016 OECD Common Approaches for Export Credit Agencies signed on to by all OECD member countries explicitly recognise the recommendations of the Guidelines, and provide that “[m]embers should… [p]romote awareness of the [the Guidelines] among appropriate parties.” Governments could also build in criteria associated with RBC into bid evaluations for construction projects and public procurement criteria generally. Public finance institutions can build in conditionality measures associated with strong due diligence systems and standards into their financing terms.

The construction sector is a critical industry: it is crucial to sustainable development and a significant source of employment globally. However, serious impacts associated with the sector can no longer go unnoticed and mounting pressure on the industry makes this an opportune time to take significant steps internationally to address ongoing problems in the sector. However, companies cannot solve these problems on their own. Governments and public finance institutions also have a critical role to play.  Governments should push construction companies to launch or participate in global corporate responsibility efforts. They should also put their money where their mouth is and condition contracts and financing for construction projects on a demonstrated commitment to international RBC standards.

Useful links

OECD Guidelines for Multinational Enterprises

OECD CleanGovBiz initiative

[1] Vinci has responded denying the allegations and filing a defamation suit against Sherpa.

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2016: CSR is dead! What’s next?

By Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct

A couple of months ago I met an expert in the field of corporate responsibility who asked me the following question: ‘So, are you the guy who killed CSR?’ Normally being labelled a killer can get you behind bars, but in this case it was meant as a compliment. However, I didn’t do it! So why was I a suspect? The reason is likely that I chair the OECD Working Party on Responsible Business Conduct, a group of 46 governments that deal with business ethics issues by promoting and implementing the OECD Guidelines for Multinational Enterprises (OECD MNE Guidelines).

The OECD MNE Guidelines are the world’s most comprehensive multilateral agreement on business ethics and are the only international corporate responsibility instrument with a built-in grievance mechanism.[1] Under the OECD Guidelines – this year 40 years old – the term ‘’CSR’’ is not used, rather they discuss ‘’responsible business conduct “(RBC). Responsible business conduct means that businesses should make a positive contribution to economic, environmental and social progress with a view to achieving sustainable development and that businesses have a responsibility to avoid and address the adverse impacts of their operations. While the concept of CSR is often associated with philanthropic corporate conduct external to business operations, RBC goes beyond this to emphasize integration of responsible practices within internal operations and throughout business relationships and supply chains.

By actively promoting this broader concept, I was caught with a knife in my hands and a motive. However, I am only one singer in the choir of business leaders, journalists and academics that have declared CSR dead.[2]

That being said, nowadays CSR is a global industry. Most companies employ CSR managers, vice presidents, and experts; armies of CSR consultants are on offer and hundreds of CSR awards are distributed every year. In addition, countries are increasingly implementing CSR laws, action plans and even CSR ‘taxes’[3]. Given the widespread recognition of CSR, is it really necessary to bury it six feet under?

The Line of Defence

Let’s be clear: I didn’t kill CSR, nor did the OECD. Ultimately, CSR killed itself! Several characteristics attributed to CSR contributed to its ultimate demise.

CSR as social philanthropy vs. sustainable development

Firstly, CSR is often associated with philanthropy and volunteer work in the social sphere, rather than long-term sustainable development. This is especially true in some regions in the world where CSR activities are limited to companies building schools, or sponsoring local activities. Indeed, company CSR reports are often largely of descriptions of feel-good projects and activities that ‘give back’ to society.

CSR as an optional activity

Secondly, CSR is often understood to be an optional add-on external to core business operations.[4]  For example the scope of a CSR managers’ responsibility is often limited to voluntary initiatives while responsibility for non-voluntary obligations falls to procurement officers, human resources or legal counsel. Therefore corruption issues are often not considered a CSR issue and are not dealt with by CSR managers. Corporate tax responsibility, an integral part of the OECD MNE Guidelines, likewise is most often not on the radar screen of a CSR manager.

This division is problematic for several reasons. For one, the ‘voluntary’ association of CSR severely limits the role of CSR managers within their companies as they often only deal with issues that are viewed as peripheral.  In contrast, responsible business conduct, as promoted by the OECD, provides a more integral perspective; it is a core business function, and as such must be integrated within corporate governance, procurement, finance, and so on.

Additionally, core elements of responsible business conduct as outlined in leading international policy such as the UN Global Compact or the OECD MNE Guidelines are not at all voluntary in most jurisdictions. Bribery is a crime in all OECD states, non-financial disclosure will be mandatory in the EU for large companies, and many issues of competition and consumer interests also covered by the OECD Guidelines are legally binding in most countries.

Lastly the ‘voluntary’ association with CSR also suggests there are no consequences attached to non-compliance. That is also a misconception. Research clearly demonstrates that there is a strong business case for companies to behave responsibly. Responsible business practices can result in positive outcomes such as improved reputation and productivity. On the other hand, irresponsible business practices can lead to significant financial liabilities as well as impact access to finance. Investors who take environmental and social issues into account in their investment decisions today represent a portfolio of at least $59 trillion in assets under management[5].

CSR associated with ‘classic’ social audits

Thirdly, CSR is strongly associated with the ‘old school’ social audit system[6]. While audits are necessary, they are an insufficient means to fulfilling responsible business conduct.  The voluntary, peripheral connotations of CSR has been reflected in the audit system in the sense that often there is little follow-up done to shortcomings identified in social audits unless they have bearing on other, generally economic, aspects of business operations. Systematic research by Prof. Richard Locke, has shown that the audit system is failing to deliver desired results in terms of addressing social and environmental impacts. [7] The best real life example of a failure of the audit system has been the Rana Plaza collapse. Some of the brands sourcing from Rana Plaza had performed audits of the factory prior to its collapse and continued to source from it, despite the clear existence of serious workplace safety issues. Responsible business conduct nowadays goes beyond auditing and stresses the importance of a continuous process of due diligence, which in addition to identifying risks also requires prevention and mitigation as well as addressing negative impacts where they do occur.

CSR as a greenwashing exercise

Finally, CSR has often been used primarily as a PR tool which has contributed to the perception that it is merely a greenwashing exercise. In the words of Michael Townsend[8]: “Corporate Social Responsibility is, at best, only a partial solution — one which can be misused to create an illusion of responsibility.” Indeed, experience has shown that misuse of the concept to create an illusion of responsibility is a common occurrence: Volkswagen, prior to its emissions rigging scandal, used to claim the number one spot on the Dow Jones Sustainability index. Enron has received CSR awards in the past and scores of companies display CSR-logo’s on their website while in practice ignoring major corporate responsibilities. Fortunately, as increasing scandals have exposed the hollowness of some CSR programs more and more companies have begun to move their CSR functions out of their PR or communications departments.

So, what’s next?

“CSR is dead. It’s over!” So declared Peter Bakker, president of the World Business Council for Sustainable Development[9]. Bakker’s key argument was that leading companies are already going way beyond traditional CSR by integrating sustainability into all aspects of their business operations in recognition that business cannot succeed if society fails. He urges us to innovate — to align with facts, to redesign what we mean by good performance and to get inspired by new definitions of success. Indeed what Bakker is suggesting is exactly in line with the responsible business conduct agenda of the OECD: integrating sustainability as a core aspect of business operations[10].

in practice there is no contradiction between corporate sustainability and responsible business; indeed company sustainability is essentially derived from responsible business conduct. Thus, while CSR as a term may be dead, the concepts of corporate responsibility and corporate sustainability are still very well alive and may well live forever!

 

[1] National Contact Points for the OECD MNE Guidelines have a mandate to engage in promotional activities, handle inquiries, and provide a mediation and conciliation platform for resolving issues that arise from the alleged non-observance of the Guidelines. Responsible Business Conduct Matters, OECD.

[2] You can find declarations of the death of CSR in many forms: ‘CSR is dead: long live social enterprise’, ‘CSR is dead, long live social value’, ‘CSR is dead, long live shared value’.

[3] India, Companies Act 2013

[4] As John Morrisson states in ‘The Social Licence’: “The unfortunate reality is that CSR has become a conceptual sideshow and a conceptual ceiling at the same time”.

[5] Recently, Morningstar, a market research company, announced it will soon launch a service comparing environmental and social performance of a large proportion of the 200,000 funds it tracks. This initiative is likely to further raise the profile of these issues amongst investors.

[6] A related misconception is that CSR suggests that ‘social’ is only about labour related issues, and not about the environment, human rights, bribery and other areas of responsible business. Jo Confino, former editor for the Guardian proclaimed CSR dead largely for this reason.

[7] The Promise and Limits of Private Power Promoting Labor Standards in a Global Economy Prof Richard Locke, 2013

[8] CEO of Earthshine

[9] Sustainability Science Congress

[10] This view is also increasingly being reflected by policymakers. For example, the 2011 the EU updated its definition of CSR to be understood as: “The responsibility of enterprises for their impacts on society. To fully meet their social responsibility, enterprises should have in place a process to integrate social, environmental, ethical human rights and consumer concerns into their business operations and core strategies in close collaboration with their stakeholders.” This is a strong definition, despite the fact that the term CSR itself has already been spoiled.

 

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).

Can Companies Really Do Well By Doing Good? The Business Case for Corporate Responsibility

By Prof. Dr. Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr). This article was original published on OECD Insights, November 2, 2015.

A recent study involving a survey of over 1000 CEOs found that 93% of them believe that sustainability will be important for the future success of their business. These views may be based on strong evidence from studies that have contributed to strengthening the link between company performance and “doing the right thing”. However it should not be forgotten that a moral, and in some cases legal expectation towards business to do the right thing exists independently of financial incentives.

Cost and risk reduction

These days the consequences of irresponsible business behaviour can be significant. For example BP’s bill for settlements of state and federal claims for environmental damages and damages to impacted communities for the Deep Water Horizon spill reached nearly USD 54 billion this June. The Volkswagen scandal involving emissions rigging of vehicles contributed to their stock plummeting a third of its value in less than a week and estimated costs associated with recalls as well as penalties that will have to be paid are being reported at USD 35 billion.

A recent study by Vigeo showed that corporate social responsibility (CSR) related sanctions for companies are also quite common. Nearly 20% of companies in a sample of over 2,500 were found to be subject to such sanctions between 2012 and 2013, amounting to penalties upwards of EUR 95.5 billion

Beyond actual legal liabilities poor business conduct can also result in delays and opportunity costs for companies. For example where companies do not adequately communicate and engage with stakeholders it frequently leads to delays in operations, misapplication of staff time, and lost opportunities in instances where companies want to expand operations, renew contracts or otherwise. A study by Harvard found that the costs attributed to delays arising from community conflict can cost a mining project with capital expenditure between USD 3 million and USD 5 billion on average, or USD 20 million per week in NPV (Net Present Value) due to delayed production.

Additionally, reputational costs stemming from poor business conduct increasingly can hurt the bottom line and scare off investors. Today divestment campaigns from companies with poor environmental and social records are a common tool to encourage better behaviour.

Competitive advantage, reputation and legitimacy.

Responsible business practices, in addition to avoiding costs, can help to build a positive corporate culture and image. This in turn can influence the retention of employees, help increase productivity as well as boost brand appeal and thus increase market strength.

In a study of the ‘’100 Best Companies to Work for in America’’, Prof. Edmans of the London School of Business found that those companies generated 2.3-3.8% higher stock returns per year than their peers over a period of 27 years.

More broadly, a cross-sector Harvard Business School study by Prof. Serafeim and others tracked performance of companies over 18 years, found that “high sustainability” companies, those with strong environmental, social and governance (ESG) systems and practices in place, outperformed “low sustainability” companies as measured by stock performance and in real accounting terms. (High sustainability include companies which include a substantial number of environmental and social policies that have been adopted since the early to mid-1990s; Low-Sustainability Companies include comparable firms that have adopted almost none of these policies.)

ESG

Firms with better sustainability performance were also shown to face significantly lower capital constraints. A study by Babson College and IO Sustainability found that CSR practices have the potential to reduce the cost of debt for companies by 40% or more and increase revenue by up to 20%. Likewise a recent meta study by the University of Oxford found that 90% of the studies on cost of capital show that sound sustainability standards lower the cost of capital of companies. Furthermore the study found that 88% of research showed that solid responsible business practices result in better operational performance. And 80% of the studies show that stock price performance is positively influenced by good sustainability practices.

Shared value creation

In a Harvard Business School article Professors Porter and Kramer coined the term ‘’shared value creation,’’ defining it as generation of economic value in a way that also produces value for society by addressing its challenges. A shared value approach reconnects company success with social progress. Firms can create shared value in three ways: (1) by reconceiving products and markets; (2) redefining productivity in the value chain; and (3) building supportive industry clusters at the company’s locations.

Porter & Kramer describe the societal and business benefits of providing products to meet societal needs and serve disadvantaged communities and developing countries. For example, a service developed by Thomson Reuters providing weather and crop pricing information for farmers earning under $2,000 reached subscription by an estimated 2 million farmers and contributed to increasing income in more than 60% of them. In another example Nespresso created shared value by investing in their suppliers, resulting in higher incomes and fewer environmental impacts among coffee growers, while increasing Nespresso’s supply of reliable quality coffee beans.

Delayed recognition of the business case for RBC

While a significant and growing body of empirical evidence is pointing to the fact that responsible business makes good business sense this understanding has yet to be internalized in the mainstream. In the first place information challenges continue to exist because certain benefits of RBC such as strong corporate culture or good will are difficult to isolate and quantify. However there is reason to believe that these data gaps will be overcome as increased information regarding RBC is collected.

Another reason is that intangible assets, whether they be related to RBC or other intangibles in general, are not usually immediately reflected by financial markets as their value is only realized in the long term. In order to make sure these values are recognized in financial markets, and thus adequately prioritized at the level of companies themselves, organizational changes will have to be made.

There is growing evidence that responsible business conduct pays off for business which affirmatively answers the question that companies can indeed do well by doing good. However in order to ensure that responsibility is embedded within corporate DNA, a move towards organizational and incentive structures prioritizing long term growth over short term gains will have to be made.

EU & Singapore promote Responsible Business Conduct and the OECD Guidelines in Free Trade Agreement

Reference to responsible business conduct is becoming increasingly common within investment treaty law, including within bilateral trade agreements.[1]

This trend is reflected within the latest EU-Singapore Free Trade Agreement which makes explicit reference to social responsibility practices and the OECD Guidelines for Multinational Enterprises:

”When promoting trade and investment, the Parties should make special efforts to
promote corporate social responsibility practices which are adopted on a voluntary
basis. In this regard, each Party shall refer to relevant internationally accepted
principles, standards or guidelines that it has agreed or acceded to, such as the
Organization for Economic Cooperation and Development Guidelines for
Multinational Enterprises
, the UN Global Compact, and the ILO Tripartite Declaration
of Principles concerning Multinational Enterprises and Social Policy. The Parties
commit to exchanging information and cooperating on promoting corporate social
responsibility.”

Full text of the agreement can be found here.

[1]  For more information see Investment treaty law: sustainable development and responsible business conduct: A fact finding survey OECD, 2014; Information on OECD work on international investment law generally is available here.

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Looking Back to Rana Plaza to Find a Way Forward

By Roel Nieuwenkamp, Chair of the OECD Working Party for Responsible Business Conduct

April 24th of this year marked the one year anniversary of the tragic collapse of the Rana Plaza factory which claimed over 1,130 lives and inspired shock and sorrow globally.  The Rana Plaza disaster was a jarring reminder of the fact that responsibility over global supply chains needs to be strengthened.

Global Mobilization

Stakeholders worldwide from industry to labour organizations to civil society mobilized to respond to this need. The breadth of initiatives launched to tackle these issues in the past year is impressive.  Private industry collaborated to form the Bangladesh Accord on Fire and Building Safety, an association of 150 apparel corporations, as well as the Alliance for Bangladesh Worker Safety, which represents 26 retailors. Both initiatives are committed to inspecting and repairing garment factories to assure safe working conditions in Bangladesh.  On a multilateral level the International Labour Organization launched the Improving Working Conditions in the Ready-Made Garment Sector (RMGP) initiative, and the Better Work Program which likewise involves factory inspections as well as implements a standard approach to assessing supplier compliance and auditing. These initiatives are coordinated on a national level by the National Tripartite Plan of Action on Fire Safety and Structural integrity which aims to extend inspections and repair to the factories not already covered by the Alliance and Accord initiatives.

Importing countries have likewise been active in this regard through their National Contact Points (national entities tasked with promoting and mediating claims under the OECD Guidelines for Multinational Enterprises). [1]  The French National Contact Point published a report earlier this year analysing the application of the Guidelines to the textile and garment sector and has since been active in promoting the recommendations of the report amongst local industry.  The Belgian, Italian, Dutch and Canadian NCPs have likewise been active in analysing challenges in their textile and garment sector supply chains and promoting due diligence to tackle some of these issues.

The impacts of these initiatives are slowly starting to be seen.  For example, the Accord initiative has already completed inspection of 550 factories and hopes to complete all 1,500 factories it sources from by September.  In addition to factory inspections the families of victims of the Rana Plaza incident are slowly being compensated. A total of nearly 15 million USD has raised for compensation through donations to the Rana Plaza Arrangement, and another 1.3 million USD has been raised through The Prime Minister’s Relief and Welfare Fund.

Remaining Challenges

Despite this progress much more needs to be done. Firstly a lack of capacity and resources for monitoring and enforcement means that the proposed initiatives may not be adequately implemented.  Since industry related initiatives only apply to first tier factories (factories brands source from directly) there remain risks that smaller factories used for subcontracting, generally those with the poorest standards, may escape adequate inspection and regulation.  Secondly current compensation schemes have been criticized as being insufficient and inefficient. Currently only half of all brands with ties to Rana Plaza have contributed to compensation funds.

Thirdly, such initiatives need to extend beyond Bangladesh to other garment producing nations with similar production risks and institutional weaknesses.

Finally, when discussing supply chain due diligence in the textile and garment sector it is important to go beyond workplace health and safety issues. Workers should be paid a living wage for their labour and multinational brands and retailors should encourage this. Brands and retailors can help promote living wage standards by conducting due diligence on adverse impacts in their supply chains to assure that fair labour standards are being respected.

Based on a pilot project of production of cotton t-shirts in India Fairwear Foundation, found that labour costs for such a garment account for only 0.6% of its total price compared to retail mark-ups which account for 59%. [2]Given the tiny proportion labour costs represent relative to total costs, competition and downward price pressures cannot be used as justification for failure to provide a living wage.

Fairwear foundation: Cost breakdown sample t-shirt

 

Another frequent excuse for a lack of collaboration on living wage standards is the liability implications for enterprises under competition law, the argument being that industry cooperation on fair wage policies may be found to be a form of collusion on price fixing.  The relatively insignificant proportion that labour costs comprise in terms of garment pricing seems to render this argument unwarranted.  However, until there is clarity on this issue it will continue to hinder progress on achieving agreement on living wage standards. Experts in the field of competition law should come together to provide answers to this issue and help resolve the debate.

 

The Guidelines and Supply Chain Due Diligence

Although serious challenges and risks still exist in the Bangladesh textile sector relevant actors should cooperate to overcome these risks rather than attempting to avoid them all together by pulling out their operations or investments.  Millions of Bangladeshi workers’ livelihoods depend on this sector. Disengagement should only be considered as an option of last resort.

The OECD Guidelines for Multinational Enterprises recommend use of risk-based due diligence to avoid adverse impacts throughout a supply chain. This approach is fully aligned with the UN Guiding Principles on Business and Human Rights and complementary to ISO 26000 which, in addition to the Guidelines have been endorsed by most G20 countries.

Under the due diligence framework buyers and suppliers work together to assure lack of adverse impacts at every tier of the supply chain. As noted some of the most serious issues in the garment and textiles sector exist in the bottom tiers of the textile and garment supply chains, amongst small companies  which are hired for ad hoc rush jobs and are not part of formal sourcing networks. Although such practices are widespread and hard to regulate in these instances buyers are still expected to take action. Often a single actor in a complex supply chain will not possess much leverage with regard to preventing or mitigation adverse impacts. However a lack of leverage does not justify a lack of action. Rather actors are encouraged to collaborate with one another in order to increase collective leverage through contracting, collective buying agreements and so on.

The year ahead

Much has been accomplished since the Rana Plaza tragedy one year ago but much more remains to be done.  Workplace safety initiatives need to be adequately monitored to assure they are being effectively implemented and compensation schemes need to be strengthened.  Such initiatives need to reach beyond Bangladesh to other garment producing nations. Additionally matters beyond work place safety, most prominently living wage issues, need to be given adequate attention.

For addressing problems of this magnitude collective action has been and will continue to be important. The second annual Global Forum will take place June 26-27, 2014. It will be an opportunity to bring together diverse stakeholder groups to review the existing initiatives and ongoing challenges present in this sector.  An informational meeting amongst senior ministers will take place during the forum which will also take stock of these issues. I encourage ministers to take an active role in reaching out to MNEs about the need for stronger engagement in this sector. MNEs can effectively engage through application of the OECD Guidelines, which provide an effective model for applying risk-based due diligence systems to avoid adverse impacts throughout supply chains and for cooperation with different actors in a supply chain to achieve this goal.  This utility of this framework could further strengthened by production of industry specific guidance for application of principles of the Guidelines to the textile and garment sector, something national ministers and stakeholder groups should encourage.

 

 

[1] National Contact Points are good offices set up by national adherents to the OECD MNE Guidelines. They are responsible for Industry will need to approach these issues seriously as scrutiny regarding responsible business conduct standards in the financial sector continues to intensify.

[2] Source http://www.fairwear.org/ul/cms/fck-uploaded/documents/policydocs/ClimbingtheLadderReport.pdf

Latin America’s growing leadership role in the realm of Responsible Business Conduct

By Professor Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct 

In the past, Responsible Business Conduct (RBC) has been viewed by some primarily as a preoccupation of the West. Clearly this characterization no longer holds. Far from being limited to North America and Europe, good examples of RBC initiatives can also be found in Latin America. Indeed, during a recent trip to the region, I found that some areas Latin American countries are even more advanced than OECD countries.  A plethora of recent initiatives demonstrate that Latin America is taking a leadership role in this field.

©Thinkstock.Istockphoto/Dorling Kindersley

©Thinkstock.Istockphoto/Dorling Kindersley

National Efforts

Argentina, Brazil, Chile Mexico and Peru and are all members of the OECD Working Party on Responsible Business Conduct  as well as adherents to the OECD Guidelines for Multinational Enterprises.  They have National Contact Points (NCPs) to promote and oversee implementation of the Guidelines in their respective countries. These mechanisms are growing stronger through ongoing capacity building, peer learning and awareness raising initiatives, enhancing the influence of the Guidelines and raising the profile of NCPs as a grievance mechanism for incidents that arise under the Guidelines in these countries.

In early April, Costa Rica became the newest adherent to the OECD Guidelines for Multinational Enterprises and likewise set up an NCP. I recently spoke at  an event in San José  celebrating Costa Rica’s adherence to the OECD Guidelines and the launch of its NCP. In many ways Costa Rica was already a leader in the field of RBC, the most well-known example being Costa Rica’s progressive environmental policies and developed ecotourism industry.  Costa Rica’s government has also been active in engaging with the business community and other stakeholders in creation of corporate social responsibility (CSR) policies as well as in ratifying conventions with explicit incorporation of RBC provisions. Additionally it has included environmental and labour provisions within their recent trade agreements.[1]  The nation’s recent adherence to the Guidelines will further raise its profile in the realm of RBC by demonstrating that its approach aligns with international standards.

 

Colombia, another adherent to the Guidelines has also started taking an active role in implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (‘Due Diligence Guidance’) through organizing training workshops and requesting sector specific guidance for its gold industry. Colombia will be the first Latin American country to undergo a baseline assessment of responsible mineral supply chains under the Due Diligence Guidance. ,  Additionally, I was impressed to see that some Colombian  enterprises have a very sophisticated approach to stakeholder engagement with indigenous people. Cerrejon for example, a Colombia coal mining enterprise,  implements programs into their corporate strategy  aimed at  protecting the cultural heritage and improving the standard of living of indigenous peoples affected by their operations.

Additionally, many countries that may not have already taken an active role in RBC initiatives seem well poised to do so. For example, Panama is relatively new to the arena of RBC. However, during my visit there I perceived strong enthusiasm from the political leadership to do more in this field.  Furthermore, Panama’s strong and dynamic economy is capable of supporting such initiatives.  A new government will be elected in Panama in early May of 2014. This government should seize the opportunity to participate in the regional trend and embrace the culture of RBC. In order to do this, I hope they would follow the lead of the other Latin American governments and as a first step become an adherent to the OECD Guidelines.

 

Regional Cooperation 

Regional efforts are also being organized to address responsible business conduct in Latin America. IntegraRSE (The Central American Integration for Corporate Social Responsibility), represents one such initiative. IntegraRSE is composed organizations from Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama and brings together more than 600 companies in the region to promote a permanent culture of corporate social responsibility in the region. [2]

Bilaterally, the Community of Latin American and Caribbean States (CELAC ) countries have been engaging in dialogue on this subject with the EU and were called upon to submit a report of national action plans on CSR at the next summit in 2015.

Leadership at the International Level

Likewise, in the international arena Latin American countries have been proactive in advancing RBC issues.  For example, Brazil was the head of the working group tasked to develop the ISO 2600 standards on social responsibility. It is also a leading member of The Group of Friends of Paragraph 47, a Rio +20 initiative advocating corporate reporting on sustainability practices.[3]   Latin American countries have also been active in getting involved with the UN Global Compact, a framework for the development, implementation, and disclosure of sustainability policies and practices particularly in the fields of business of human rights, labour, environment and anti-corruption.  As of today 17 Latin American nations are members of the Compact.

Remaining Challenges

Although significant progress is being made in the field of RBC amongst Latin American countries, some important challenges still remain.  Latin America has a large and varied indigenous population which makes effective engagement with indigenous groups an important issue for companies operating within the region. Additionally, labour issues remain a challenge in some areas of the continent. A recent study found that labour standards represent the primary risk in supply chains present in South America, as inadequate working conditions and forced and child labour are still present in some parts of the continent. [4] Adherence to RBC recommendations under the Guidelines will necessitate improvement in the status of these issues and may encourage such improvement through providing guidance to companies on conducting effective risk-based due diligence of their supply chains.

Conclusion

Latin American countries are increasingly playing a leadership role with regard to RBC through national, regional and international initiatives. Although challenges remain, the demonstrated commitment to the culture of RBC gives me grounds for optimism.  As adherence to RBC recommendations grows, Latin American nations will benefit not only from better working conditions, cleaner environments, and less adverse impacts to local communities but may also increase their investment profile globally.

 

[1] For more information and specific initiative please see OECD Investment Policy Reviews: Costa Rica, OECD (September 2013) 191-213.

[2]For more information see http://www.integrarse.org/

[3] Paragraph 47 refers  to the 47the paragraph  of the Final Document of the Conference on Sustainable Development  (Rio +20 ) and  states ‘’ We acknowledge the importance of corporate sustainability reporting and encourage companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle. We encourage industry, interested governments as well as relevant stakeholders with the support of the UN system, an appropriate, to develop models for best practice and facilitate action for the integration of sustainability reporting, taking into account the experiences of already existing frameworks, and paying particular attention to the needs of developing countries, including for capacity building.’’

[4] Will Green. ‘’Labour standards are primary supply chain risk in Latin America’’ Supply Management Daily (February 2014). Available ahttp://www.supplymanagement.com/news/2014/labour-standards-are-primary-supply-chain-risk-in-latin-america