A Responsibility Revolution in the Fashion Industry: How OECD’s new Due Diligence Instrument can transform the global garment industry

By Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr). This article was originally published on OECD Insights on 31 January 2017.

218px-sri_lankan_garment_workers

The collapse of the Rana Plaza factory in 2013 with a loss of over 1,130 lives was a jarring reminder that though much has been accomplished to improve working conditions in global supply chains, more is needed. Following the tragedy, stakeholders worldwide, ranging from industry to labour organizations and civil society, mobilised to respond to this need. The breadth of initiatives launched to tackle these issues is impressive. Perhaps most visible are the Bangladesh Accord on Fire and Building Safety and the Alliance for Bangladesh Worker Safety. Together, these initiatives have joined over 250 brands, retailers and their suppliers to inspect and upgrade shared factories, demonstrating that a sector-wide approach to building safer supply chains is not only feasible but effective. During my last trip to Bangladesh, I witnessed the great progress these initiatives have made. The Accord and the Alliance are only two responses amongst many since the Rana Plaza tragedy.

A common understanding of company responsibility in an age of globalization

Rana Plaza was a subcontractor to many garment companies, meaning that in many cases global brands did not place their orders directly with factories operating out of Rana Plaza. Furthermore, in some cases the subcontracting was illegal. While there was already general agreement in the sector that companies should identify and address risks with direct suppliers, the complexities of Rana Plaza raised the question, whose responsibility is due diligence when we look beyond direct contractors and further up the supply chain?

The OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights are clear: companies have a responsibility to identify, prevent, mitigate and account for adverse impacts in their supply chains. In June 2015 the G7 promoted international efforts to promulgate industry-wide due diligence standards in the textile and ready-made garment sector.

On 8 February 2017 the OECD will launch a Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector which responds to this call. This Guidance, developed through an intense multi-stakeholder process, supports a common understanding of due diligence and responsible supply chain management in the sector.

The Guidance is a global instrument

This is really a global instrument, contributing towards a level playing field for responsible business conduct. The OECD Guidelines apply to all companies operating in or sourcing from the 46 adhering countries, but they are likewise relevant for any company operating in their global supply chains. The Guidelines are relevant for a Bangladeshi factory that sells to companies in the US, even while Bangladesh itself is not an Adherent, just as they are relevant for cotton producers in Pakistan exporting to EU markets. OECD , demonstrating the global reach of the OECD Guidelines in the garment sector alone.

Adherents to the OECD Guidelines account for over 72% of world imports of clothing

The relevance of the OECD Guidelines globally is no longer hypothetical. The National Contact Points (NCPs), the globally active grievance mechanism of the Guidelines, have already handled several cases related to due diligence in the garment and footwear sector. For example, the Danish NCP recently concluded its consideration of a case involving PWT Group, a Danish retailer, for failing to carry out due diligence in relation to its textile manufacturer in the Rana Plaza building. Both the Guidance and the conclusions of the Danish NCP in this case are significant for the future of human rights due diligence in the textile sector globally.

The Guidance is progressive, realistic and balanced

The Guidance encourages the sector to think differently and to react differently, but does so in a progressive, balanced, and realistic way. Under the Guidance, companies are expected to scope risks across the full length of their supply chain, including risks related to subcontracting and homeworkers. Moreover, this assessment moves beyond auditing to not only identify labour, human rights and environmental impacts, but also understand why they are occurring. This tailor-made approach to risk assessment recognises that risks in the garment and footwear sector are very different and the assessment methodologies should reflect these differences. An assessment for child labour and forced labour should not be the same as an assessment of occupational health and safety or wage compliance. This Guidance also recognises the challenge of ‘audit fatigue’, so it pushes the sector towards harmonised assessments and most importantly effective monitoring.

While the Guidance is ambitious, it is also realistic. Addressing the full range of challenges in the sector all at once is mission impossible for brands with vast supply chains that go several layers deep. So brands will have to prioritise issues where the impacts are most severe. This could be, for example in relation to hazardous chemicals in finishing or forced labour in cotton.

Finally, the Guidance recognises the diversity of actors in this sector and the diversity of sourcing models. It does not prescribe a one-size-fits all approach, seeking rather to provide recommendations for how companies can carry out due diligence given their circumstances (size, context, etc). For example, the Guidance recognises that companies may source materials and products directly from suppliers or indirectly through buying agents and provides tailored recommendations for each. Similarly, it acknowledges the role subcontracting plays and therefore recommendations point more to ‘responsible subcontracting’ than always ruling out subcontracting altogether.

No more neo-colonial top-down system

In November of last year I participated as a panellist in India on responsible garment supply chains. A fellow panellist, a factory owner, called the traditional garment audit model a colonialist approach: ‘Western brands telling the developing country factories what to do’. With the new OECD Due Diligence Guidance we finally say goodbye to this neo-colonialist approach. It appreciates the importance of a partnership between buyers, suppliers and workers in identifying methods to address risks and monitor progress over time.

But just as important as this partnership, is the fact that due diligence is not merely about looking outward; it’s also about looking inward. Another remark made by my fellow panellist is that companies do not align their purchasing policies with responsible business policies. For example, brand purchasing officers often ask the factory to cut prices by 10%, while the brand ethical sourcing team asks for a 20% wage rise. In a study conducted by ETI Norway, Suppliers speak up, suppliers responded that paying legal minimum wage and legal overtime premiums would increase labour costs by 10-20%. However, despite this reality, little science goes into price-setting by brands and retailers. So functional alignment of brand policies needs to be part of due diligence.

Under the OECD Due Diligence Guidance, companies, particularly brands and retailers, are expected to assess their own purchasing practices and determine how their price setting and ordering may be contributing to excessive overtime, low wages, precarious contracts, illegal subcontracting, etc. Personally, I think that embedding responsibility indicators in the bonuses or performance appraisals of purchasing officers should incentivise due diligence; otherwise due diligence and respect for human rights will stay a peripheral issue.

The new global instrument for garment due diligence that will be launched next week at the OECD Roundtable on Due Diligence in the Garment and Footwear Sector can change the fashion industry worldwide. It is global, progressive, and realistic, and assists in more mature supply chain dialogues than the neo-colonialist audit system. Now is the time to implement and make fair fashion the standard.

Useful links

More on the garment industry and on due diligence on OECD Insights

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National Action Plans on Business and Human Rights: Strong support for OECD’s Responsible Business Grievance Mechanism

By Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct and Froukje Boele, Policy Analyst Responsible Business Conduct, OECD

The year 2017 got off to a good start for business and human rights with a number of prominent National Action Plans (NAPs) finalised last December right in time for Christmas. The fresh German, Italian, Swiss and US NAPs resemble each other by placing the OECD Guidelines and the attached grievance mechanism at the forefront of efforts to promote responsible business conduct for enterprises operating at home and abroad. They also acknowledge the alignment between its Human Rights Chapter and the UN Guiding Principles on Business and Human Rights. Moreover the NAPs uphold and strengthen the National Contact Point (NCP) system of the OECD Guidelines as a means for effective problem solving, thereby supporting the OECD’s globally active grievance mechanism for responsible business as a de facto complaints mechanism for the UN Guiding Principles.

Some highlights:

Responsible Supply Chains and Due Diligence

The concept of adequate due diligence – to identify, prevent and mitigate actual and potential adverse impacts of business operations – centres at the heart of the NAPs with action-oriented language on the different OECD sectoral guidelines. Yet Governments emphasize different aspects, for example the German NAP on Business and Human Rights and the Swiss NAP on Business and Human Rights include a particular focus on helping small and medium-sized enterprises.

The US Government’s National Action Plan on Responsible Business Conduct recognises the OECD Due Diligence Guidance for Responsible Minerals Supply Chains from Conflict and High Risk Areas as a key tool for businesses to help them “respect human rights and avoiding contributing to conflict through their mineral sourcing practices.” In this regard, the German and the Italian NAP on Business and Human Rights also point to their involvement in the process of the elaboration of an EU Regulation for supply chain due diligence in this field. If adopted, the Swiss Government also commits to consider the formulation of similar legislative proposals adapted to the Swiss context.

For agriculture, both Switzerland and Italy commit to active implementation of the OECD-FAO Guidance for Responsible Agricultural Supply Chains.

Moreover, in line with Italy’s active involvement to improve standards in the textile sector, its NAP emphasizes the OECD’s work on the Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector, which will be launched next 8 February.

Sensible to the risks involved in the banking industry, Switzerland has included its support for the OECD work on a guide for due diligence in the financial sector in the NAP.

Not only do the NAPs on the whole indicate a high level of support for implementing the outcomes of the proactive sector projects, they also signal a political commitment to engage in their multi-stakeholder advisory groups going forward.

National Contact Points

The role of the NCPs to promote corporate responsibility and deal with issues relating to business and human rights is prevalent throughout the recent NAPs. Delivering on the G 7 Leaders’ Summit Declaration of June 2016, Italy, Germany and the United States recall their commitments to undergo an NCP peer review in 2017.* The plan for Germany also announces the repositioning and further strengthening of its NCP. Interestingly, the US announces it will implement procedures to ensure that stakeholders outside the US and using other languages than English can engage in the NCP process. The NAPs for Germany and Switzerland also make an operational link between the work of the NCPs and national export credits and guarantees. As such, the German NCP is upgraded as a central complaint mechanism for projects for foreign trade promotion and the Swiss Export Risk Insurance Agency is reported to have to take account of the results and evaluations by the NCP.

Policy coherence on responsible business conduct

At the same time, the national action plans send a clear message on policy coherence on corporate responsibility issues and set an example for other countries in the process of developing a NAP. They are comprehensive efforts to ensure alignment between all policies relevant to responsible business with Governments leading by example on issues such as procurement, exports credits but also responsible retirement plans (US NAP). Beyond the national level, the NAPs make a point about international policy coherence by including corporate responsibility commitments in trade and investment agreements, as well as development finance. These are complemented on an operational level with measures to train German and US diplomats abroad.

Conclusion

The high level of commitment to the OECD Guidelines, the NCP system and the OECD sector due diligence instruments will greatly contribute to their visibility and implementation worldwide. They also present promising building blocks for the 2017 German G20 efforts to address RBC and sustainable global supply chains and the Italian G7 Initiative on sustainable global supply chain management. Finally, these 2016 Christmas gifts are full of inspiration for Governments that are in the process of developing a national action plan, for example in Latin America.

*               The peer review of the Swiss NCP is ongoing.

Landmark human rights cases show value of OECD grievance mechanism for responsible business

Landmark human rights cases show value of OECD grievance mechanism for responsible business

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

This article was originally published on OECD Insights on 11 November 2016.

Compensation for indigenous people for adverse impacts of business activities, companies agreeing to carry out human rights due diligence concerning products in their value chain, authoritative statements that set the standard for the garment industry worldwide in the aftermath of Rana plaza – these are just some examples of achievements by the National Contact Points (NCPs) for responsible business in recent months.

In the run up to the 2016 UN Forum on Business and Human Rights it is good to highlight the importance of the NCP mechanism for business and human rights. Five years ago the OECD Guidelines for Multinational Enterprises were revised and the UN Guiding Principles were embedded in its human rights chapter. This way the OECD’s globally active grievance mechanism for responsible business became a de facto grievance mechanism for the UN Guiding Principles on Business and Human Rights.

The complaints mechanism is globally active as it covers global value chains with a link to companies from the 46 adherent territories. Over 360 cases have been brought to the NCP mechanism since 2000 addressing impacts from business operations in over 100 countries and territories.

What has been the experience thus far?

Since the 2011 addition of a human rights chapter 54% of all complaints brought to the NCP mechanism concern human rights and business.

From 2011 to 2015 about half of all complaints brought which were accepted for mediation, resulted in a mediated agreement between the parties.

Concrete results were for example ending forced and child labour in supply chains, improved health and safety for agricultural workers and better human rights due diligence for mega sport events. I would like to highlight a couple of landmark business and human rights cases that are worth looking at.

Value chain responsibility concerning the death penalty

Most attention has been paid to supply chain responsibility of business. Yet it is largely unknown that with the 2011 revision, the scope of the OECD Guidelines was extended to cover the entire value chain, meaning that they apply to the supply and distribution chains, or in simple words: it matters from whom you buy and to whom you sell taking into account the potential end use. The far reach of the Guidelines has been illustrated in a number of instances.

Last year a case was brought to the Dutch NCP involving Mylan, a pharmaceutical company, for possible human rights abuses associated with the production and sales of rocuronium bromide to prisons in the United States for use in lethal injections. The Dutch NCP concluded that the Guidelines are applicable to the value chain and in particular to the distribution chain. The case is also noteworthy as it demonstrated the force of finance used by the shareholders to exert their influence to hold the company accountable for responsible business conduct. In parallel to the specific instance proceeding, several investors entered into dialogue with Mylan to persuade the company to ensure that its products are not used to carry out lethal injection executions. One pension fund even decided to sell its shares in the company, whereas others continued the dialogue. The parties in the case concluded a mediated agreement and Mylan has taken active steps to prevent rocuronium bromide from being used in US prisons for executions.

Value chain responsibility concerning sales of teargas

In another case the French NCP also considered the distribution chain. The complaint concerned the sale of tear gas by Alsetex to the government of Bahrain allegedly used by security forces in the pro-democracy protests in 2011 and thereafter to violate human rights. The consideration of the case demonstrated that the Guidelines go beyond enterprise compliance with the export control regulations for strategic goods and require companies to take risk-based due diligence measures. With due consideration to the State duty to protect human rights, the French NCP concluded that Alsetex complied with the Guidelines, however recommending the company to formalise in-house due diligence procedures particularly in order to increase the traceability of its exports. The parties agreed with the conclusions of the NCP.

Indigenous people’s rights

Indigenous people’s rights have also been addressed by the NCP mechanism in the context of a complaint by the Saami village alleging that Statkraft AS, a Norwegian multinational enterprise, had breached human rights chapter of the Guidelines by planning to build a wind power plant on reindeer herding ground in Sweden. The case reveals the possible tensions between environmental concerns for sustainable energy production and the indigenous peoples’ rights for their community’s economic and cultural survival. The Swedish and Norwegian NCPs applied the principle that enterprises are expected to carry out consultations with a view to obtaining from the parties Free, Prior and Informed Consent (FPIC consultations) based on the UN Declaration on the Rights of Indigenous Peoples. While the NCPs found that the company had not failed to comply with the OECD Guidelines, some areas for improvement were identified. Following the conclusion of the NCP case, the parties have subsequently themselves reached an agreement last August on compensation for the impact and negative effects of the windmills.

Supply chain responsibility regarding the Rana Plaza tragedy

In practice a lot of human rights cases under the NCP system concern labour rights issues. The collapse of the Rana plaza factory has symbolised poor working conditions in global textile supply chains. The responsibility of global brands has also been brought to the attention of the NCPs. The Danish NCP for example recently concluded its consideration of a case involving PWT Group, a Danish retailer, for failing to carry out due diligence in relation to its textile manufacturer which was located in the Rana Plaza building. The case confirms the importance of the Bangladesh Accord on Fire and Building Safety which includes inspection of building structures as part of occupational safety and health. Under the OECD Guidelines, companies cannot hide behind the industry practice that risk-based analyses did not include the inspection of building safety. Following the Rana Plaza tragedy, the OECD has convened governments, business, civil society and trade unions to develop a Due Diligence Guidance on Responsible Garment and Footwear Supply Chains, which provides specific recommendations to support a common understanding of due diligence and responsible supply chain management in the sector. This Guidance is expected to be finalised soon. Both the Guidance and the conclusions of the Danish NCP in this case are significant for the future of human rights due diligence in the textile sector globally.

Delivering important results

This year marks the 40 years anniversary of the OECD Guidelines. Five years ago the Guidelines were dramatically revised, increasing the scope to global value chains and embedding the UN Guiding Principles into the human rights chapter. Five years down the road the OECD’s globally active grievance mechanism for responsible business has proven its potential added value for reinforcing the UN Guiding Principles on business and human rights, delivering important results.

Useful links

OECD Guidelines for Multinational Enterprises

Implementing the OECD Guidelines for Multinational Enterprises: The National Contact Points from 2000 to 2015

2016 UN Forum on Business and Human Rights

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.

The Force of Finance for Responsible Business: How the financial sector could and should contribute to responsible business conduct

Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr). This article also includes a contribution by Bob Jennekens, LL.M./M.A. student, Maastricht University Faculty of Law/Arts and Social Sciences.

This article was originally published on the OECD Insights webpage, on 6 June 2016.

These days a critical mass of investors promote investment approaches which take into consideration environmental, social, governance (ESG) factors, otherwise known as responsible investment. Investors involved in the ‘Principles for Responsible Investment (PRI) Initiative, a membership based organization which seeks to promote responsible investment, currently manage over $60 trillion in assets.

Responsible investment is not only an ethical consideration but also relevant to managing risks regarding returns on investment as often there will be alignment between salient ESG risks and financial materiality. A wide body of research suggests that responsible business practices can represent a competitive advantage for firms, creating increased returns for investors, while irresponsible practices can pose serious risks and costs. For example, earlier this month investors of ExxonMobil and Chevron voted to support a resolution for a climate ‘stress-test’, signalling that investors view climate change as a material financial risk.

In this context many investors rely on the OECD Guidelines for Multinational Enterprises (the OECD Guidelines) as an important benchmark for responsible business conduct (RBC) for their investee companies. The OECD Guidelines are a comprehensive multilateral agreement on corporate responsibility which are accompanied by a globally active grievance mechanism that aims to resolve issues arising under the Guidelines, including those linked to investments in companies which may be behaving irresponsibly. This mechanism is known as the National Contact Point (NCP) system.

Because they hold the purse strings, investors have the potential to exert substantial influence, or leverage, on their underlying companies. Under the Guidelines institutional investors are expected to conduct due diligence and use their leverage to influence companies they invest in to prevent or mitigate negative impacts they are causing.  Similarly, PRI members subscribe to the principle of being active owners of their investments, which in practice also includes engaging with and exerting leverage on investee companies to promote responsible business practices. We have already seen many significant examples of the ‘’force of finance’’ in promoting responsible business practices. In the context of the OECD Guidelines’ grievance mechanism, investors have helped persuade companies to come to a mediated agreement with parties raising complaints and have followed up on NCP statements with recommendations, adding ‘teeth’ to the process. In practice this has resulted in investor engagement to fight forced labour in Uzbekistan, to prevent environmental damage in the Democratic Republic of the Congo (DRC) and to prevent human rights violations in India.

These examples, described in more detail below, have demonstrated that harnessing the “force of finance” can create real market incentives for responsible business and promote respect of non-binding international standards, such as the OECD Guidelines.

The OECD Guidelines and National Contact Points (NCPs)

The OECD Guidelines, affectionately referred to as the grandmother of all corporate responsibility standards, celebrate their 40 year anniversary this year. The Guidelines are a comprehensive set of recommendations directed towards multinational enterprises (MNE’s).  While they are non-binding for companies they represent a “firm expectation by governments on company behaviour.”

They are however binding for member states of the OECD, who are obliged to 1) promote the OECD Guidelines amongst MNEs operating in or from their territories and 2) establish National Contact Points (NCPs).  NCPs are mandated to promote the OECD Guidelines within their jurisdictions and to serve as the unique grievance mechanism of the OECD Guidelines.[1] NGOs, citizens and other interested parties can refer complaints to NCPs regarding alleged non-observance of the OECD Guidelines, termed as “specific instances.” Specific instance proceedings usually involve mediation between the parties followed by a final statement on the issues.

The role of the financial sector in promoting RBC is increasingly being discussed in the context of specific instance proceedings.  Specific instances involving the financial sector have seen significant increases in terms of submissions of complaints, from about 8% of specific instances from 2000-2010 to 17% of specific instances from 2011. Increased attention to expectations of investors to manage environmental and social risks in their underlying companies as well as recognition of the financial materiality that such risks may bring has encouraged investors to take an active role in promoting responsible business conduct. Below we highlight five specific instances to illustrate the potential force of finance in promoting the recommendations of the OECD Guidelines.

Divestment based on poor stakeholder engagement and risks to Indigenous Peoples

In 2009 the UK NCP handled a specific instance involving Vedanta Resources, a diversified metals and mining group, with regard to establishment of a bauxite mine and the expansion of an aluminium refinery in Orissa, India.  The NCP concluded that Vedanta Resources had failed to adequately consult indigenous communities about the proposed mine.  In response to this finding and the ongoing controversy, some investors made an effort to engage with Vedanta while others disinvested or significantly decreased their stakes in the company.  Investors that chose to divest included the Norwegian Government Pension Fund (one of the largest pension funds in the world), the Church of England, the Joseph Rowntree Charitable Trust and more recently, the PGGM, a large Dutch pension fund manager.  PGGM noted that it had attempted engagement with Vendanta for two years with regard to its mining activities in Orissa, and that it had met with the company’s management and non-executive directors. PGGM stated however that when it had tried to organise a meeting with a  group of other investors: ‘to discuss possible solutions to the problems in Orissa, Vedanta did not accept the invitation to participate.’

Engagement with government regarding human rights and forced labor in the cotton sector

In 2014, the Korean NCP received a complaint alleging that Daewoo International had breached the human rights provisions of the Guidelines by purchasing cotton produced in Uzbekistan despite their awareness of on-going state-sponsored forced labour in the country. The Korean NCP recommended that the company continue to monitor the situation and respond actively to the issues by means of dialogue and co-operation with the government of Uzbekistan, state-owned companies, related international organisations, NGOs, and local communities.

Upon issuance of these recommendations by the NCP the CEO of Daewoo  and other senior executives of the company asked the government for consistent efforts to eliminate the risk of forced labor in Uzbekistan.   Pension funds from Sweden, UK, Denmark, Poland, etc. have also been engaged with Daeweoo to  encourage them to contribute to improved labor conditions in the cotton industry. These major global investors want the company to keep pressing the government of Uzbekistan to introduce risk mitigation measures in this context, for example, independent monitoring of the cotton harvesting.

Exclusions and human rights violations in the mining sector

In 2012 three complaints were filed claiming POSCO, a South Korean steel company had not engaged in meaningful stakeholder consultations and had not respected environmental and human rights standards when establishing a new plant in India.  In addition to bringing a specific instance involving Posco’s parent company, two other specific instances were filed implicating pension funds with investments in POSCO. These were ABP, one of the Netherlands’ largest pension providers, and its administrator APG and Norges Bank Investment Management (NBIM).

As a result of the NCP process ABP agreed to use its leverage in the future to bring the operations of POSCO up to the required international standards and proposed organizing a fact finding mission to India to map the adverse impacts. However this fact finding mission was not undertaken and POSCO was effectively excluded from ABPs portfolio. Subsequent to the issuance of a final statement from the Norwegian NCP, POSCO has been included on NBIM’s conduct-based investment exclusion list.

Prevention oil prospecting in a World Heritage Site

In 2013 a complaint was lodged by the World Wildlife Fund (WWF) at the UK NCP against SOCO, a British oil and gas exploration company for its operations in the Virunga National Park in the DRC. These operations were deemed to be contrary to the DRC’s treaty obligations to protect the Virunga National Park as a UNESCO World Heritage Site.  WWF also appealed to SOCO investors to engage with the company. The investors, including Aviva, heard WWF’s call and responded by engaging with SOCO to bring it in line with expectations under the OECD Guidelines. Some even called to remove SOCO’s CEO in reaction to the event. As a result of the NCP case and pressure exerted by investors SOCO committed to cease exploration in the park unless UNESCO and the DRC government agree that such activities are not incompatible with its World Heritage status and also committed to “not to conduct any operations in any other World Heritage site.”

Protesting the pharmaceutical sector’s involvement with capital punishment 

Recently a case was brought to the Dutch NCP involving Mylan, a pharmaceutical company, for possible human rights abuses associated with the production and sales of rocuronium bromide to the United States for use in lethal injections.  In parallel to the specific instance proceeding several investors entered into dialogue with Mylan to persuade the company to ensure that its products are not used to carry out lethal injection executions. ABP had been in talks with Mylan since October 2014 about the use of muscle relaxants in executions in US prisons, however because it felt its requests to alter its distribution systems were  not met with an adequate response, ABP decided to sell its shares in the company.  Other shareholders, such as ROBECO, PGGM-Pensioenfonds Zorg & Welzijn and NNGroup N.V., indicated their intention to continue the dialogue. Excluding investments was seen to be ‘a last resort that should be used only when all other forms of active shareholdership have not led to the desired result.’  Since the specific instance was first filed Mylan has taken active steps to prevent the rocuronium bromide from being used in US prisons for executions. The Dutch NCP concluded in its final statement for the specific instance that “dialogue as well as disengagement by some [investors] appear to have contributed to improvements in Mylan’s conduct.”

Investors have the power  

Investors have significant potential to use the “force of finance” to promote better business behaviour amongst their investee companies.  Indeed, applying this leverage is an expectation under the OECD Guidelines as well as Principles for Responsible investment.

These five specific instances represent fascinating case studies of how investors can exert leverage on their underlying companies, either through engagement or divestment, to promote responsible business conduct.  In practice, often investor engagement with investee companies is done in confidence and thus likely many more examples of successful outcomes exist.  Furthermore, direct engagement and divestment represent only two approaches investors have at their disposal in using the force of finance to promote responsible business practices. Shareholder activism is another potentially effective approach. Recently AFL-CIO, the most powerful trade union in US, introduced a shareholder resolution at seven companies urging them to participate in mediation processes to remedy human rights violations, including through NCPs. Even if these resolutions are not ultimately successful they nevertheless will serve to heighten awareness amongst investee companies at the board level about the NCP procedure as well as importance of these issues for their investors.

While these initiatives and results are promising, active ownership and application of due diligence as promoted by the OECD Guidelines by institutional investors is a trend that is still only in its infant stage. In order to have greater impacts these ESG initiatives will have to be scaled up considerably and global investors will have to collaborate with one another to encourage positive solutions to pervasive challenges in the context of corporate responsibility.

Useful links:

The Global Forum on Responsible Business Conduct, 8-9 June  will be broadcast live starting at 9.30am Paris time on Wednesday, 8 June 2016 Watch

Roel Nieuwenkamp maintains a blog where all of his articles are archived. Please visit https://friendsoftheoecdguidelines.wordpress.com/

 

[1] Established per article I, paragraph 1 of the Amendment of the Decision of the Council on the OECD Guidelines for Multinational Enterprises

“I don’t care if it’s legal, it’s wrong”: Panama Papers show taxation is a core corporate responsibility issue

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

“I don’t care if it’s legal, it’s wrong.” This quote from US President Obama about tax avoidance illustrates the shift in thinking about tax from issues from a strictly legal perspective to the domain of corporate responsibility.

Global tax avoidance has been attracting increasing attention and ire over the past few years. In the UK public outrage over tax avoidance has been very visible, several years back company executives of the world’s largest MNE were publically scrutinized over tax avoidance issues. In the midst of the financial crisis EU countries like Greece and Portugal were furious to learn that their multinational enterprises paid almost no taxes because of fiscal arrangements involving the same jurisdictions that had put pressure on them to implement severe austerity packages. In developing countries tax base erosion and profit shifting (BEPs) has likewise been the cause of outrage and is increasingly viewed as an impediment to development. According to the OECD ‘’Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.’’ The Luxleaks and SwissLeaks exposed instances of tax avoidance that shocked the general public. Now the Panama Papers have again demonstrated that corporate tax responsibility is not just as a legal issue but also an ethical one.

While the Panama Papers uncovered some clearly illegal conduct they also evidenced widespread practices that while not necessarily illegal are morally questionable. ‘Ethical’ tax issues are often linked to aggressive tax planning. According to the European Commission (EC), a key characteristic of aggressive tax planning practices is that they reduce tax liability through strictly legal arrangements which contradict the intent of the law. The EC Action Plan to strengthen the fight against tax fraud and tax evasion further provides that “aggressive tax planning consists in taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability and can take a multitude of forms. Its consequences include double deductions (e.g. the same loss is deducted both in the state of source and residence) and double non-taxation (e.g. income which is not taxed in the source state is exempt in the state of residence).”

Several approaches are used in aggressive tax planning including the transfer pricing and the use of brass plate trust companies based in tax havens. Another example of an aggressive tax planning strategy could concern the use of hybrid entities or hybrid financial instruments.

According to the OECD a number of indicators show that the tax practices of some multinational companies have become more aggressive over time. Though companies are usually acting legally, this development is raising serious compliance and fairness issues. In response countries and international institutions have been active in developing creative solutions to curb these practices. For example, the OECD has elaborated a comprehensive action plan on Base Erosion and Profit Shifting (BEPS) which has been endorsed by the G20.  At the EU level an Action Plan to strengthen the fight against tax fraud and tax evasion  was developed in 2012. Among other recommendations the Action Plan stresses  that “[a]ggressive tax planning could thus be considered contrary to the principles of Corporate Social Responsibility”.

Responsible tax planning as an expectation of corporate social responsibility is not a new concept. Indeed the OECD Guidelines for Multinational Enterprises (OECD Guidelines), the most comprehensive standard on corporate ethics, celebrate their 40th anniversary this year and have long included a chapter on Taxation.

Under the OECD Guidelines enterprises are encouraged to design their tax governance and tax compliance in a responsible manner. Furthermore, enterprises are called on to comply with both the letter and spirit of the tax laws and regulations of the countries in which they operate. (See Annex: Relevant language on taxation under the OECD Guidelines for Multinational Enterprises).

46 countries, including the 34 OECD member governments have adhered to the OECD Guidelines and have made a legally binding commitment to set up a National Contact Point (NCP) to promote the recommendations of the OECD Guidelines – including promoting corporate tax responsibility! – in addition to handling complaints arising with regard to the non-compliance with these recommendations.

As of yet one tax related complaint has been brought to the NCP system. In 2012 the Swiss NCP considered a submission based on a leaked report from an auditing firm that suggested that commodities giant Glencore was resorting to various techniques to avoid paying taxes in Zambia with regards to its subsidiary, Mopani Copper Mines Plc. The Swiss NCP undertook mediation with the parties which resulted in constructive engagement and ultimate agreement between the parties.

Did Mossack Fonseca, the law firm at the center of the Panama Papers scandal, act within the spirit of the tax law when advising its clients? Did the clients of that firm act responsibly? Are the practices of establishing shell companies in tax havens, use of transfer pricing, or hybrid mismatch agreements aimed at tax avoidance in line with the OECD Guidelines? As strictly legal arrangements which contradict the intent of a tax law do not pass muster under the framework of the OECD Guidelines, the answer would likely be ‘no’.

As clearly stated by President Obama, international tax planning is no longer simply a legal compliance matter, but also an ethical one. This ethical expectation is already embedded in the OECD Guidelines, which governments have committed to promoting.  Additionally it is only a matter of time that more tax related complaints will be filed in the NCP system, thus governments should be active in promoting responsible tax planning as a corporate ethics issue.

The OECD/G20 BEPS project already has already been a game changer in regards to transparency of fiscal policies. Leaks will continue to expose companies’ fiscal conduct in practice. In times of ‘radical transparency’ companies have to take a very critical look at their tax policies and verify whether their policies are not only legally compliant but also ethically sound.

Annex: Relevant language on taxation under the OECD Guidelines for Multinational Enterprises

Chapter XI of the OECD Guidelines provides principles and standards of good practice consistent with corporate citizenship in the area of taxation, it reads:

It is important that enterprises contribute to the public finances of host countries by making timely payment of their tax liabilities. In particular, enterprises should comply with both the letter and spirit of the tax laws and regulations of the countries in which they operate. Complying with the spirit of the law means discerning and following the intention of the legislature. It does not require an enterprise to make payment in excess of the amount legally required pursuant to such an interpretation. Tax compliance includes such measures as providing to the relevant authorities timely information that is relevant or required by law for purposes of the correct determination of taxes to be assessed in connection with their operations and conforming transfer pricing practices to the arm’s length principle.

Enterprises should treat tax governance and tax compliance as important elements of their oversight and broader risk management systems. In particular, corporate boards should adopt tax risk management strategies to ensure that the financial, regulatory and reputational risks associated with taxation are fully identified and evaluated.

The commentary of Chapter XI offers the following reference in order to assess whether certain transactions could be contradictory with the spirit of the tax law:

“An enterprise complies with the spirit of the tax laws and regulations if it takes reasonable steps to determine the intention of the legislature and interprets those tax rules consistent with that intention in light of the statutory language and relevant, contemporaneous legislative history. Transactions should not be structured in a way that will have tax results that are inconsistent with the underlying economic consequences of the transaction unless there exists specific legislation designed to give that result. In this case, the enterprise should reasonably believe that the transaction is structured in a way that gives a tax result for the enterprise which is not contrary to the intentions of the legislature.”

Tackling modern slavery in global supply chains

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

This article was original published on the OECD Insights blog on March 11, 2016.

The recent migrant crisis paired with shocking exposes of labour issues in global supply chains has heightened public attention to modern slavery, forced labour and human trafficking. Children working in cobalt mines for the Apple and Samsung supply chains, Syrian refugees working under terrible circumstances for garment supply chains in Turkey, Rohingya refuges working as slaves in the Thai fishing industry and North African migrants working in agriculture in Italy and Spain.

The International Labour Organization estimates that 21 million people are victims of forced labour, of which 44% are migrants. In total, forced labor generates an estimated $150 billion in illegal profits every year. A recent ETI survey found 71% of companies suspect the presence of modern slavery in their supply chains.

In response, a number of binding regulations regarding modern slavery in supply chains have been introduced. On an international level, the ILO has adopted the Forced Labor Protocol that requires States to take measures regarding forced labor. Domestically, the California Transparency in Supply Chains Act of 2010 is intended to ensure consumers are provided with information about the efforts to prevent and eradicate human trafficking and slavery from their supply chains. President Obama also launched a far reaching executive order to avoid human trafficking in federal contracts and passed a law allowing for stronger enforcement of the Tariff Act of 1930, which aims to block the import of products to the US produced using child labour.

Currently two lawsuits related to slave labour in supply chains of Thai shrimp are pending against well-known multinationals in US federal courts. Likewise earlier this year the US Supreme Court declined to hear an appeal for the dismissal of a lawsuit alleging that three large multinational enterprises aided and abetted child slave labor on cocoa plantations in Africa.

The recent UK Modern Slavery Act applies to all companies that do any part of their business in the UK if they have annual gross worldwide revenues of £36 million or more each year. These companies have to publish an annual slavery and human trafficking statement. The OECD Guidelines for Multinational Enterprises are referenced in the statutory guidance of the Act, 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 recommendations to companies backed by 46 adhering governments and recommend that companies carry out supply chain due diligence to identify, prevent, mitigate and account for all adverse impacts that they cover, including child labour and forced labour. The OECD has developed more detailed guidance on how these expectations can be responded to in specific sectors. The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, the global standard on mineral supply chain responsibility, provides a 5 step framework for due diligence to manage risks in the minerals supply chain including forced and child labour in the context of artisanal mining. The FAO and OECD recently jointly developed a Due Diligence Guidance for Responsible Agricultural Supply Chains which also provides due diligence recommendations to manage risks related to forced labour and child labour in high risk agriculture sectors including palm oil and cocoa. Such approaches could be applied in the Thai shrimping industry as well. The OECD is also developing a Due Diligence Guidance on Responsible Garment and Footwear Supply Chains, which provides specific recommendations for addressing risks of forced and child labor. This Guidance will be launched later this year and will be relevant to migrant workers in textiles factories and cotton fields.

Although the OECD Guidelines are a non-binding mechanism they are accompanied by a unique grievance mechanism, the National Contact Points (NCPs). NCPs in the 46 countries that adhere to the Guidelines facilitate dialogue and mediation with companies who allegedly do not observe their recommendations. Several issues regarding forced or child labor in supply chains have been brought to the NCP mechanism and some have resulted in successful outcomes.

For example, in 2011 complaints were submitted to the NCP mechanism regarding sourcing of cotton from Uzbekistan cultivated using child labour. NCP mediation led to several agreements with companies involved in sourcing the products as well as heightened industry attention to this issue. In a follow up to the NCP processes several years later the European Center for Constitutional and Human Rights (ECCHR) concluded that the submission of the cases had encouraged traders to take steps to pressure the Uzbek government to end forced labour, although company commitment and media attention around the issue diminished over time. Nevertheless the report also noted that the NCP cases triggered investment banks to monitor forced labour issues in Uzbekistan in the context of their investments.

Other NCP cases, while not resulting in agreements between the parties have led to statements determining that certain companies were not observing the recommendations of the OECD Guidelines in the context of forced labour impacts, resulting in reputational harm to those enterprises (e.g. see DEVCOT) . Currently the Swiss National Contact Point is overseeing mediation between the Building and Wood Worker’s International (WWI) and FIFA regarding forced labor issues in Qatar. The results will have important implications for global sporting events and for managing risks of forced labour in large scale infrastructure projects.

Companies themselves have been proactive in addressing these issues. For example Nestlé, despite currently being subject to a lawsuit related to slave labour in its supply chain, participated in and released a report developed with the non-profit organization Verité which identified labour abuses in its supply chain with regard to Thai-sourced seafood.  Within the report the company outlined plans to tackle the problem, and notes that other companies that do business in this sector likely face the same risks.

Several MNEs also participate in the Shrimp Sustainable Supply Chain Task Force set up in 2014 by retailers such as Costco. This brings together manufacturers, retailers, governments and CSOs to conduct independent audits on Asian fishing vessels to ensure seafood supply chains are free from illegal and forced labour. The first round of audits is expected to be complete by July 2016.

In February this year, H&M asked all of its suppliers to sign an agreement prohibiting the use of cotton from Turkmenistan and Syria, on pain of termination in order to avoid sourcing of cotton from ISIS controlled territories, produced through forced labour. H&M also terminated a sourcing relationship with a Turkish supplier after discovering a Syrian migrant child working in its factory, responding to documented abuses against Syrian refugees in the Turkish textile industry.

Labour issues in global supply chains present a serious and pressing problem, therefore it is encouraging to see they are being taken seriously. In addition to regulatory approaches non-binding mechanisms such as the OECD Guidelines, accompanied by the NCP system, and industry initiatives have resulted in important progress and provide alternative models for managing forced labour risks throughout global supply chains. While litigating these issues can be a forceful tactic in bringing companies to account, non-judicial grievance mechanisms can provide a more affordable and more accessible platform for tackling forced labour issues.

In the context of modern slavery, all stakeholders must step up their efforts. Governments should promote due diligence in global supply chains among their companies as outlined in the OECD Guidelines and its related industry-specific instruments. Civil society can continue to be instrumental in reporting upon and exposing these issues and furthermore should rely on the NCP platform for reaching resolutions on supply chain issues with MNEs. Finally, as the current migrant crisis will last many years, companies should conduct heightened due diligence to ensure that they are not linked to forced labour throughout their supply chains, particularly in contexts with large migrant populations.