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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Drilling down and scaling up in 2015

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

After the development of new global standards on responsible business conduct (RBC = beyond CSR…) in 2011[1] it was time to get down to business and work on making these standards a reality. The implementation process has been hard, complex and slow, however the good news is that this has not deterred companies and governments from taking new standards seriously. In 2014 we saw some important developments and we saw many demonstrated leaders being proactive in trying new approaches.

Global players made significant advances in RBC policy. For example, China demonstrated exciting and encouraging efforts on RBC including the development of guidelines on corporate social responsibility for outbound mining investments.[2] Follow closely how this is implemented; it could have a huge impact. Canada likewise introduced a tough new CSR policy for international mining operations guided by the OECD Guidelines and promoting the NCP grievance mechanism.[3]

Companies also stepped forward to address ongoing challenges in their sector. For example the Accord and Alliance initiatives were established through company networks after Rana Plaza to inspect and remediate fire and safety problems in garment factories throughout Dhaka, Bangladesh. In 2014 both programs completed the bulk of their inspection programs.

Additionally we saw civil society and companies collaborate together and reach solutions on RBC through mediation. A good example of this was a case mediated by the UK NCP and brought by the World Wild Life Fund (WWF) which resulted in pledge by Soco, an oil company, that it would cease oil exploration in a treasured national park in DR Congo.

Despite some advances and important resolutions there remains a lot of work to do, by companies, by governments and by civil society. The field of RBC is changing rapidly and will be shifting to an even higher gear in 2015. In preparation for this gear shift I have prepared a list of top 5 RBC developments to watch in 2015.

Responsible Business Conduct in 2015: Top 5 issues to Watch

  1. Hardening of soft law

Over the past few years we have increasingly been seeing a shift of CSR standards from the voluntary domain into the hard law domain. This year a couple of important developments will be concluded further reinforcing this trend.

Legislating due diligence

In the UK, Switzerland, and France there are proposals in the pipeline to make due diligence regarding aspects of RBC mandatory. The broadest scheme is this sense is the proposal being considered in France which would mandate supply chain due diligence in accordance with the OECD Guidelines for Multinational Enterprises, thus covering a comprehensive range of RBC issues.[4] The Prime Minister of France Manual Valls publically endorsed this proposal in December and it will be discussed in end of January in French parliament.

The UK[5] and Swiss[6] laws being proposed have a more narrow focus, forced labor and human rights and the environment respectively, but likewise oblige companies to avoid such impacts throughout their supply chains. These laws will follow suit of several existing policies. For example, California mandates supply chain due diligence to avoid modern slavery[7]. Last year the ILO adopted the Protocol to Convention n. 29 which calls on companies to take measures to prevent forced or compulsory labour through supporting due diligence to prevent and respond to risks of forced or compulsory labour. [8]

Binding International Treaty: will it fly?

In June of 2014 a UN Working Group was established to discuss the development of a binding treaty which would hold transnational corporations accountable for human rights violations. Such a treaty would be the first international human rights instrument with legal enforceability against transitional corporations. We will soon see whether this will prove to be a serious effort t or just a distraction. There are still many flaws in the setup, for example in that it excludes national companies. One early indication of the seriousness of the initiative will include who will be asked to chair the working group. Will it be someone from a pragmatic country who could act as a bridge builder between countries that have supported the treaty on the one hand and the US and EU on the other? If that is the case, the treaty might fly, with a potentially huge impact. However if a more dogmatic representative from a country with rigid views is selected, my prediction is that we can ignore the development in the future.

 

  1. Specific due diligence recommendations in high risk sectors

While expectations of companies to conduct due diligence to avoid certain impacts are beginning to be regulated, practical guidance will be launched in 2014 across a range of sectors to help guide companies in meeting these expectations.

Textile and Garment Sector

In the wake of the Tazreen and Rana Plaza tragedies, the textile and garment industry experienced a wake-up call. Old CSR models simply have not been working and executives and civil society alike have agreed that returning to business as usually is simply unthinkable.

To be sure some important advances have been made in the sector over the past decade. However, a multitude of challenges continue to exist in the sector. The fast paced and unreliable nature of the business, reliance on unskilled labour, strong downward price pressures and complex global supply chains all heighten the risk of adverse impacts and make supply chain management difficult.

The OECD is currently developing guidance on tackling some of these issues and practicing responsible business conduct in the face of ongoing challenges. This guidance will be finalized and released this year and we can only hope that it will have the transformational impact on the industry that the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals of from Conflict-Affected and High-Risk Areas has had on the extractives sector.

Financial Sector

As expectations of RBC in the financial sector continue to be shaped, increasing evidence is emerging demonstrating the positive business impact of social and environmental due diligence in the financial sector. For example a recent study by the University of Oxford and Arabesque Partners suggests that investment strategies that incorporate environmental and social governance (ESG) issues outperform comparable non-ESG strategies. [9]

This past year we made some advances in clarifying the expectations of the financial sector in the context of responsible business conduct. A few cases at the NCP level found a lack of adherence to the OECD Guidelines where environmental and social due diligence processes of certain financial institutions were not strong enough. In response to these cases the OECD and UN provided statements and explanatory notes exploring how the expectations of the OECD MNE Guidelines and UN Guiding Principles for Business and Human Rights (UNGPs) should apply in the context of the financial sector. [10]

This year the OECD will launch a project on responsible business conduct in the financial sector. Along with other leaders in this field such as the Equator principles, Principles for Responsible Investment, Thun Group of Banks, the OECD is now getting down to business and drilling down to the complex details of how financial institutions should actually conform to the expectations of the OECD MNE Guidelines and UNGPs. The financial sector represents relatively unchartered territory in the context of RBC. Ongoing work on these issues will lead to emerging good practices, which can be scaled up across the sector.

Extractives

For years now the OECD has been articulating best practices in responsible mineral sourcing. This year the OECD will release a User Guide on Stakeholder Engagement and Due Diligence in the Extractive Industries, contributing guidance on another crucial area of RBC in the extractives sector.

Effective stakeholder engagement is crucial to both communities as well as well as extractive enterprises themselves. Extractive operations often contribute to severe environmental and social impacts. Thus special attention on engagement with communities to avoid such impacts is crucial.   A lack of good community relations can also be critical from the perspective of maximizing profitability of operations. For example, a recent study found that the cost of community conflict amounts to a loss of approximately 20 million USD a week in NPV on average for major mining operations. [11]

The OECD User Guide on Meaningful Stakeholder Engagement is being developed in consultation with a multi-stakeholder advisory group and when finalized will represent the first authoritative multilateral guidance on this issues. Despite its political clout, the aim of the User Guide will be to provide practical, site level guidance and serve as a practical tool for practitioners.

Agriculture

Agriculture represents another high-risk sector due to high fluctuations in commodity markets, at times dangerous and laborious working conditions. As global demand for food continues to rise, developing countries represent new sources for agricultural markets. Agricultural operations in contexts of weak governance and land rights raise additional risks and challenges with regard to responsible business conduct.

This January a public consultation will be launched on a guide to responsible business conduct in agricultural supply chains developed in partnership with the OECD, FAO and a multi-stakeholder advisory body. This guide brings together various authoritative guidance on this issue and will help provide guidance to all actors throughout the supply chain on avoiding salient risks and operating ethically in this sector.

  1. UN Convention on Climate change: how can companies contribute to solutions?

The 21st session of the Conference of the Parties (COP 21) to the United Nations Framework Convention on Climate Change (UNFCCC) will take place in Paris, December 15th. This is set to be a historic event.  The announced objective of the 2015 conference is to reach a binding and universal agreement on climate, from all the nations of the world. This would be the first such agreement to be reached in over 20 years of UN negotiations.   While this will certainly prove to be an ambitious and challenging goal, certain developments provide promise that such a goal may be achievable. Notably, in late 2014 China and the US announced a plan to cap and lower emissions levels. The deal represents the first time that China has agreed to peak its carbon emissions signalling to the world that China is ready to come to the table to combat climate change.

Climate negotiations and policy have historically focused on government commitments and this continues to be the case today. Currently little guidance exists on the obligations and expectations of companies in climate change mitigation, but given that central role industry plays in production of global emissions, businesses should also be brought to the table. Applying the RBC agenda to the climate debate can help can contribute to adding dialogue on corporate responsibility in the context of GHG emissions to COP 21 and raising engagement from business and corporate stakeholders on these issues in the lead up to the event.

Several concrete areas where business responsibility and climate impacts have already been seen are in the context of transparency and finance. Increasingly countries are requiring greenhouse emissions reporting from companies. The OECD is currently developing a study analysing such reporting obligations amongst G20 countries. Additionally, climate risks are becoming a significant factor of consideration in investment strategies. We are already seeing many institutional investors divesting from industries such as coal due to heightened financial risk. Investment strategies incorporating climate risk may provide additional impetus to companies to report on emissions and climate impacts as well as to mitigate any such impacts.

  1. National Action Plans: will the US use its ‘Soft Power’?

This year several countries will develop and launch their National Action Plans (NAPs) on Responsible Business Conduct or more focused on business and human rights. NAPs for business and human rights are strategy documents that States are encouraged to develop as part of the State responsibility to disseminate and implement the UNGPs.  Although non-binding, NAPs will represent important reflections of countries’ policies on human rights and business and could prove useful in scaling up commitments to RBC as well as detecting best practices.

Several states have already developed and submitted NAPs, while others are now in the process.

One NAP of special importance and impact will be that of the United States. President Obama announced last year the development of a U.S. National Action Plan (NAP) to promote responsible and transparent business conduct overseas. The US NAP will address ways in which the U.S. government can promote, encourage, and enforce established norms of responsible business conduct with respect to human rights, labour rights, anti-corruption, and transparency. The plan will be consistent with the UNGPs and the OECD MNE Guidelines.

Consultations on the US NAP are currently ongoing. The potential impact of the document is significant. The EU CSR communication released several years back proved to be highly influential. My hope is that the US action Plan will be successful in projecting the ‘soft power’ of the US in the field of RBC.

  1. Sustainable Development Goals (SDGs): what can businesses do?

The SDGs grew out of Rio+20 conference and are meant to build off and replace the Millennium Development goals as the leading global framework for development. This summer the  UN General Assembly’s Open Working Group on Sustainable Development Goals released the first draft of the SDGs— 17 proposed goals accompanied by 169 targets. The goals cover a broad range of sustainability issues centred on poverty eradication, environment and development and are designed to be “action-oriented, concise and easy to communicate.’

What role will businesses play in the implementation of the SDGs?

Some of the goals, notably Goal 12 which is ‘’ensuring sustainable production and consumption patterns’’ have direct implications for business conduct. However on a general level, my guess is that the SDG’s will provide a rallying point for progressive businesses to contribute to reaching these goals and as well as to manage their operations to avoid undermining the SDGs. In this way the SDG’s will support the ‘do good’ as well as the ‘do no harm’ part of the RBC agenda. The SDG’s will also shape RBC risk profiles of certain sectors, particularly those with high environmental impact.

2015 will surely prove to be an exciting year for RBC. The hardening of voluntary principles into legal obligations, the availability of a range of practical guidance for business on RBC due diligence along with historical policy developments through the upcoming climate conference, development of NAPs and the SDGs will all contribute to raising the bar on RBC. Personally, I am looking forward to watching these initiatives unfold and predict it will indeed be a happy new year.

[1] Including the OECD Guidelines for Multinational Enterprises (revised in 2011); the UN Guiding Principles for Business and Human Rights   (2011) and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (MNE Declaration) (2011).

[2] Available here: http://www.srz.com/files/upload/Conflict_Minerals_Resource_Center/CCCMC_Guidelines_for_Social_Responsibility_in_Outbound_Mining_Operations_English_Version.pdf

[3] Available here: http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/Enhanced_CS_Strategy_ENG.pdf

[4] See Proposition de Loi 1897 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre.

[5] Modern Slavery Bill (proposal), UK (2014) Available at: https://friendsoftheoecdguidelines.files.wordpress.com/2014/11/modern-slavery-bill-15051.pdf See particularly Part 6, section 51 Transparency in Supply Chains

[6] Parliament Motion 14.3671 Umsetzung des rechtsvergleichenden Berichtes des Bundesrates über die Verantwortung von Unternehmen bezüglich Menschenrechten und Umwelt. Prof Ruggie on Motion 14.3671 Available at: http://business-humanrights.org/en/swiss-foreign-affairs-committee-calls-for-mandatory-human-rights-due-diligence-for-companies-0#c106965

[7] California Transparency in Supply Chains Act of 2010; Available at https://friendsoftheoecdguidelines.files.wordpress.com/2014/11/california-slavery-in-supply-chain-act-164934.pdf

[8] Protocol to Convention 29 – Protocol to The Forced Labour Convention, 1930, Adopted by the Conference at its one hundred and third Session, Geneva, 11 June 2014. Available at: http://www.ilo.org/ilc/ILCSessions/103/reports/committee-reports/WCMS_248900/lang–en/index.htm

[9] Oxford University and Arabesque Partners, ‘’From the Stockholder to the Stakeholder’’ (2014)

[10] See Expert letters and statements on the application of the OECD Guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights in the context of the financial sector, 2014; Scope and application of ‘business relationships’ in the financial sector under the OECD Guidelines for Multinational Enterprises, 2014 ; Due diligence in the financial sector: adverse impacts directly linked to financial sector operations, products or services by a business relationship, 2014

[11] Source: Daniel M. Franks, et al.  ‘’Conflict translates environmental and social risk into business costs’’)

“Going Out” in Search of Oil and Gas: How should Chinese companies investing abroad tackle human rights challenges? by IHRB Board Member Motoko Aizawa

“Going Out” in Search of Oil and Gas: How should Chinese companies investing abroad tackle human rights challenges? By IHRB Board Member Motoko Aizawa

“Ongoing steps by the Chinese Government to clarify its expectations of Chinese companies operating abroad, coupled with growing international expectations of businesses, are likely to lead to the GPs eventually becoming part of standard operating procedure for Chinese companies doing business anywhere in the world.”

Remarks by Angel Gurría, OECD Secretary General on the OECD proactive agenda and Global Forum from March 31, 2014

Remarks by Angel Gurría, OECD Secretary General on the OECD proactive agenda and Global Forum from March 31, 2014

Remarks by Angel Gurría, OECD Secretary General, on the OECD proactive agenda, presented at the meeting “Boosting social and environmental standards in international trade” in Paris, March 31st.