Corporate Social Responsibility and the Law : Foley Hoag LLP

Gwen Jaramillo and I recently authored an article for BNA Corporate Governance Report on the role of the board of directors in overseeing a company's CSR initiatives and commitments.  A copy of the article ("Board Oversight and Corporate Social Responsibility: Obligations and Considerations") is available here (.pdf).

At the conclusion of the article, we identify a number of questions that board members may wish to consider when thinking about their role in overseeing a company's approach to, and implementation of, CSR commitments.  These questions are set forth below:

Considerations for CSR Positioning

1. How does the company currently perceive CSR? Is CSR seen as a foundation for risk management and compliance, philanthropic efforts, and/or sustainability reporting?
2. What are the major legal, operational, and reputational challenges faced by the company and its industry peers? Are the company’s CSR initiatives, along with other company policies and practices, preparing the company to meet those challenges?
3. Who are the company’s stakeholders? How does the company’s CSR program enable the company to engage with, and assess the concerns of, those stakeholders?
4. How does the company compare with its industry peers in terms of its view and implementation of CSR? What value do industry members derive from their CSR positioning?
5. What voluntary commitments, codes, or standards have the company’s industry peers signed on to? Has the company done the same? Why or why not?
6. Does company management see the company as a leader? Does management want the company to be perceived as an industry leader or as in “the middle of the pack”? Is the company’s CSR positioning appropriate given management’s goals and self-perception?
7. What are potential avenues for better calibrating the company’s CSR positioning with its internal and external goals?

Considerations for CSR Implementation

1. What is the company’s CSR strategy? To what extent has the company implemented CSR initiatives? What is the state of awareness among company personnel of the existence and importance of these initiatives?
2. Does the board have a clearly defined role in overseeing the company’s CSR strategy? If not, how can a role for the board be established? Can it be linked with existing compliance oversight functions of the board? What are the risks and benefits to the company of formalizing a role for the board with regard to CSR?
3. Is the board currently informed regarding CSR-related compliance and reputational issues? What information is regularly provided to the board regarding the social and environmental impacts of the company’s operations?
4. Who is responsible for defining and overseeing CSR at the company? What oversight and accountability mechanisms reinforce the company’s CSR strategy?
5. What specific resources are required to implement the company’s current CSR policies and initiatives? Have those resources been effectively deployed or allocated? Have, or can, existing compliance mechanisms been utilized to build CSR capacity? What costs does the board perceive will be involved in implementing or augmenting a CSR strategy, and are such resources appropriately allocated to CSR at this time?

 Ultimately, as we state at the conclusion of the article,

...the board is charged with fulfilling its duties of care and loyalty. Whether the ultimate impact of CSR lies in its ability to protect against legal, reputational, and operational risks, or its capacity to create shared value for the company and its stakeholders, the board can best fulfill these duties to the corporation, and to stakeholders, by considering CSR’s value for the corporation and acting upon its conclusions.

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This post, authored by Sarah A. Altschuller and Gwendolyn W. Jaramillo, was originally published, in excerpted form, by The Elm Consulting Group.

The U.S. Securities and Exchange Commission (“SEC”) failed to issue a final rule on conflict minerals regulations before the end of 2011, and companies still await clear guidance on the scope of Section 1502 and the nature of the relevant reporting requirements. In an announcement regarding "upcoming activity" related to the implementation of Dodd-Frank, the SEC has now indicated that the final rule for Section 1502 will be adopted between January and June 2012. Notably, the SEC’s announcement indicates that “this is an estimated timeline and may be subject to change.” The final rule was originally scheduled to be issued no later than April 15, 2011.

The Conflict Minerals Report Requirement

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies that utilize tin, tungsten, tantalum, and gold to conduct and disclose due diligence on their supply chains in order to identify whether the those minerals originated in the Democratic Republic of Congo (“DRC”) or adjoining countries. If an issuer either determines that its conflict minerals originated in the DRC countries, or cannot conclude that the conflict minerals did not originate in the DRC countries, the issuer will be required to disclose this information in its annual report. The issuer must then furnish a Conflict Minerals Report (“CMR”) as an exhibit to the annual report, and must disclose the Internet address at which this exhibit is available.

The CMR must describe the due diligence that the issuer conducted on the source and chain of custody of its conflict minerals. Issuers will be required to describe: products that are not "DRC conflict free"; the country of origin of those conflict minerals; the facilities used to process those minerals; and efforts taken to locate the mine or source of the minerals with the greatest possible specificity.

The Reporting Timeframe

Section 1502 requires impacted issuers to submit their first disclosures regarding their first full fiscal year which begins after the promulgation of the final rule. With a final rule now delayed again, issuers currently subject to the legislation must evaluate how to prepare for the future disclosure requirements.

Looking ahead, and based on previous experience, it is most likely that the SEC will introduce a phased approach for disclosures, whereby certain initial disclosures will be required in the first reporting year that will need to be augmented in subsequent years. Many stakeholders have urged the SEC to adopt a phased approach in comments to the proposed regulations issued in December 2010.

Groups calling for a phased approach include the U.S. Chamber of Commerce, the National Association of Manufacturers, and the House Financial Services Committee. This could logically take the form of requiring larger issuers to fully comply in the first year following the issuance of the final rule, while giving smaller issuers the benefit of more time to comply. This approach has been used in several prior instances, including: the requirement for the inclusion of XBRL (eXtensible Business Reporting Language) data files in corporate filings; and the requirement, pursuant to Section 404 of the Sarbanes-Oxley Act, for an independent auditor’s report on the effectiveness of internal controls over financial reporting (although the requirement for smaller companies was eliminated by Dodd-Frank).

If the rule is issued in the next few months, issuers with fiscal years beginning in March/April or June/July would be required to issue their first reports in early to mid-2013. Issuers may fear being required to report on due diligence efforts undertaken during a time period unguided by final regulations, but that appears unlikely based on the language of Section 1502. That said, however, issuers with fiscal years beginning soon should be prepared to hit the ground running and ideally will have identified appropriate internal groups or departments who would be charged with collecting the required information in order to facilitate full compliance.

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The Obama Administration has filed an amicus brief with the U.S. Supreme Court in Kiobel v. Royal Dutch Petroleum in support of the plaintiffs' position that corporations are proper defendants in cases involving claims under the Alien Tort Statute ("ATS").  Filed on December 21, the brief was signed by the Department of Justice, the Department of State, and the Department of Commerce. 

The Supreme Court will review the Second Circuit's controversial decision that corporations cannot be properly sued under the ATS for violations of customary international law.  Notably, the Ninth Circuit, the D.C. Circuit, the Seventh Circuit, and the Eleventh Circuit have all upheld corporate liability under the ATS.

In its brief, the Administration states that neither international law nor "[t]he text and history of the ATS itself" provide a basis for distinguishing between natural and juridical persons. The brief then observes "[b]oth natural persons and corporations can violate international-law norms that require state action. And both natural persons and corporations can violate international-law norms that do not require state action."  

Stating that international law is the proper source of law for the relevant standards of conduct in ATS cases, the Administration states that "[w]hether corporations should be held accountable for those violations in private tort suits is a question of federal common law."  Federal courts must cautiously exercise their discretion to enforce specific international law norms and "[i]nternational law informs, but does not control, the exercise of that discretion."

Kiobel is scheduled for oral argument before the Supreme Court on February 28, 2012.

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Former UN Special Representative on Business and Human Rights John Ruggie, now a senior advisor to our CSR practice, recently authored an article in Corporate Secretary magazine in which he observed that there has been a "convergence of expectations" with regard to business responsibilities in the area of human rights.  

These expectations are set forth in the UN Guiding Principles on Business and Human Rights, authored by Professor Ruggie and his team.  As discussed previously, these Principles were endorsed by the UN Human Rights Council in June of this year. Central to the Principles is the expectation that companies have a responsibility to respect human rights and that this requires companies to conduct human rights due diligence on their operations.  As noted by Professor Ruggie,

[h]uman rights due diligence requires companies to develop effective policies and procedures to assess the actual and potential human rights impacts associated with their activities and business relationships, and to act upon the findings.

Professor Ruggie observes that the Guiding Principles are "not just another set of voluntary standards vying for attention in an increasingly crowded space" but rather represent "authoritative UN standards around which the articulated expectations of many public and private institutions have already converged." (emphasis added)

Specifically, as noted in the article, the United States Council for International Business, the International Organization of Employers, and the International Chamber of Commerce have all voiced support for the Principles. The guidance set forth in the Principles has also been incorporated into:

• The revised Organization for Economic Cooperation and Development ("OECD") Guidelines for Multinational Enterprises;
• The revised International Finance Corporation ("IFC") Sustainability Policy and the corresponding Performance Standards; and
• The ISO 26000 social responsibility standard adopted by the International Organization for Standardization ("ISO"). 

The formal endorsement, and rapid incorporation, of the Guiding Principles marks 2011 as a transformative year in the field of business and human rights. Looking ahead to 2012 and beyond, companies should expect that stakeholder expectations with regard to corporate impacts on human rights will increasingly be informed by this new framework. 

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I recently authored an article for IR Magazine on "CSR and the Role of the Board." In looking at board oversight in the area of CSR, one source that I relied upon was the 2010 report, Board Oversight of Environmental and Social Issues, published by Calvert Asset Management Company and The Corporate Library. 

The report analyzed board committee charters at S&P 100 firms and found that only 65 companies in the S&P 100 have board committees with some level of responsibility for oversight of corporate responsibility concerns. One of the most notable statistics from the study was the finding that less than 50% of those 65 boards monitor and provide recommendations on CSR trends and developments.

Ultimately, this lack of focus on trends is troubling.  Looking at developments in the CSR field over the previous decades, it is not hard to see that stakeholder expectations in the areas of environmental and social standards have often lead to the developments of new regulations, legislation, and lending guidelines.  As I noted in the article,

Understanding key trends is an integral component of effective long-term strategy development and can help ensure that companies have the capacity to respond to concerns when they arise. Companies regularly seek to identify trends in consumer preferences and in regulatory environments. Companies should exercise the same diligence in identifying future stakeholder expectations with regard to social and environmental performance. Stakeholder expectations in the area of CSR frequently ask companies to go “beyond compliance” with existing legal and regulatory standards. At the same time, these expectations are often predictive of the future content of legal and regulatory requirements.

A full copy of the article is available here (.pdf).

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A developer for Google's Android mobile phone operating system has exposed what has the potential to be the most significant user privacy security vulnerability ever discovered in any computing device.

In a video posted to YouTube, Connecticut-based developer Trevor Eckhard has demonstrated how a program called Carrier IQ logs an astonishing amount of information about every aspect of mobile device use — from the full-text of SMS messages to the URL of every website visited using the device, not to mention every single keystroke that a user enters into their phone or tablet.

The Carrier IQ software is made by an eponymous company based in Silicon Valley (www.carrieriq.com) and is now known to come preinstalled on Android phones sold by many major carriers, including Sprint in the United States. The software launches automatically whenever a device on which it is installed is powered up, and there appears to be no way to disable or delete the software without “rooting” the device. It has not yet been confirmed whether the software is preinstalled on devices running operating systems other than Android, although this seems very likely given that a media alert issued by Carrier IQ earlier this month explains that its software is used for “counting and measuring operational information in mobile devices” including “feature phones, smart phones and tablets.”

In the same media alert, Carrier IQ denied that its software was being used to “record[] keystrokes or provid[e] tracking tools.” This denial appears to be contradicted by Mr. Eckhart's YouTube video, although in fairness to Carrier IQ, the video does not actually demonstrate the information collected by the software being transmitted to a mobile phone operator.

It is, of course, entirely possible that the potential the Carrier IQ software seems to provide for tracking nearly everything an individual does on their mobile device cannot actually be realized due to other aspects of the software architecture. If this is the case, Carrier IQ needs to explain that the user tracking potential of its software is the result of a programming oversight and move quickly to patch its software. If, on the other hand, the Carrier IQ software can be used by a mobile phone company to capture keystroke, phone call, SMS, or URL information, the company needs to inform the public immediately. One does not need a very fertile imagination to see what a formidable surveillance tool Carrier IQ might be in the hands of a totalitarian government, and users in such countries ought to know whether their mobile devices can be used to expose intimate personal information.

More generally, the Carrier IQ incident offers an object lesson on the importance of collecting and retaining the least amount of data required to accomplish a given task. There is no reason to doubt Carrier IQ's statement in its media alert that its software is designed to “assist operators and device manufacturers in delivering high-quality products and services to their customers” by “counting and measuring operational information in mobile devices.” That being said, there is no reason that keystroke, phone number, URL, or SMS data needs be collected in the level of detail in which Carrier IQ seems capable to optimize mobile devices or their network use. Reducing the amount of data collected to the bare minimum required is not only a good strategy for protecting user privacy and preventing data breaches, but it also helps companies avoid the glare of negative publicity when overbroad data collection capabilities are revealed.
 

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Earlier today, Federal Trade Commission ("FTC") and Facebook announced a settlement of the government's charges that the company had deceived users regarding their ability to keep their information private. We have reposted below a blog post outlining the major elements of the settlement agreement. The post was authored by our colleague Colin Zick, co-founder of Foley Hoag's Security & Privacy practice group, and originally posted on the firm's Security, Privacy, and the Law blog.

One of the most interesting aspects of the settlement from a corporate social responsibility perspective is that Facebook has agreed to submit to independent audits to ensure that its privacy controls and policies are consistent with the FTC settlement. These audits are to occur every two years -- over the course of the next 20 years. A similar requirement was imposed in the FTC's settlement of its case against Google, which involved charges stemming from the company's launch of the Buzz social network.

In incorporating independent audit requirements, these recent FTC consent orders are consistent with the best practices established over the last decade in a variety of industries. For example, the Fair Labor Association requires its apparel industry member companies to submit to independent external monitoring, while in the information and communication technology industry, member companies of the Global Network Initiative (including Google) have agreed to regular independent assessments of their policies and procedures intended to protect user privacy and freedom of expression online.

Looking ahead, it will be interesting to see whether today's announcement may lead to other social media companies developing stronger internal and external mechanisms to ensure that their privacy policies are appropriate and effective.

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Facebook Settles FTC Charges that It Deceived Consumers, Agrees to 20 Year Consent Order

Posted on November 29, 2011 by Colin J. Zick

In a settlement announced today by the Federal Trade Commission and Facebook, the social networking service agreed to settle charges that it deceived consumers by telling them they could keep their information on Facebook private, and then repeatedly allowing it to be shared and made public according to the FTC's press release.

In its complaint, the FTC alleged, among other things, that Facebook users could not restrict access to their profile information to specific groups, such as “Only Friends” or “Friends of Friends” through their Profile Privacy Settings despite Facebook's representations that users could impose such restrictions on their accounts.

In the extensive consent order Facebook entered with the FTC, Facebook agreed (among other things) to “obtain initial and biennial assessments and reports . . . from a qualified, objective, independent third-party professional, who uses procedures and standards generally accepted in the profession,” which assessments and reports will:

• set forth the specific privacy controls that [Facebook] has implemented and maintained during the reporting period;
• explain how such privacy controls are appropriate to [Facebook's] size and complexity, the nature and scope of [Facebook's] activities, and the sensitivity of the covered information;
• explain how the privacy controls that have been implemented meet or exceed the protections required by Part IV of this order; and
• certify that the privacy controls are operating with sufficient effectiveness to provide reasonable assurance to protect the privacy of covered information and that the controls have so operated throughout the reporting period.

This consent order will last for an astoundingly long time: 20 years. (Query whether this agreement's terms and length will become the standard for future FTC privacy settlements.)

Facebook founder Mark Zuckerberg also released a blog post on the settlement, and in it he announced a split in the company's privacy officer role: Erin Egan will become Facebook's Chief Privacy Officer, Policy, and Michael Richter, currently Facebook's Chief Privacy Counsel,will become Facebook's Chief Privacy Officer, Products.

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In less than two months, on January 1, 2012, the California Transparency in Supply Chains Act will go into effect. Companies impacted by the legislation will be required to disclose their efforts, if any, to ensure that their direct supply chains are free from slavery and human trafficking.

As discussed in previous posts, the legislation applies to retail sellers and manufacturers doing business in California that have annual worldwide gross receipts exceeding one hundred million dollars.

Today, a group of investors released a best practices guide for companies seeking to comply with the California legislation. The guide, Effective Supply Chain Accountability: Investor Guidance on Implementation of The California Transparency in Supply Chains Act and Beyond, was released by the Interfaith Center on Corporate Responsibility, Christian Brothers Investment Services, and Calvert Investments. 

Beyond making the minimum disclosures required by the legislation, the guide urges companies to implement a comprehensive approach to the management of human rights risks in their supply chains. Specifically, the authors call on companies to develop a comprehensive management approach to human rights-related risks that includes the following elements:

• A human rights policy;
• Human rights due diligence;
• Human rights risk assessments;
• Verification and traceability mechanisms;
• Training/capacity building;
• Collaboration; and
• Disclosure/transparency. 

This guidance is responsive to the expectations of key corporate stakeholders, including shareholders, legislators, and consumers, who are increasingly demanding that companies identify and manage the human rights impacts of their operations, including human trafficking.  As the guide states,   

[g]iven the enactment and proposal of similar laws protecting human rights, including Section 1502 of the Dodd-Frank Act and HR 2759, the Business Transparency on Trafficking & Slavery Act, it has become clear that human rights risks within business value chains are becoming more widely acknowledged. As such, it is imperative that companies take active steps to combat human trafficking within their direct operations as well as supply chains to ensure that they are not complicit in human rights abuses.

In a press release accompanying the guide, David Schilling, Program Director for Human Rights at the Interfaith Center on Corporate Responsibility, observed that

We believe that additional legislation, at both the state and the federal levels, addressing these egregious human rights violations in company supply chains is inevitable.  The California Supply Chain Act may be the first law of its kind in the nation, but it will most certainly not be the last.

We believe that stakeholder expectations regarding the corporate responsibility to respect human rights will be increasingly embedded in state, national, and international legislative and regulatory frameworks. This "convergence of expectations" is a trend reflected by the California legislation and the advice provided in the new guide is intended to assist companies in meeting both current and future compliance requirements.

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Business Ethics magazine recently published an interview with John Ruggie, the former U.N. Special Representative on Business and Human Rights who recently joined Foley Hoag's CSR practice as a senior advisor. Michael Connor, Editor and Publisher of Business Ethics, conducted the interview.  The conversation focused on the Guiding Principles on Business and Human Rights, the business drivers for respecting human rights, and the ways in which the Principles have been adopted by both public and private stakeholders.  

Speaking about the corporate responsibility to respect human rights, Professor Ruggie observed that,

The corporate responsibility to respect human rights is a social responsibility over and above compliance with applicable laws. It is the minimum expectation society has of business conduct in relation to human rights. It means that as business goes about its business, it should not infringe on the rights of others. So manufacture your mouse traps, deliver whatever services you provide, but don’t infringe on others’ human rights in the process.

He also discussed the "business case" for respecting human rights, in particular noting some of the costs that may be associated with lawsuits and community opposition when companies fail to address human rights concerns.  In this context, he referenced recent research on the costs of conflict that was initiated under his former mandate.  Specifically with regard to mining companies, he noted that,

For a world-class mining operation, which requires about $3-5 billion capital cost to get started, there’s a cost somewhere between $20 million and $30 million a week for operational disruptions by communities. Another estimate used by the mining industry is that an asset manager is supposed to spend between 5% and 10% of his or her time on community engagement issues. We found that it can be anywhere from a one-third to 50%, and in some cases 80% of their time. So there are opportunity costs, financial costs, legal costs and reputational costs. 

Finally, speaking about the fundamental concept of human rights due diligence, which is a core element of the Guiding Principles, Professor Ruggie observed the extent to which this normative obligation has been adopted in both voluntary and legislative standards:

Human rights due diligence is now...in the requirements of the OECD (Organisation for Economic Development and Cooperation) guidelines on multinational enterprises. ..The principle has been incorporated into a new ISO (International Standards Organisation) standard, ISO 26000. The International Finance Corporation has updated the performance standards it requires of clients, which now reference the business responsibility to respect human rights. The European Commission has incorporated the same principles, including human due diligence, into a new EU strategy on corporate social responsibility. In the U.S., the Dodd-Frank Act includes a due diligence element for companies sourcing certain minerals closely tied to conflict in the Democratic Republic of Congo.

The full text of the interview is available here. 

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Almost one year ago, we wrote about the long history of Sarei v. Rio Tinto, an Alien Tort Statute ("ATS") case filed in 2000 against Rio Tinto Plc involving allegations stemming from the company's mining operations on the island of Bougainville, Papua New Guinea. Last week, on October 25, the Ninth Circuit Court of Appeals reversed the District Court's dismissal of plaintiffs' claims for genocide and war crimes.  In doing so, the Court upheld corporate liability under the ATS.  

Notably, this decision comes shortly after the Supreme Court's decision to grant plaintiffs' petition for a writ of certiorari in Kiobel v. Royal Dutch Petroleum Co. In Kiobel, the Second Circuit held that corporations are not proper defendants in ATS cases. The Ninth Circuit disagreed and emphasized the importance of looking to the statute's "language and purpose." The Court noted that it had previously held that Torture Victim Protection Act's "express language and documented legislative history reflected congressional intent to limit liability under that statute to individuals." (citing Bowoto v. Chevron, 621 F.3d 1116 (2010)). In comparison, the Court found that

The ATS contains no such language and has no such legislative history to suggest that corporate liability was excluded and that only liability of natural persons was intended. We therefore find no basis for holding that there is any such statutory limitation.

The Ninth Circuit thus joins the D.C. Circuit, the Seventh Circuit, and the Eleventh Circuit in upholding corporate liability under the ATS. In response to the Ninth Circuit's ruling, one legal observer stated, "[t]his opinion reiterates that Kiobel is an outlier." 

Notably, one year ago, the case had been referred to a mediator “to explore the possibility of mediation.” Sarei v. Rio Tinto, 02-cv-56256 (9th Cir. October 26, 2010). In February 2011, the case was returned to the en banc Court. Sarei, 02-cv-56256 (9th Cir. February 11, 2011).

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On Monday, October 17, the U.S. Supreme Court granted plaintiffs' petition for a writ of certiorari in Kiobel v. Royal Dutch Petroleum Co. In Kiobel, the Second Circuit Court of Appeals held that corporations cannot be sued under the Alien Tort Statute (“ATS”) for violations of customary international law. The question of corporate liability under the ATS was left unsettled by the Supreme Court in Sosa v. Alvarez-Machain (2004) and the Court's decision to grant certiorari in Kiobel was widely anticipated. 

Cases brought by plaintiffs in the United States under the ATS represent the largest body of domestic jurisprudence on corporate responsibility for violations of international human rights law.  Kiobel itself is one of a series of cases arising from claims that Royal Dutch Petroleum was complicit in human rights abuses against the Ogoni people in Nigeria. Three related cases (the Wiwa cases) settled on the eve of trial in June 2009 for a disclosed settlement of $15.5 million. 

The September 2010 decision in Kiobel was suggested by some legal scholars to be the beginning of the end for ATS litigation again corporate defendants. Since the Second Circuit's ruling, however, the Seventh Circuit and the D.C. Circuit have both issued decisions finding that corporate liability is proper under the ATS. The Eleventh Circuit has also upheld corporate liability under the ATS. 

The Supreme Court also granted certiorari in Mohamed v. Rajoub, in which the D.C. Circuit held that non-natural persons were not proper defendants under the Torture Victims Protection Act. In Mohamed, plaintiffs had sought damages against the Palestine Liberation Organization and Palestinian Authority. In its orders granting certiorari, the Supreme Court directed that Kiobel and Mohamed be argued in tandem.

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Corporate social responsibility and nuclear power? Indeed. In September, the very first code of conduct for the nuclear power plant industry was launched.

The development of the "Principles of Conduct" was facilitated by the Carnegie Endowment for International Peace. Representatives of all of the major exporters of nuclear power plants participated in the drafting process, which was initiated in 2008. I had the honor of being selected by the Carnegie Endowment to help facilitate the negotiations.

The Principles set forth expectations in the following areas: 

1. Safety, Health, and Radiological Protection; 
2. Physical Security;
3. Environmental Protection and the Handling of Spent Fuel and Nuclear Waste;
4. Compensation for Nuclear Damage;
5. Nonproliferation and Safeguards; and
6. Ethics.

While the Principles were initiated prior to the Fukushima nuclear accident, the completed text reflects certain initial lessons learned from that disaster, especially in the area of safety. At the time of the Principles' launch, Richard Giordano, Chairman of the Board of Trustees for the Carnegie Endowment, observed

Whatever lessons particular countries draw from Fukushima over time, new nuclear plants will continue to be built, some in countries that have only recently begun to utilize nuclear power. It is therefore imperative that nuclear energy is implemented safely and responsibly in both emerging and developed markets. 

I was especially involved in the drafting of Principle 6, which focuses on ethics. Principle 6 helps nuclear exporters meet three primary objectives:

1. Safeguarding the environment and the wellbeing of communities near nuclear power plants, including through effective communication with those communities;
2. Respecting human rights, including the fundamental labor rights of employees; and
3. Fighting corruption.

Principle 6 is important because it addresses measures to mitigate the potential effects of nuclear power on communities and the environment. Principle 6 states that the exporters will work with their customers to consult with communities near nuclear power plants regarding the social and environmental effects of planned activities. The exporters also agree to take sustainable development into account in their activities.

Principle 6 also states that the exporters will respect the fundamental labor rights of their employees, including the right to collective bargaining. They also pledge to respect the Universal Declaration on Human Rights -- a commitment which has implications for their interactions not only with employees, but also with communities and other stakeholders.

Finally, Principle 6 addresses the challenge of corruption, which can arise in the context of large infrastructure projects. The exporters commit to having internal programs in place to fight corruption, and to seek a reciprocal commitments from customers.

The Principles represent a significant new development for the nuclear industry.  As stated on the Principles'  website, 

The Principles of Conduct reflect a recent trend in the management of global challenges. Leading industries, including those in the oil and gas, apparel and pharmaceutical sectors, increasingly have recognized the value of their reputations as socially responsible actors to their long-term business success.

Ultimately, the launch of these new Principles reflects a convergence of international expectations regarding corporate behavior and self-discipline: companies in every industry are expected to demonstrate responsible stewardship with regard to the social and environmental impacts of their operations.

To date, the following companies have adopted the Principles:

• AREVA
• ATMEA (an AREVA-Mitsubishi joint venture)
• Atomstroyexport
• Candu Energy (the successor exporting company to Atomic Energy of Canada Limited)
• GE Hitachi Nuclear Energy
• Hitachi-GE Nuclear Energy
• Korea Electric Power Company (KEPCO)
• Mitsubishi Heavy Industries (including Mitsubishi Nuclear Energy Systems, a subsidiary)
• Toshiba
• Westinghouse Electric Company

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The most popular suite of tools to measure and manage greenhouse gases just got a lot more complete -- allowing companies to track the impact of their products from natural resources and raw materials, through manufacturing, use and disposal, and providing a detailed framework to measure companies’ “everything else” Scope 3 emissions.   

The Greenhouse Gas Protocol Initiative (a collaboration between the World Resources Institute and the World Business Council for Sustainable Development) finalized its two newest global greenhouse gas standards on October 4. The GHG Protocol are the most widely used suite of accounting tools for measuring, managing and reporting greenhouse gas emissions -- for instance, in 2010, more than 85% of the nearly 2,500 respondents to the Carbon Disclosure Project survey used these standards. With the addition of the two new standards -- the Corporate Value Chain (Scope 3) Accounting and Reporting Standard and the Product Life Cycle Accounting and Reporting Standard -- companies have more guidance on a methodology and common language to report the impacts of their operations as they span the supply chain and the life cycle of their products. The GHG Protocol website even includes a cute video to explain what Scope 3 emissions are and why they claim these new protocol will save the world.

The new standards, which have taken three years to develop, involved the input of close to 2,500 partners, and were actively road-tested by 60 companies from 17 countries. The final standards have been influenced by the many comments received since they were published in draft form last November, and are intended to build upon the GHG Corporate Standard from 2004 which details how to report Scope 1 emissions (direct emissions from sources a company owns or controls, like factory smokestacks and company-owned cars) and Scope 2 emissions (indirect emissions attributable to the electricity, heat and cooling the company directly consumes).

Scope 3 emissions, which include everything else, are the great unknown variable in greenhouse gas reporting. They contain the vast majority of emissions, and accordingly, have the biggest opportunities for reductions. The authors of these new standards hope that they provide companies with a “treasure map” to identify and locate these opportunities to help both the environment and the business’s bottom line. At the very least, these protocol will simplify and reduce the costs for companies taking on a Scope 3 inventory, and improve the relevance, completeness, consistency, transparency and accuracy of the emissions reported each year. 

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More than a Resource: Water, Business, and Human Rights, a recent report by the Institute for Human Rights and Business ("IHRB") calls on companies to take action to respect the human right to water.

The report references the emerging consensus among international institutions that businesses have a responsibility to respect human rights, and highlights the Guiding Principles on Business and Human Rights, drafted by the former U.N. Special Representative on Business and Human Rights, John Ruggie, as providing the most authoritative guidance on how to implement this responsibility. The Guiding Principles specifically state that companies should conduct human rights due diligence in order to assess and respond to the actual and potential human rights impacts of their operations. 

As previously discussed, in July 2010, the U.N. General Assembly declared access to safe water to be a human right.  Soon thereafter, in September 2010, the U.N. Human Rights Council adopted a resolution recognizing access to clean water and sanitation as a fundamental human right, “equal to all other human rights” (emphasis added) and capable of legal enforcement.  These developments came at the same time as increasing water scarcity is impacting communities, and companies, around the world. 

The new report by IHRB suggests that

[i]n view of the fact that the right to drinking water and sanitation was formally recognized in 2010, all businesses should take account of this right when they implement human rights due diligence procedures and develop a human rights policy statement

as called for in the Guiding Principles.  In our previous analysis of the human right to water, we noted that companies will likely find that stakeholders increasingly expect due diligence efforts, especially with regard to human rights impacts, to include assessments of corporate impacts on community water resources. 

Notably, the IHRB report also predicts that "governments and intergovernmental organizations will increasingly call on businesses to be transparent and accountable for their impacts in relations to water, in human rights terms." That said, as the report observes, "most businesses do not yet consider water to be a social issue, and the great majority do not explicitly address the human rights impacts of their policies and operations in this area."  This is an emerging challenge that many companies, especially those with water-intensive operations, will need to address in order to manage their operations and stakeholder relationships effectively.

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On September 20, the Obama Administration announced its intent to join the Extractive Industries Transparency Initiative ("EITI"). Government members of the EITI are required to disclose the payments that oil, gas, and mining companies make to them, and companies operating in those countries publish their payments to the governments. The two can then be reconciled for greater transparency and certainty regarding payments to governments.

A working group in each EITI member country – made up of the government, companies, and civil society -- determines precisely how the reporting is conducted for that jurisdiction. In most countries, the information is presented in a partially aggregated manner so that, for example, the precise dollar amount paid in royalties by a particular company for a specific project is not clear.

The Obama Administration’s statement would make it the first G8 government to become a reporting country under the EITI. Other G8 governments are "supporters" of the EITI, but this does not require them to undertake reporting on their own extractive industry revenues. As a political gesture, the Obama Administration’s statement is significant because it implies that western countries should be subject to the same reporting standards as less-developed nations. It also means that oil, gas, and mining companies with contracts with the U.S. government would be required to report on their payments.

The Obama Administration’s statement arrives amid continuing controversy in the United States regarding the best way to increase revenue transparency. Section 1504 of the Dodd-Frank Wall Street Reform Act requires companies reporting to the Securities Exchange Commission ("SEC") to disclose their payments to the SEC on a project basis. Civil society celebrated this development, stating that it will increase the accountability of governments to their citizens regarding the use of oil, gas, and mining money, and thus ensure more benefits reach the general public. Industry, however, has raised concerns regarding the cost and political implications of the reporting required by Section 1504, which is likely to be more detailed than that required by the EITI. Industry maintains that the EITI remains the best mechanism to enhance revenue transparency. The SEC has yet to issue its final rule to guide implementation, so it is not clear whether it will demand reporting significantly more detailed than the EITI requires. Therefore, the precise implications of the law are uncertain.

NGOs have welcomed the Obama Administration’s intent to join the EITI, stating that it ensures that privately held companies with oil, gas, or mining contracts with the U.S. government will be required to report their revenues. Such companies do not report to the SEC, and therefore are not covered by Section 1504. At the same time, the American Petroleum Institute has welcomed the Obama Administration’s decision, claiming that, based on the Administration’s support for the EITI, the SEC should simply follow the EITI’s reporting standards when devising its rule. Time – and the SEC rule – will tell which side has read the tea leaves correctly.

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Last week, I gave the keynote address at an Extraordinary Plenary Meeting of the Voluntary Principles on Security and Human Rights, held in Ottawa, Ontario on September 15-16, 2011. (Note: I did not deliver my remarks in my capacity as Senior Advisor to Foley Hoag's CSR practice. As noted previously on this blog, however, Foley Hoag serves as the Secretariat for the Voluntary Principles.) 

In my remarks, I observed that the Voluntary Principles "deals with the most palpable and widely recognized of all human rights: the physical security and integrity of the person."  I also recognized that the multi-stakeholder nature of the Voluntary Principle provides critical support to companies operating in difficult environments. Specifically, I noted that "companies need granular advice and assistance from home and host states alike. They need to be able to count on the in-country government-to-government interface that is a critical component of the [Voluntary Principles]—for example, to address the challenges of security sector reform, or to provide assistance in managing the predictable influx of people and corresponding demand for infrastructure when a new site opens."

The full text of my remarks can be found here.  

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In the Carbon Disclosure Project's 2011 analysis of the largest 500 companies, the Global 500, there is a very interesting statistical trend -- the companies who were the most strategically focused on accelerating low-carbon growth had returns from January 2005 to May 2011 that doubled the Global 500 as a whole, with returns totaling over 85%, compared to the 42.7% returns for the index.  Even more amazingly, the 13 companies that had been recognized by CDP for this strong focus for the last 3 years outperformed the Global 500 by over 60 percentage points over the same period.  Does monitoring and disclosing a company's carbon footprint and incorporating the risks and opportunities of climate change at executive levels actually lead to increased financial performance?  This report suggests there is a high correlation, at least. 

The report analyzes the responses the Global 500 companies submitted to a questionnaire that has CDP has sent on behalf of institutional investors every year since 2002.  Participation has increased each year -- up to 81% for 2011 -- as has the quality of the companies' answers and reporting, and the targets and goals that companies set for themselves.  This year's results show significant progress by all of the reporting companies in a few key areas, such as 74% of respondents setting greenhouse gas reduction targets, and 59% reporting a payback period of 3 years or less on their emission reduction activities. This year's survey also marked the first time that a majority (68%, up from 48% in 2010) of respondents have integrated carbon reduction efforts into the heart of their business strategies.

The set of 58 companies that doubled the returns of their peers were listed by CDP as part of the Carbon Disclosure Leadership Index (CDLI) (those that scored the highest on carbon emission measurement techniques and subsequent public disclosure) and Carbon Performance Leadership Index (CPLI) (those that fell within the top 10% of respondents when scored on strategic commitment to the business issues related to GHG emissions, energy use, and climate change).  There were 23 companies who made both lists.  Companies in Canada, Japan and the US were under-represented on these lists, compared to their peers in Australia, Germany, Italy, Switzerland and the U.K.  Surprisingly, given the regulatory focus it faces, the energy sector lags behind other sectors with the lowest proportion of companies setting targets (55%) and under-representation on both the CDLI and CPLI.

What did the CDLI and CPLI companies do differently?  As the report highlights, one notable difference between the companies named to the CDLI and those that were not is the practice of setting emissions reduction targets on which the company places significant emphasis -- 96% of the CDLI companies have emissions reduction targets, versus just 70% of the remaining companies.  Also significant seems to be whether the companies dedicated resources and time to identifying the new opportunities, investments and potential partnerships that a low-carbon economy could bring about -- the average score for the CDLI companies on this rubric is 88 (out of 100) compared to 54, across all respondents.  Similarly, all 29 of the CPLI companies have integrated their climate-related risks and opportunities into their business strategy, and used monetary incentives to encourage employees to meet carbon reduction goals.  The CPLI companies also universally submitted their emissions data for adequate verification -- something that only 37% of the remaining companies did, despite the importance of providing investors validated data.

Although the authors of the report argue that this data is a clear indicator that it makes good business sense to manage and reduce carbon emissions, correlation is not necessarily causation.  The companies who are better managing their carbon may just be better managed overall, leading to better performance.  Either way, the fast-rising number of Global 500 companies who are moving to capitalize on these opportunities highlights that more sustainable business models are, increasingly, simply the way business is done.

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Human trafficking is a problem that is often hidden from sight, especially in the United States. The statistics on human trafficking and commercial sexual exploitation are unsettling. Nearly 800,000 people are trafficked across international borders every year. The U.S. Department of State’s 2010 Trafficking in Persons Report estimated that 2,000,000 children are exploited in the global commercial sex trade. ECPAT International, an international non-governmental organization, estimates that between 100,000 – 300,000 children are potentially subject to commercial sexual exploitation in the United States.

The U.S. Department of Justice has identified human trafficking as the fastest growing criminal industry in the world. Correspondingly, the level of advocacy seeking to address this problem has increased significantly in recent years, with a specific focus on engaging the private sector in efforts to combat the efforts of traffickers. Companies, especially in the travel industry, are facing increased pressure from stakeholders to play a role in addressing the problem. Companies have been subject to shareholder resolutions, online petitions, and legislative pressure asking companies to implement policies and procedures intended to promote the identification and reporting of trafficking activity.

For example, in June 2011, the Interfaith Center on Corporate Responsibility issued a statement asking 90 companies, including four companies in the travel industry, to take a leadership role in abolishing human trafficking and slavery. At the time of the statement, a representative of Boston Common Asset Management observed, “[i]t is no longer acceptable for companies to avoid this issue: each must do its part to eradicate the threat of human trafficking and slavery within its spheres of influence.”

Congress has also taken an interest in the travel industry’s actions to combat human trafficking. At a hearing in June 2011, Rep. Christopher Smith (R-NJ) observed, “No country and few industries are untouched by [human trafficking]. Traffickers use airlines to move their victims, [and] hotels to exploit sex trafficking victims.” His remarks focused on the potential for public-private partnerships. The U.S. Department of State, through the Office to Monitor and Combat Trafficking in Persons, has been involved in a number of these partnerships, working with companies in the travel sector on programs to protect and assist victims of trafficking.

As part of this advocacy and engagement, many companies have been asked to sign The Code of Conduct for the Protection of Children from Sexual Exploitation in Travel and Tourism (“The Code”). The Code, originally developed over ten years ago by ECPAT International, is not technically a code of conduct, but rather a set of business principles that can be adopted and implemented by companies in a manner appropriate to their business models. Consistent with The Code’s principles, advocates have urged companies to: adopt corporate policies against sexual exploitation; train staff to be observant to potential victims; provide staff with information on how to report suspicious activity; build alliances with police, anti-trafficking organizations, and child welfare agencies; and provide information to guests regarding national laws, hotline numbers to report potential incidents, and the penalties imposed for trafficking and the sexual abuse of children.

In 2004, Carlson became the first American company to sign on. In a recent statement, Beathe-Jeanette Lunde, Executive Vice President for People Development, Responsible Business, Safety and Security at Carlson, stated that affiliation with The Code represents “an opportunity to be open and proactive” about the crime of child exploitation and child trafficking “so all our stakeholders, be it employees, guests or suppliers, can feel safe while working or doing business with us.” More recently, in 2011, Delta Air Lines and Hilton Worldwide have also signed on to The Code.

That said, few American travel industry companies have signed The Code since its initiation over ten years ago. Some companies have policies against signing external codes of conduct, but the reluctance to adopt these business principles has also reflected industry concern regarding the legal and reputational risks of being associated with human trafficking. In recent remarks before a Congressional committee, Ambassador Luis CdeBaca, Director of the U.S. State Department’s Office to Monitor and Combat Trafficking in Persons, noted that many companies have stated that they “would love to do something” but find the notion of having their brands in any way associated with trafficking activity to be too “nerve-wracking.”

As companies worry about creating associations between their brands and human trafficking, the reality is that external stakeholders are already making this association. Companies increasingly risk being perceived as failing to address this criminal activity and its associated human rights concerns. Ultimately, companies are in the position of needing to define the narrative, rather than letting external advocates define it for them. As more and more companies are growing comfortable with taking proactive steps, those who have not yet addressed the issue will likely face increased scrutiny.

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Press Release

September 7, 2011 -- John G. Ruggie, the former U.N. Secretary-General’s Special Representative for Business and Human Rights and current Harvard professor, has joined Foley Hoag LLP’s Corporate Social Responsibility Practice as a senior advisor.

Ruggie authored the Guiding Principles on Business and Human Rights, which the U.N. Human Rights Council unanimously endorsed in June after six years of development. The Guiding Principles set a standard of practice that is now expected of companies with regard to human rights. They also make recommendations to governments and are likely to affect legal and policy developments at national and international levels.

Key elements of the Guiding Principles have also been incorporated into the updated OECD Guidelines for Multinational Enterprises, under which complaints can be brought against companies in the 42 adhering countries. And the International Finance Corporation, the private sector arm of the World Bank, has updated its sustainability policy and corresponding performance standards it requires clients to meet to explicitly reference the business responsibility to respect human rights. More than 70 financial institutions worldwide and several national credit export agencies track the IFC standards.

As a senior advisor in Foley Hoag’s Corporate Social Responsibility Practice, Ruggie will help multinational companies navigate the Guiding Principles and apply them to their global business practices. He will also provide broad-based guidance in the area of business and human rights. Ruggie will continue to serve as the Berthold Beitz Professor in Human Rights and International Affairs at Harvard’s John F. Kennedy School of Government and as an Affiliated Professor in International Legal Studies at Harvard Law School.

Foley Hoag’s Corporate Social Responsibility Practice advises multinational corporations, governments, and multilateral institutions on a range of social, political, and environmental issues in the global business marketplace. Foley Hoag helps clients anticipate social, ethical, and environmental accountability challenges and limit their risks by incorporating internationally recognized standards into their strategies and operations and relationships with stakeholders.

Ruggie has long been involved in practical policy work, initially as a consultant to various agencies of the United Nations and the U.S. government. From 1997-2001 he served as U.N. Assistant Secretary-General for Strategic Planning, where he was responsible for establishing and overseeing the U.N. Global Compact, now the world’s largest corporate citizenship initiative; proposing and gaining General Assembly approval for the Millennium Development Goals; advising Secretary-General Kofi Annan on relations with Washington; and broadly contributing to the effort at institutional renewal for which Annan and the United Nations as a whole were awarded the Nobel Peace Prize in 2001.

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As discussed in an earlier post, the International Finance Corporation ("IFC") recently released an updated version of its Performance Standards on Environmental and Social Sustainability.  The IFC uses the Performance Standards to manage the social and environmental risks and impacts associated with projects receiving IFC financing.  The revised Standards reflect a number of important changes, particularly on the topic of engaging with communities, with special guidance related to indigenous peoples. 

The Performance Standards, in essence, lay out three tiers of community engagement:

(1)   Baseline Consultation

Pursuant to Performance Standard 1, companies are required to have a social and environmental management system ("ESMS") in place throughout the life of each project receiving IFC financing.  As part the ESMS, companies must engage in consultation with communities that are subject to risks and adverse impacts from the project, and must respond to concerns raised by those communities.  The depth of the required consultation is dependent on the specific risks associated with the project, and the concerns raised by affected communities. 

The consultation requirements in the updated Performance Standards are substantially similar to the requirements reflected in the previous version, released in 2006.  Specifically, the consultation should: 

• Begin early;
• Be based on prior disclosure of information to communities in an accessible format;
• Be free from coercion; and
• Be documented. 

(2)   Informed Consultation and Participation

The revised  Performance Standards establish additional consultation requirements for projects with “potentially significant adverse impacts" on local communities.  In such instances, a company must conduct an “Informed Consultation and Participation” (“ICP”) effort, building on the basic consultation process.  The company is supposed to utilize the information gathered in this consultation to mitigate impacts, tailor its implementation, and identify appropriate mechanisms for the sharing of project benefits. 

It is not yet clear how much ICP will differ from the basic consultation process outlined above, although ICP will likely involve a more in-depth exchange of views and information.  Until the IFC releases the Guidance Notes that will accompany the revised Performance Standards, companies face uncertainty regarding when ICP is triggered, and how, exactly, it differs from the baseline consultation that the Performance Standards require.  The Guidance Notes are expected to be released in October 2011.

(3)   Free, Prior, and Informed Consent of Indigenous Peoples

Most notably, IFC Performance Standard 7 now requires that a company seek the “free, prior, and informed consent” ("FPIC") of affected indigenous peoples.  The IFC previously required that a company engage in “free, prior, informed consultation” with indigenous peoples. 

The IFC has not yet provided detailed parameters regarding how a company would know that it has obtained FPIC, although the Guidance Notes may do so.  Performance Standard 7 acknowledges that the process must involve the indigenous peoples’ representative bodies.  The IFC seems to contemplate that the process is not one-size-fits-all and may look different from project to project or community to community, because it will depend in part on the customs of the affected population.  Therefore, the Performance Standard calls on a company to:

• Document that it has agreed upon a process with the affected community – presumably a process through which the community would express its consent or lack thereof; and
• Document evidence of an agreement between the company and affected indigenous communities.

Performance Standard 7 notes that consent does not always require unanimity.  Presumably, what is required will depend on the process that the company agreed upon with the community. 

*     *     *     *     *     

With the release of the revised Performance Standards, companies face a number of new questions related to community engagement.  For instance, when are different consultation or consent requirements triggered?  What processes are adequate to fulfill them?  Finally, when indigenous peoples are not involved, the IFC must still define in the Guidance Notes when projects have “potentially significant impacts” sufficient to trigger an ICP process, rather than a baseline consultation process. 

In upcoming posts, we will look in more depth at revised Performance Standard 7 and its implications for companies.

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