Corporate Social Responsibility and the Law : Foley Hoag LLP

On July 28, the United Nations General Assembly passed a non-binding resolution recognizing access to clean water as a fundamental human right (.pdf).  This U.N. resolution will likely feature in corporate dialogues with stakeholders regarding water use, water access, water production, and the impact of corporate activities on local watersheds. 

Finding solutions that provide for the current and future needs of all water users is imperative. The stakes for both companies and communities are significant: a recent report by the 2030 Water Resources Group, a coalition of major multinational companies, observed that:

growing competition for scarce water resources is a growing business risk, a major economic threat that cannot be ignored, and a global priority that affects all sectors and regions. It is an issue that has real implications for the stability of countries in which businesses operate and the sustainability of communities and the ecosystems they rely upon. 

Community concerns about water use, and water access, have affected the social license to operate of companies in a wide range of business sectors.  Another recent report, Water Scarcity & Climate Change: Growing Risks for Businesses and Investors, produced by Ceres and the Pacific Institute, found that food and beverage, oil, and chemical companies are particularly exposed to advocacy, and litigation, in this area.  Examples include:

• In Newmont Mining’s recent Community Relationships Review, based on a study of six of the company's mines, we observed that community perceptions of mining's impact on local water resources was significant factor in the company's capacity to engage with local communities. 
• The Coca-Cola Company and PepsiCo Inc. have faced widespread community protests, and litigation, in India due to community allegations that the companies’ use of local groundwater supplies has contributed to water scarcity and the pollution of available water supplies.

In this context, and prior to the adoption of the U.N. resolution, a number of companies have faced pressure to recognize water as a human right.  In 2010, shareholder resolutions were filed against ExxonMobil and Intel asking them to adopt water policies articulating respect for and commitment to the human right to water.  Similar resolutions were filed against Pepsi and American International Group in recent years. In the face of such pressure, Pepsi and Intel have both formally recognized the human right to water. 

Shareholder activity around water is likely to continue. The Ceres/Pacific Institute report cited above observed that:

investors are now filing resolutions asking companies for more disclosure on water practices and performance, including water policies, environmental and social impacts of water use, and water usage throughout the value chain. A large number of resolutions also ask for new company-wide policies on the human right to water, water reuse and recycling, and water-efficient technology.

In this context, the U.N. resolution will likely increase pressure on companies to incorporate water access into their human rights policies and assessments.  Although the resolution is non-binding and does not impose specific obligations on companies (or countries), it represents a clear declaration by the international community that corporate use of water resources has fundamental human rights implications.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

Foley Hoag recently released a ground-breaking report on the relationship between companies and indigenous peoples.  Talisman Energy commissioned this report at the request of two responsible investors, Bâtirente and Regroupement pour la responsabilité sociale des entreprises (“RRSE”).  The World Resources Institute (“WRI”), a think tank and thought leader on indigenous rights, was asked to provide a third party commentary on it.  The report was developed with substantial input from business and civil society.  The report focuses on the benefits and challenges of implementing a corporate free, prior, and informed consent (“FPIC”) policy, and also provides guidance on best practice for community engagement. The final report:

• Reviews the international legal standards that address the responsibilities of states and companies to indigenous peoples, as well as the implications of evolving case law in domestic and international human rights courts. 
• Highlights the evolution of voluntary commitments to respect indigenous rights, including commitments to obtain the FPIC of indigenous peoples.  
• Concludes with recommendations regarding the components of a FPIC policy and implementation steps.

Indigenous rights constitute a rapidly evolving area in both international law and the practices of companies. Although international law principally creates obligations for governments, rather than companies, to respect indigenous rights, it nevertheless affects corporations. For example, international legal standards increasingly influence domestic courts, which can lead to the revocation of a company’s license if the government fails to carry out its duty to consult or obtain the consent of indigenous peoples. It is, therefore, timely for companies to consider revising their policies on indigenous peoples.

Companies that seek to implement a policy on free, prior, informed consent face a number of challenges. These include:

• Identifying the customary users of land and the traditional representatives of the community.
• Balancing the rights of indigenous peoples against the expectations of non-indigenous populations.

On the other hand, companies that implement a FPIC policy will enjoy benefits, such as a stronger social license to operate and a reduced risk of legal challenges to their projects.

The report is particularly timely, as the International Finance Corporation is reviewing its lending requirements regarding indigenous rights, including with regard to FPIC.  In addition, the U.S. government, one of four governments that voted against the U.N. Declaration on the Rights of Indigenous Peoples in 2007, is formally reviewing its position on the Declaration.  New Zealand, Australia, and Canada, the other three governments that initially voted against the Declaration, have already changed their positions and now support the Declaration.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Dodd-Frank Wall Street Reform and Consumer Protection Act (.pdf), signed into law by President Obama on July 21, contains provisions requiring publicly traded companies that utilize certain "conflict minerals" to report regarding whether their products are “conflict free” – meaning that they should report on any due diligence steps taken to demonstrate that their products are not fueling conflict in the Democratic Republic of Congo ("DRC"). The legislation does not prohibit companies from using minerals from conflict areas. Rather, it relies on the reputational effects of public reporting to push companies to rely on conflict free sources. Human rights organizations believe that the sale of conflict minerals -- tantalum (coltan), cassiterite (tin), wolframite (tungsten), and gold – helps armed groups fund the purchase of weapons and the continuation of hostilities in the DRC.

For over a year, civil society has pushed the U.S. Congress to implement these provisions (.pdf) as an attempt to address the ongoing conflict in the eastern DRC, and have used a variety of means, including viral videos, to focus the public's attention on this issue. 

The minerals in question are commonly utilized in a variety of commercial products, such as automobiles, cellular phones, and airplane engines. The legislation therefore affects a large spectrum of industries, including mining, automotive, aerospace, and jewelry. The aim of the legislation is not to ban the use of these minerals if they originate from the DRC, but rather to ensure that the minerals do not come from conflict areas of the DRC or otherwise help fund the conflict. Given the due diligence that may be necessary to decisively demonstrate that products are conflict free, some have argued that the legislation will unintentionally create a de facto ban on minerals from the DRC and neighboring countries. On the other hand, if the SEC provides appropriate guidance, the legislation is likely to offer a clearer path for companies to demonstrate that they are not supporting conflict in the DRC.

Requirements imposed by the legislation include:

• A company that uses conflict minerals must produce an annual disclosure to the Securities and Exchange Commission ("SEC") if the minerals are "necessary to the functionality or production of a product" manufactured by the company. The company must also report on its public website.
• The annual disclosure must state whether the conflict minerals originated in the DRC or an adjoining country (including Angola, Burundi, Central African Republic, Republic of Congo, Rwanda, Sudan, Tanzania, Uganda, and Zambia).
• If the minerals used by a company originate in the DRC or an adjoining country, the company must report on the due diligence measures that it took regarding the source and chain of custody of those minerals. These measures are expected to include an audit by an independent professional audit company.
• Companies must also submit a description of any products manufactured by the company that are not "DRC conflict free." Products are conflict free if they do not contain minerals that directly or indirectly finance or benefit armed groups in the DRC or an adjoining country. Products are considered to benefit such groups if they come from areas where armed groups physically control mines or force civilians to mine, transport, or sell conflict minerals; tax, extort, or control any part of trade routes for the minerals up to the point of export; or tax, extort, or control trading facilities, in whole or in part.

Unfortunately, many key aspects of the legislation remain uncertain at this time. It is not clear exactly which companies will be required to produce reports.   In addition, it is not clear whether the information must be in companies’ 10-Ks or can be contained in other reports, although it is likely that penalties associated with fraud or deceit in SEC reporting will apply. Finally, it is not certain what it means for a mineral to be "necessary to the functionality or production of a product.” The SEC's 270-day rulemaking process should provide greater clarity for many companies.

The legislation is likely to affect all levels of the supply chain for these minerals. At this time, companies that utilize the named minerals should consider how they will demonstrate that they conducted due diligence to ensure that the mines from which their minerals come, as well as the routes and trading depots through which the minerals came, are conflict free. For end-user companies, this will mean ensuring, at a minimum, that smelters have robust due diligence processes on the ground and providing for an independent audit of those due diligence processes.

The legislation allows the U.S. State Department to expand the list of minerals that fuel conflict in the DRC, which would potentially affect a larger number of companies. The legislation currently covers the minerals that human rights organizations believe are primarily funding the conflict, so the expansion of the list seems unlikely unless a new mineral begins to be sourced from the eastern DRC in significant quantities.  

Under the legislation, the Department of Commerce can designate specific independent private sector auditors and due diligence processes as “unreliable.” If, in its reporting, a company relies on a determination of an independent audit or other due diligence process that is deemed unreliable, the report does not satisfy the SEC reporting requirement. Therefore, it is particularly important that due diligence processes are robust.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Dodd-Frank Wall Street Reform and Consumer Protection Act (.pdf), signed into law by President Obama on July 21, contains broad-reaching transparency provisions requiring oil, gas, mining, and other extractive industry companies to report their payments to governments to the Securities Exchange Commission (“SEC”).

The premise of the bill is that transparency, in the long run, supports human rights, and helps limit corruption in countries where few benefits from mineral wealth typically reach the general population.

Key elements of the legislation include:

• Companies that are securities issuers under U.S. law must report annually to the SEC on their payments, as well as those of their subsidiaries and entities under their control, to the U.S. and foreign governments. The law does not exempt foreign issuers, and it is likely that the legislation will cover many issuers of ADRs, as well. The legislation does not specify whether the annual report must be the company’s 10K or another form of reporting, leaving this decision to the SEC rule-making process. It is likely that the penalties related to fraudulent or deceptive reporting to the SEC will apply. 
• Companies must report on the type and total amount of payments made on a project basis to both the U.S. and foreign governments. It is unclear whether companies must report on projects for which they do not serve as the operator, nor hold a majority interest in the project. 
• The payments that companies must report include taxes, royalties, fees, production entitlements, bonuses, and other material benefits, to the extent that the SEC determines that these are part of the commonly recognized revenue stream for extractive projects. Payments do not include de minimis payments. The SEC rulemaking process should help clarify the extent to which this information must be disaggregated. 

The legislation covers most, but not all, major multinational companies, but likely does not encompass a number of state-owned companies that are primarily active in their own jurisdictions and have no presence in the United States. The SEC rule-making process will help determine whether contractors and service providers must comply with the legislation.

The legislation is intended to reinforce the Extractive Industries Transparency Initiative, which is a multi-stakeholder initiative consisting of oil, gas, and mining companies; civil society; and governments. Under the Extractive Industries Transparency Initiative, many U.S. companies already report their payments to some, although not all, governments around the world. The bill may require the reporting of more detailed payment information than the Extractive Industries Transparency Initiative demands, depending on the SEC’s interpretation of the legislation. 

The SEC’s rulemaking process will help define more clearly how companies will need to change their accounting practices. For instance, the SEC will presumably define a de minimis payment. Companies are advised to monitor the SEC’s rulemaking process closely.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In late June, Foley Hoag's CSR practice was selected to serve as the new Secretariat for the Voluntary Principles on Security and Human Rights (“The Voluntary Principles”).  On June 30 and July 1, three Foley Hoag attorneys, Gare Smith, Sarah Altschuller, and Amy Lehr, helped facilitate a special Mid-Year Special Session of the Voluntary Principles hosted by the United States Government, the current chair of the Voluntary Principle's Steering Committee.

The Voluntary Principles, a tripartite multi-stakeholder initiative established in 2000, provide guidance to companies in extractive industries on maintaining the safety and security of their operations within a framework that ensures respect for human rights and fundamental freedoms. The Voluntary Principles urge companies to

recognize a commitment to act in a manner consistent with the laws of the countries in which they are present, to be mindful of the highest applicable international standards, and to promote the observance of applicable international law enforcement principles.

More than sixty representatives of companies, governments, and nongovernmental organization, representing the Principles’ “three pillars”, attended the Mid-Year Special Session, and engaged in collaborative discussions aimed at formulating a common vision for the future as the Principles enter their second decade.

Notably, John Ruggie, the U.N. Special Representative on Business and Human Rights, addressed participants. (.pdf)  Citing a three part framework under which states have a duty to protect human rights, companies have an obligation to respect human rights, and access to remedies must be provided to rights-holders, (as set forth in his 2008 report to the UN Human Rights Council (.pdf)) the Special Representative observed that the Voluntary Principles “address a critical subset of issues encompassed by the Protect, Respect and Remedy Framework. They cut across all three of the Framework’s pillars. And they literally can affect life and death issues.”  He noted that

the worst forms of corporate-related human rights abuse take place in conflict or otherwise stressed governance zones. They account for the largest number of foreign direct liability claims against multinational companies, such as the Alien Tort Statute, brought in domestic courts but often invoking international standards.

The Special Representative then observed that companies operating in areas of conflict "increasingly suffer significant financial costs as a result of stakeholder-related risks to their operations—which in turn reflect push-back by communities for harms they associate with company activities."  The Voluntary Principles aims to address both the security concerns of companies as well as the common interest of companies and communities to prevent security-related human rights abuses.

Foley Hoag's new role as Secretariat of the Voluntary Principles allows our attorneys to build upon a wealth of experience in advising clients on specific in-country efforts to comply with the Principles as well as the development of corporate policies that that incorporate respect for human rights and enhance compliance with host and home-government laws and voluntary codes, including the Voluntary Principles.  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On June 29^th, the United States Supreme Court declined to grant a petition for a writ of certiorari filed by Pfizer Inc. seeking review of a January 2009 decision by the Second Circuit Court of Appeals involving claims brought under the Alien Tort Statute (“ATS”). The Second Circuit's decision held that Nigerian plaintiffs could properly bring claims against Pfizer under the ATS for “violation of the norm of customary international law prohibiting medical experimentation on human subjects without their consent.”  Abdullahi v. Pfizer, Inc., 562 F.3d 163 (2d Cir. 2009).  The Second Circuit decision represents that first time that a court has found that the failure to gain informed consent for medical testing is a cognizable claim under the ATS.

The Second Circuit’s decision addressed consolidated appeals in two cases in which plaintiffs allege that Pfizer conducted nonconsensual testing of Trovan, an experimental drug, during a meningitis outbreak in Nigeria in 1996.  Eleven children died as a result of their participation in the drug trial.  Plaintiffs specifically allege that the testing was done with the involvement of the Nigerian government and that the drug was tested on children without their parents’ informed consent.

In evaluating the current impact of the Pfizer litigation, a 2009 column in the New England Journal of Medicine suggested that the Second Circuit’s decision that domestic tort liability may stem from the failure to secure informed consent in international clinical trials “should help persuade international corporations and researchers alike to take informed consent…much more seriously.”

Companies conducting clinical testing abroad should be very careful to ensure that proper consent is obtained, especially when dealing with patient populations that, because of language barriers or level of education, may not fully comprehend the risks associated with specific trials. 

More generally, companies should be aware of the analysis used by the Second Circuit in finding that the international law norm prohibiting nonconsensual medical testing is sufficiently “universal, specific, and obligatory” so as to meet the standard for subject matter jurisdiction under the ATS established in the Supreme Court’s decision in Sosa v. Alvarez-Machain (2004).  The court observed that “declarations of international norms that are not in and of themselves binding” may provide evidence as to the current state of customary international law when viewed in conjunction with state practice. 

In its determination, the Second Circuit looked to a wide range of international sources cited by plaintiffs including non-binding treaties, declarations by international organizations, and the Nuremberg Code, promulgated by a U.S. military tribunal after the Nuremberg trials.  The court found that it is not necessary for these sources of international law to explicitly authorize a cause of action in order to give rise to proper claim under the ATS.   This type of analysis may support a wider range of ATS claims that many observers thought would be properly viable after Sosa. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link