Corporate Social Responsibility and the Law : Foley Hoag LLP

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. 

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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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Some of the world's most well-known apparel companies have come under criticism from Greenpeace for not sufficiently monitoring and limiting industrial wastewater discharges by suppliers.  In a new report called "Dirty Laundry", Greenpeace highlights the wastewater discharges from two major manufacturers in China that supply products to a range of major brands -- including Adidas, Bauer Hockey, Calvin Klein, Converse, Lacoste, Nike, Phillips-Van Heusen and Puma.  

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On August 1, Rep. Carolyn Maloney (D-NY) introduced H.R. 2759, the Business Transparency on Trafficking and Slavery Act (.pdf), a bill modeled after the California Transparency in Supply Chains Act.  The bill would require companies to disclose efforts to identify and address the risks of human trafficking, forced labor, slavery, and the worst forms of child labor in their supply chains. 

The requirements of the California statute, which goes into effect on January 1, 2012, have been described in several previous posts.  Similar to the California legislation, the proposed federal legislation would only apply to companies with annual worldwide gross receipts exceeding one hundred million dollars.  Notably, however, the federal legislation is not limited to retailers and manufacturers.  If enacted, the legislation would be applicable to any publicly-traded or private company currently required to submit annual reports to the Securities and Exchange Commission ("SEC"), as long as the company meets the annual gross receipts threshold. 

Specifically, H.R. 2759 would require companies to include, in their annual reports to the SEC, disclosures describing to what extent, if any, they:

• Maintain policies to identify and eliminate risks of forced labor, slavery, human trafficking, and the worst forms of child labor within their supply chains;
• Maintain policies prohibiting the use of company products, facilities, or services to obtain or maintain conditions of forced labor, slavery, human trafficking, and the worst forms of child labor;
• Engage in verification of product supply chains to evaluate and address risks of forced labor, slavery, human trafficking, and the worst forms of child labor;
• Ensure that audits of suppliers are conducted, including specifications as to whether audits are independent and unannounced;
• Assess the supply chain management and procurement systems of suppliers to verify whether suppliers have appropriate systems in place to address risks of forced labor, slavery, human trafficking, and the worst forms of child labor within their own supply chains;
• Require suppliers to certify that materials incorporated into products comply with the laws regarding forced labor, slavery, human trafficking, and the worst forms of child labor in the country or countries in which they are doing business;
• Maintain internal accountability standards, supply chain management and procurement systems, and procedures for employees or contractors that fail to meet company standards regarding forced labor, slavery, human trafficking, and the worst forms of child labor;
• Provide training to employees and management on forced labor, slavery, human trafficking, and the worst forms of child labor;
• Ensure that recruitment practices of all suppliers comply with company standards for eliminating exploitive labor practices that contribute to forced labor, slavery, human trafficking, and the worst forms of child labor; and
• Ensure that remediation is provided to those who have been identified as victims of forced labor, slavery, human trafficking, and the worst forms of child labor.

The bill is co-sponsored by Rep. Christopher Smith (R-NJ), Rep. Jackie Speier (D-CA), and Rep. Jim McGovern (D-MA).  Rep. Maloney and Rep. Smith are co-chairs of the Congressional Human Trafficking Caucus.

While the ultimate passage of this proposed legislation is uncertain at best, given the current Congressional climate, the introduction of the bill reflects increased attention to the issue of human trafficking by public policy leaders.  Looking ahead, it is likely that legislative and regulatory efforts to eradicate human trafficking and other human rights abuses will involve provisions seeking to engage companies in addressing these concerns.  As noted in a recent article in Ethical Corporation magazine,

[n]ew efforts to combat human trafficking and slave labour have placed growing pressure on larger companies throughout the world to work towards eradicating trafficked and forced labour from their supply chains....Companies worldwide are being increasingly presed to become more transparent about their efforts to eliminate all formes of forced labour.

H.R. 2759 has been referred to the House Committee on Financial Services for further consideration.  We will be tracking the progress of this legislation closely.

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The International Finance Corporation ("IFC") released its updated Sustainability Framework today, reflecting changes adopted by the IFC's Board of Directors in May 2011. The Framework includes the IFC's Policy and Performance Standards on Environmental and Social Sustainability.  The updates reflect a number of important changes, including both the scope of Framework's application and the nature of the substantive requirements for borrowers. The new Framework will be effective on January 1, 2012.

Notably, the scope of application for the Performance Standards has expanded substantially. Previously, the Performance Standards only applied to project financing.  Going forward, the Standards will apply to a wider array of the IFC’s financing activities, significantly increasing the types of projects and entities that will need to meet the Standards' requirements.

With regard to substantive revisions, we will address several key updates in future posts, but a number of changes are worthy of immediate note. Specifically, the revised Performance Standards: 

• Recognize the responsibility of companies to respect human rights. The IFC also notes that following the Performance Standards will allow companies to address many relevant human rights issues, but acknowledges that additional human rights due diligence may be necessary to address all human rights risks, especially in high risk circumstances. 
• Require companies to develop emergency preparedness and response systems to address potential social or environmental impacts of projects, working with local stakeholders and the government as appropriate.
• Require due diligence to identify gender-specific social and environmental risks and impacts.
• Address migrant workers and trafficked persons for the first time, creating an expectation that migrant workers will receive pay similar to that of other employees, and classifying trafficked workers as a form of forced labor.
• Require “free, prior, and informed consent” when a business activity will affect specified interests of indigenous peoples. When a proposed business activity triggers this requirement, the IFC plans to conduct an in-depth review of the company's efforts to ensure they meet applicable standards. The Performance Standards also call on companies to obtain external expertise in certain circumstances in order to effectively manage issues pertaining to indigenous peoples.

As of May 2013, with regard to extractive sector projects financed by the IFC, the updated Framework will require the public disclosure of the principal contract between a company and the relevant government, with appropriate redactions of commercially sensitive information.  In lieu of full contract disclosure, a company will also be allowed to publish a summary of the key terms and conditions of the relevant contract. 

Notably, the IFC has not yet released the updated Guidance Notes that will elaborate on the Performance Standards and their associated requirements. The Guidance Notes are expected to be released in October.

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