Tuesday, February 19, 2008

EU & UN Warning to US Multinationals: Adopt & Conform to Our CSR Mandates Or Be Disparaged and Diminished in Value

EU & UN Warning to US Multinational Companies: Adopt & Conform Our CSR Mandates Or Be Disparaged and Diminished in Value

The following has been extracted from an article appearing within the International Journal on Economic Development entitled,

Precautionary Preference: How Europe Employs Disguised Regulatory Protectionism To Weaken American Free Enterprise

The article is accessible at: http://www.itssd.org/White%20Papers/ijed-7-2-3-kogan.pdf .

...U.S. companies have increasingly fallen subject to the relatively new but growing ENGO discipline of ‘supply-chain management’, which is an outgrowth of the global corporate social responsibility (‘CSR’) movement. With guidance and assistance from the EU and the United Nations Global Compact Office, Environment Program, and Commission on Sustainable Development, European-based ENGOs and social groups have developed and imposed on U.S. multinational companies and their small and medium-sized suppliers the duty/obligation to comply with Euro-style CSR standards. These standards generally demand that companies act in a socially and environmentally responsible manner consistent with the precautionary principle, in excess of legal requirements, no matter where they conduct their business. These standards also require that multinational companies and their suppliers submit to audits and verification by private third parties – ‘global stakeholders’ (ENGOs and social groups, not stockholders or debt-holders) – and that they publicly report their CSR activities annually.
(pp. 70-71)

...[R]einsurers like Swiss Re perceive climate change, namely, as a risk management (and a business reputation) issue that boards must address as a matter of corporate governance. 192 This view is not too dissimilar from the view taken by corporate social responsibility and environmental advocacy groups such as the Rose Foundation. According to the NGO Corporate Sunshine Working Group, ‘While the Sarbanes-Oxley Act did not create any specific new environmental or social disclosure obligations, the increased care and attention now given to SEC reporting may increase the quality of reporting generally, and thus indirectly promote better environmental and social disclosure.”193
(pp. 131-132)


A. General

Whether U.S. small and medium-sized businesses export their U.S. manufactures to Europe, source and import their products from China, or are engaged exclusively in a domestic business, they are all likely to be affected by global supply chain management programs.650 These programs, which incorporate the precautionary principle, are being promoted by the EU Commission and prominent international environmental groups such as Greenpeace, Friends of the Earth, the World Wildlife Fund, the Natural Resources Defense Council, the Basel Action Network, the Rainforest Action Network, and the Sierra Club. In addition, these programs are championed by corporate governance and corporate social responsibility groups such as Business for Social Responsibility, Prince of Wales Business Leaders’ Forum , and the World Business Council for Sustainable Development, and the Rose Foundation.

Indeed, the EU institutions and these civil society groups have a symbiotic relationship. Pursuant to one or more alternative EU governance instruments, such as coregulation651
or self-regulation652, Brussels financially underwrites, facilitates and promotes many environmental and corporate accountability campaigns that are consistent with and effectively implement EU policy frameworks.653 And, precaution-based regulations and product standards increasingly reflect the political influence wielded by such groups within the European Parliament and Commission and now the International Organization for Standardization (ISO).654

These groups, together with international labor groups such as the International Labor Organization (ILO) and the Fair Labor Association in the United States, have continued to wage campaigns of intimidation (‘naming and shaming’) against U.S. multinationals and their key suppliers, in order to shape public opinion against them. And, as these groups have become better recognized within the growing global civil society, their role and influence within the United Nations’ programs and agencies and national governments has expanded commensurately.

...B. The EU and the United Nations as Protagonists

The UN Global Compact Office and the UN Environment Program have convened several public-private partnership meetings and global business dialogues 655 organized and promoted by EU representatives that have focused on the issue of global supply chain management. An overarching theme within these ostensibly ‘voluntary’ initiatives has been the promotion of global corporate social responsibility (CSR) standards that require companies, wherever they operate, to adopt a ‘precautionary approach’ (effectively, the ‘wingspread’ version of the precautionary principle) to environmental challenges in all product and service sectors. This, in effect, involves employing an EU-style life cycle (‘cradle-to-grave’ or ‘design-to-disposal’) approach that evaluates the potential social and environmental impacts of their design, manufacturing processes, technologies and products.

Whether they like it or not, U.S. companies are subjected to the demands of ‘green investors’ and civil society ‘experts’ (European socialists as well as American liberals) who are critical of industry’s motivations and objectives. They discourage companies from investing in process and production methods that are deemed ‘unsustainable’, or that are otherwise considered to deplete natural resources and degrade the environment. And they encourage companies to utilize expensive and unproven technologies as a proactive and preventive measure, in order to avoid the potential that their current technologies, processes and products might cause irreversible environmental damage sometime in the future. In some cases, they have even pressured companies to stop their economic activities altogether if the companies cannot find what these groups consider more environment-friendly alternatives (substitutes).

The corporate social responsibility work of the Global Compact Office and the environmental work of UNEP is further supported by the activities of the U.N. Commission on Sustainable Development (CSD), which organized the 2002 World Summit on Sustainable Development (WSSD).656 CSD reports to the U.N. Economic and Social Council (ECOSOC), which functions under the authority of the U.N. General Assembly. Not surprisingly, most funding to support these agencies/organizations is derived from the European Union and EU member states. It is this last aspect that needs to be urgently addressed by the Bush Administration if the creeping impact of the precautionary principle is to be arrested.

1. Threatening Company Brand Reputation and Shareholder Value

While environmental NGOs are at the forefront of these public pressure campaigns, the EU and the United Nations are the catharsis behind them. Indeed, they continue to encourage ENGOs to employ these pressure tactics against public-image sensitive U.S. multinational corporations in order to reach their small and medium-sized suppliers. A recent paper prepared by the Chief of the UN Treaty Section demonstrates what the EU Commission and the United Nations have in mind:

In particular, European Community directives and legislation in individual countries have played a major role in influencing the attitudes of private sector corporations. In some instances, corporations have responded to public pressure even in the absence of legislative rules. Increasingly, such legislation is being enforced, sometimes through action undertaken by civil society. Noncompliance with environmental legislation could lead to costly litigation and adverse publicity which corporations would very much like to avoid. Compliance with environmental standards also makes them less susceptible to public criticism…Not only would these assist in avoiding conflict with legal requirements in the target markets, it would help to avoid damaging protests by vigilant civil society groups…

The reasons for the gradual conversion of the decision makers of some private sector institutions to adopting environmental friendly policy approaches are interesting given their traditional focus on profits and the obsession with year end bonuses. The message that civil society groups and academics have been preaching for some time, that non-compliance with global environmental standards carries financially negative consequences, may be getting through finally. In fact, non-compliance with global environmental standards may actually result in the loss of profits and bonuses and this has been a powerful element in focusing the minds of those making critical corporate decisions…

The continuing pressure exerted by civil society lobby groups has had a significant impact. Groups such as Greenpeace, WWF, Rainforest Action Network (RAN) and Sierra have continued to highlight corporate shortcomings and attract public attention to these. The naming and shaming approach adopted by such pressure groups has had a critical impact in some cases. It could be assumed that the negative publicity would harm not only the image of a company, but also its earnings. Television images of prominent individuals cutting up their credit cards issued by Citibank at the instigation of RAN may have had an impact on this bank‘s decision to enter into a ‘common understanding of key global sustainable development issues’. Home Depot changed its wood sourcing policies following a campaign carried out by environmental groups including RAN (emphasis added).

2. U.S. Manufacturing Sectors Affected

Environmental and labor groups have continued to utilize global supply chain management to publicly compel U.S.-based multinationals commanding significant U.S. market share to adopt EU precautionary principle-based labor, environmental and CSR standards.658 As in Europe,659 these standards are then passed downstream to their many small and medium-sized suppliers. 660 Some of the best known examples of this program involve the retail buying groups formed among large supermarket chains. Others involve large mass home-improvement retailers such as Home Depot and Lowe661, which have curtailed their purchases of Indonesian tropical forest-based wood products and adopted ENGO-consistent policies to affirmatively promote sustainable forestry in response to such pressures.662 In the case of Home Depot, for instance,

“From 1997-1999, environmental groups organized protests against [Home Depot], charging it was failing to ensure that its wood didn‘t co m e fro m endangered forests. Activists picketed hundreds of Home Depot stores, hung banners at its corporate headquarters in Atlanta and demonstrated at shareholder meetings. Home Depot was afraid the protests might lead to a consumer backlash and sliding sales… So the company agreed to stop using products from endangered forests… In bowing to the environmentalists’ demands, Home Depot agreed to give preference to wood that have been logged in an environmentally friendly way… usi[ng] guidelines from the Forest Stewardship Council, a body now based in Bonn, Germany, that certifies trees as properly harvested.” 663

Such pressures seem to have paid off. During 2003, “Home Depot, Inc…used its purchasing clout to get two of Chile's biggest loggers to quit buying land that was being deforested,” even though the land was being re-cultivated with plantation forests.664 Apparently, the Forest Stewardship Council‘s environmental preference for natural forests had something to do with this.665

U.S. Office-supply giant Office Depot suffered a similar fate. “[A]fter an activist’s campaign against it, [the company] canceled purchases from an Indonesian paper supplier that activists say was using trees from the country‘s endangered forests.”666 Apparently, that campaign had been launched by the San Francisco-based environmental group, Forest Ethics, whose “successful campaign against the [entire] office supply industry resulted in a groundbreaking environmental policy by Staples, (and later Office Depot and Office Max).” 667

In January, the same group focused its contempt on Limited Brands, Inc., the owner of the Victoria‘s Secret chain of women’s lingerie, in an effort to change its product procurement practices. In particular, the group alleged that the company had used non-recycled paper to print 398 million catalogues annually harvested largely from old growth and endangered forests in the Canadian Boreal (“the third largest forest wilderness in the world and a critical regulator of global climate”) and in the Southern U.S. Multiple means were employed to achieve this desired change. They included, most recently, a full page advertisement in The New York Times entitled “Victoria‘s Dirty Secret” featuring “a sultry model wearing fluffy wings and carrying a chainsaw.” They also included over one hundred demonstrations at Victoria Secret stores, an outdoor advertising campaign waged in cities across the U.S., and the construction of a disparaging website – http://www.victoriasdirtysecret.net/ .668 Predictably, Victoria’s Secret pointed out that it uses some recycled paper already, and “will try much harder [to do so] in the future,” regardless of the impact on its suppliers.669

Other examples involve U.S. mass retailers and specialty store chains that sell clothing and footwear, such as the Gap, Inc.670, Wet Seal, Disney Stores and Walmart Stores 671. Each of these companies ultimately adopted stringent procurement and/or factory reporting policies in order to mollify environmental and labor rights activists and thereby protect its stock value. 672

As additional evidence of the pressure being applied against industry by environmental and labor activists, one should consider the recent lawsuit instituted against Nike. Nike, a Global Compact member that dutifully published its Corporate Social Responsibility Report for 2003 on the Internet, was sued by a California activist under that state‘s false advertising statute for allegedly misleading consumers and potential customers in communications about its labor standards. “The communications were made in defense to a torrent of criticism in the U.S. media about conditions in factories in Indonesia and Vietnam.” The litigant (a representative of the Fair Labor Association, an U.S.-based NGO) alleged that “Nike was not a responsible corporate citizen [and] that the communications were basically lies to maintain the brand image, whilst Nike knew and allowed ‘sweatshop labor’ to exist in its supplier factories” (emphasis added).673

In each case, as the result of ENGO public pressures, large manufacturers and retailers have agreed to purchase only those products that are certified environment-friendly or otherwise bear an environment-friendly eco-label attesting that the product was manufactured consistent will all relevant international environment or labor standards. As a precondition to doing business, or as a condition to remaining on a retailer‘s vendor matrix, these retailers then typically require that their suppliers and their suppliers’ suppliers employ a life-cycle approach to product development that reflects these values. Even large international trading companies based in manufacturing countries such as China (e.g., Li and Fung) have succumbed to supply chain management principles to retain their supplier status in both Europe and the U.S.674 Considering how quickly these Global Compact -promoted practices have spread across product sectors and throughout the many levels of the global supply chains, unless U.S. small and medium-sized businesses remain vigilant in monitoring and slowing their progress, such practices will eventually catch up with them.675

3. U.S. Service Sectors Affected

Furthermore, ENGOs have also imposed precautionary principle-based supply chain management obligations upon international companies operating within the financial services sector. On January 22, 2004, as the result of several years of public disparagement campaigns employed by the Rainforest Action Network, a U.S.-based group of environmental activists676, U.S.-based Citigroup, Inc., the world’ largest bank, was compelled to enter into an environmental pledge agreement with that organization. The ostensibly ‘voluntary’ agreement, was based on the ‘Equator Principles’, which were embraced originally by the World Bank‘s International Finance Corporation (IFC)677 and later adopted by mostly European banks.678 Private banks have been targeted because “[t]he Equator Principles only apply to direct lending for project finance [generally the province of development banks]. [They do not apply to] [m]any sensitive transactions, such as mining and forestry activities, [which] are more likely to be funded through lines of credit or corporate loans [extended by private banks]…”679

The agreement obliges Citigroup to scrutinize and consider refusal of all lending projects that potentially have an impact on sensitive biodiversity areas, referred to as ‘critical natural habitats’ (e.g., tropical rain forests).680 The term ‘critical natural habitats’ is synonymous with the term ‘high conservation value’ tropical rain forests, as defined by the Forest Stewardship Council, an international environmental group that has sought to establish the Precautionary Principle as an international legal requirement in the area of sustainable forest management. 681 The agreement also subjects Citibank‘s activities to oversight by environmental and social group third-party verifiers.682

On May 17, 2004, Bank of America, the second largest U.S. bank, announced with the Rainforest Action Network (‘RAN’) that it had joined Citigroup Inc. in tightening lending standards for project financing to address potential environmental hazards. “Bank of America agreed not to provide funding for [projects involving] resource extraction from old-growth forests, and lending proceeds will not go to logging operations in intact forests as defined by the World Resource Institute…”683 According to RAN, “Bank of America will also support forest protection by banning all financing for logging operations…creating strict ‘No-Go Zones’ off limits to destructive industrial activity.

Additionally, all resource extraction (e.g., oil and gas, mining and logging) in all forests must be verified by an independent third party audit” (i.e., by environmentalists) (emphasis added).684 As in the case of Citibank, the rules concerning which forests must be protected and how have been defined by the Forest Stewardship Council, an ENGO devoted to establishing the Precautionary Principle as an international legal standard in the area of sustainable forest management. It would appear that Bank of America may have gone further than Citigroup, however, in committing itself “to finance further mapping of intact [natural] forests around the world, and research methods to measure and reduce financial investments in greenhouse gas emitting industries.”685

It would appear, based on the above, that Friends of the Earth and RAN have utilized the same playbook and rationale to entrap American banks and investment brokerages underwriting natural resource extraction and construction activities that they have successfully employed against U.S. manufacturing and retail industries. In each case, ‘first mover’ (mostly European) companies tend to benefit from the more ‘level economic playing field’ established by the transatlantic (global) economic ‘burden sharing’ imposed by their civil society agents.

[T]he EPs [Equator Principles] represent an industry approach, in which several banks are working together. This collaboration helps level the playing field among banks, and reduces the ability for corporate clients to shop around for a bank that has lower environmental and social standards (emphasis added).686

At Bank of America… w e are committing to a higher standard of environmental awareness in our business and financing practices, and will encourage others in corporate America to do the same” (emphasis added).687

Indeed, the Rainforest Action Network next turned its sights upon J.P. Morgan Chase. During December 2004, RAN induced a suburban Connecticut elementary school teacher to transport second-graders to New York City to protest against J.P. Morgan lending practices. According to the New York Sun,

“Apparently, the 7-year-olds objected to the bank‘s lending practices in developing
nations…The children were lured to J.P. Morgan under the pretext of a poster contest… J.P . Morgan was targeted… because it balked at RAN’s initial…demands… ‘to stop lending money to projects that destroy endangered forests and cause global warming’”.

While J.P. Morgan did not, early on, officially disclose whether it would satisfy RAN’s demands, it went to certain lengths to publicly reaffirm its commitment “to develop a [company] policy that would address these issues.”689

Unfortunately, the lack of a definite time frame was not suitable to RAN. During the week of March 14, 2005, RAN activists traveled to the home of J.P . Morgan Chase’s CEO, William Harrison and proceeded to turn up the pressure. They “put up old-fashioned Wild West-type “Wanted” posters featuring Mr. Harrison and calling him “Billy the Kid”. The posters criticized the bank for ‗reckless investment in environmentally and socially destructive projects in dozens of countries‘, and urged Mr. Harrison’s neighbors and friends to “ask him to do the right thing”.690 Following the incident, “a J.P . Morgan Chase spokesman told The New York Times… that the bank w as ‘on track for A pril’ in terms of a review of its lending practices.”691

On April 25, 2005, the Wall Street Journal reported that J.P . Morgan Chase had finally capitulated to “ecological activist[] and shareholder group[]” demands by agreeing to “adopt sweeping guidelines that restrict its lending and underwriting practices for industrial projects that are likely to have an environmental impact.”692 According to the

"The New York banking giant -- third largest in assets in the U.S. -- is expected to issue a 10-page environmental policy today that takes an aggressive stance on global warming, including tying carbon-dioxide emissions to its loan-review process for power plants and other large polluters. The bank also plans to calculate in loan reviews the financial cost of greenhouse-gas emissions, such as the risk of a company losing business to a competitor with lower emissions because it has a betterpublic standing.693And J.P. Morgan plans to lobby the U.S. government to adopt a national policy on greenhouse-gas emissions, becoming the first big American bank to pledge that kind of activism on such a contentious issue, according to shareholder activists 694… In giving in to the protesters, J.P. Morgan is ‘guilty of political correctness and cowardice,’ says Niger Innis, spokesman for the Congress of Racial Equality, a civil-rights group in New York that advocates more investment in the developing world. ‘A lot of these projects that banks finance have real health benefits” (emphasis added). 695

Apparently, J.P. Morgan‘s grandiose pledge reveals that it had not only been pressured by protest groups such as RAN. According to the WSJ, even “[b]efore the RAN campaign began last spring, J.P. Morgan had already promised socially oriented shareholder groups, including Trillium and Christian Brothers Investment Services Inc., to draft a new environmental policy.” 696 Thus, J.P. Morgan’s rather quick surrender was most likely the result of the ‘whipsawing’ it had received at the hands of both social investors and environmentalists.

Hence, to the extent other US financial services companies (banks, insurance, reinsurance, capital leasing, investment brokerages, etc.) finance or otherwise underwrite the producers or users of products, substances or activities (e.g., capital equipment and/or extraction, excavation, manufacturing or construction) that might potentially threaten sensitive forest areas in developing countries , even by emitting carbon dioxide, they and their suppliers are also likely to fall subject to such harassment. As RAN’s executive director has warned, RAN will next target these institutions’ large manufacturing clients, the American automakers.697

It is most likely because of incidents such as these that a number of American companies from different industry sectors have formed a non-profit organization named GEMI (the Global Environmental Management Initiative). GEMI is devoted to demonstrating good governance and corporate social responsibility in furtherance of promoting environment, health and safety consistent with U.N. notions of sustainable development.698 According to one of its recent reports,699 GEMI companies employ supply-chain management principles to ensure that their suppliers follow suit. 700 701

What this means, in effect, is that the supply-chain management disciplines practiced by GEMI members do not focus primarily on ‘hard’ supply-chain issues such as logistics and operations, product design economics and manufacturing quality, product performance or even distribution efficiencies, which can serve to reduce costs, ensure satisfaction of ‘just-in-time’ inventory requirements, drive profitability and meet customer needs. Instead, GEMI companies focus on the ‘soft’ supply-chain issues that are important to politically influential civil society members and the United Nations, but which have little bearing on the corporate ‘bottom line’ or on actual consumer needs.

Unfortunately, the small and medium-sized suppliers of such companies have little or no say in deciding whether or not to appease these constituencies. They are only told that it is the ‘right thing to do’,702 can uncover “hidden sources of business value” and can “enhance supply chain performance” (emphasis added).703 In the case of most small and medium-sized companies, however, EHS/sustainable development initiatives, by themselves, will do nothing at all to reduce costs or generate profits, regardless of whether such value is hidden.

(pp. 241-254)

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