Tag Archives: human rights

Why Political Risk Matters

This is the first in a series of articles that looks at human rights risk and how to integrate principles of risk analysis into global business development.

What is political risk and why does it matter to businesses? The following situation is playing out as we speak and exemplifies the problem facing transnational corporations operating overseas.

In 2013, the Rana Plaza building in Savar, Bangladesh collapsed, killing more than 1000 garment workers. The tragedy set in motion significant reputational, compliance and supply-chain impacts on many global apparel brands and retailers who employed local manufacturers at Rana Plaza and elsewhere in that country. Consumers and civil society groups in the U.S. and Western Europe reacted and drew unwanted scrutiny on the products sold by the likes of H&M, Walmart, The Gap and dozens of other businesses. However, while the event was shocking, it was not entirely unpredictable. Bangladesh has few labor protections and they are rarely enforced. Wage rates are extremely low and while that is appealing to the apparel industry, which seeks to keep their costs low, this pressure on local manufacturers ensured that working conditions and building standards were going to be ignored. For companies that failed to account for this eventuality, the financial and reputational costs were significant.

Simply stated political risk is the loss of revenues or assets that result from a range of non-financial risk factors. These risk factors could broadly include governmental, social or economic factors. Historically, political risk is thought to emanate from governmental actions (e.g. taxation, expropriation, corruption) or in this case, human rights risks. However, in recent years, that definition has become much more broad to include a range of societal problems in addition to macro economic effects on a business or industry. For example, community opposition to a mining project in the Andes or the possibility that Russia might invade Ukraine are other examples of political risk not directly related to the internal actions of a government. (The latter example reflects external political forces from a neighboring superpower that can impact businesses.)

For companies entering into a new market or expanding existing operations, political risk factors are sometimes overlooked but cannot be ignored and while some companies rely on internal expertise or undertake a cursory assessment of possible impacts on business, there is a danger that such superficial approaches will miss significant risks that ultimately become a reality. As a starting point, it is important to understand the components of political risk, namely the probability of a risk factor occurring and the impact that such an event will have on a business. The diagram below illustrates how these two aspects of political risk work and sets the stage for developing a fuller understanding of possible problems ahead.

PRA-PID

Obviously, attention should be paid to high probability, high impact risks that a company might face in its business operations in a country or region. Identification of those risks and developing appropriate mitigation strategies are key. However, risks that fall into the high impact, low probability range of risks are perhaps the most dangerous types of risk as it is often overlooked or ignored.

Ian Bremmer discusses these types of events in his book, The Fat Tail describing the term as “the unexpectedly thick “tails” – or bulges – that we find on the tail end of distribution curves that measure risks and their impact. They represent the risk that a particular event will occur that appears so catastrophically damaging, unlikely to happen, and difficult to predict, that many of us choose to simply ignore it. Until it happens.”

The Greek tale of the Trojan Horse describes just the sort of event that, while posing a catastrophic risk for the city of Troy, was unimaginable to its protectors. Who would ever think that soldiers would hide inside a wooden horse and subsequently open the gates of the protected city? Clearly the Trojan army had not given it a thought, to its peril. Modern versions of these sorts of high risk, low probability events occur with some frequency, most notably, the Arab Spring and the subsequent regional upheaval.

Some in business argue that these kinds of risks are simply a cost of doing business but little can be done to account for such events. However, a careful analysis of the political events that lead up to these financially disastrous events can be anticipated, and better informed business decisions can be made to account for these possibilities. This is the essence of political risk analysis. The Political Instability Task Force (formerly the State Failure Task Force) has for a number of years considered a range of factors that increase the probability that a state would fail due to revolution, civil war and other obvious events. In hindsight, the PITF indicators of state instability suggested that the unraveling of many of the Middle Eastern countries could have been foreseen, even though most political risk analysts failed to foresee the dramatic events that continue to unfold today.

In a sense, political risk analysis is a framework for considering non-financial risks to a business enterprise. Combined with a deep knowledge of a country or region and a methodical approach to the subject, political risk analysis can reduce unforeseen costs to a project or business activity.

As a starting point, framing the analysis is vital. Commonly, political risk is understood as country risk. Such an analysis looks at governmental (political), societal and economic factors that individually or in combination could create risks for an enterprise. Consider the following political risks in a particular country. Is the government authoritarian or democratic? Is there a high degree of grand corruption or is it pettier in nature (bribing the port customs officer)? Is there a high level of infant mortality? Is HIV/AIDS on the rise? How unequal is the income distribution in the country? At first glace, all of these questions suggest simple answers but in fact, the answers are far more complex and applying them to a particular business activity may not be straightforward. More importantly, each of these indicators suggests the possibility of political risks that could impact a business enterprise operating in that state.

Several studies have shown that authoritarian governments tend to be less likely to fail than fledgling democracies. Infant mortality is often an indicator of dissatisfaction in society that if left unaddressed, may lead to internal conflict manifesting itself in a variety of ways (See: State Failure Task Force Report: Phase III Findings at 14). Corruption, depending on the amount and at what levels it occurs, can have widely different consequences – hiring the president’s son to facilitate an oil deal is different from paying off traffic cops and can have profound impacts on an oil company seeking an exploratory gas lease in the country. Such an analysis, though important to understanding the political risks in a country is only the starting point. This macro level approach to understanding risk must also be complemented with an analysis of the specific risks to the business in question, its industry and the specific location where it is intending to operate in a country. This micro risk is more likely to be overlooked by companies undertaking an analysis of non-financial risks but is often posing serious if not perilous circumstances to the company, its employees and other stakeholders.

Next installment: How micro risks can impact business operations.

 

International Code of Conduct Association Reviews the Past Year and Maps Road Ahead

The International Code of Conduct Association (ICoCA) held its Annual General Assembly meeting on October 8 in Geneva. The ICoCA, established in September 2013, governs and oversees implementation of the International Code of Conduct for Private Security Service Providers and promotes the responsible provision of security services in line with the human rights and humanitarian law commitments laid out in the Code. As was the case at last year’s General Assembly, the Swiss-based multi-stakeholder initiative brought together its members from private security companies (PSCs), civil society organizations, and governments as well as observers to review the achievements of the previous year, discuss remaining challenges, and map next steps. Human Analytics participates as an observer to the ICoCA.

The Secretariat provided an Annual Report for 2014-2015 and addressed progress made to date in key areas. What follows are some highlights from the meeting. With regard to governance, the Secretariat has continued to grow in size and currently has a five person staff. Tasked with, among other things, administering the day to day business operations, overseeing the membership application process, administering the certification procedure, and providing support to the Board as it develops additional procedures, the Secretariat expects to add new staff when the monitoring and complaint procedures are completed. The ICoCA’s twelve member Board has created committees and working groups to assist it with its work, to include growing the size of the Article 12 Development Working Group, which is currently developing the monitoring, reporting and performance assessment procedure.

With the certification procedure recently completed and ANSI/ASIS PSC.1 recognized as the first national standard to serve as a basis for ICoCA certification, the Board is now focusing to monitoring adherence to the Code, one of the core functions of the ICoCA. With financial support from the U.S. government, as a first step the Article 12 Development Working Group is developing performance benchmarks based on the Code. The benchmarks will serve as objective criteria for assessing performance, shape the reporting requirements, and guide the Secretariat and Board’s efforts to monitor member companies remotely and in the field. A few industry members expressed concerns that any requirements under Article 12 must not be duplicative of steps already taken to gain certification to ANSI/ASIS PSC.1. If the time needed to develop the certification procedure is any indication, it will be awhile before stakeholders reach consensus on the procedure for monitoring, reporting, and performance assessment. From the perspective of many civil society organizations, this procedure is core to the ICoCA’s ability to assess the actual impact of security operations on local populations’ human rights. The complaint process will also prove essential to identifying negative human rights impacts, and the Board’s Complaint Process Development Working Group is currently undertaking a comparative study of existing complaints and grievance mechanisms to inform its work.

In addition, the ICoCA is currently piloting ICoCA certification and plans to develop guidelines to assist member PSCs through that process, in particular with regard to the additional human rights related information they must submit. The Board’s Certification Committee, with the new certification procedure and analytical matrix to assess new standards in hand, is completing its review of the maritime security standard ISO 28007-1. This is an important development for maritime security providers, who initially signed on the Code in large numbers. The next standard to be reviewed will be the new ISO 18788. The Secretariat indicated that since ISO 18788 builds on the already recognized ANSI/ASIS PSC.1, there is no reason to believe that the Board would not also recognize ISO 18788 in a time frame that would comport with the first certification bodies becoming accredited to certify to it.

Perhaps somewhat more unexpectedly, a proposal was made by a Swiss company to examine the suitability of the generic ISO 9001 quality management standard for certification to the ICoCA. The request is likely linked to Switzerland’s new law that requires membership in the ICoCA for companies based in Switzerland providing security services overseas or who support the provision of those services, as well as PSCs providing contracted security services to Swiss government agencies overseas and holding companies headquartered in Switzerland with control over PSCs operating overseas. The law’s expansive definition of security services does not match that of the Code which, among other things, has created some implementation challenges. The proposal met opposition, with some fearing that the ubiquitous ISO 9001 certification might result in a watering down of the Code’s requirements, as well as support, with some advocating a pragmatic, stepped entry into the ICoCA for both small and medium sized and non-U.S. and UK PSCs, for whom certification to ANSI/ASIS PSC.1 may not be as readily attainable. The Secretariat committed to examining the factual basis for concerns that certification to PSC.1, and ultimately ICoCA certification, is inaccessible to some PSCs interested in becoming members. The Secretariat stated that it does not want to exclude PSCs committed to the Code based on commercial considerations.

During break-out sessions of the individual pillars and observers, the industry pillar of the ICoCA voted in a new representative, and announced shortly thereafter that Pamela Hosein would join the Board. Ms. Hosein’s company is based in Trinidad & Tobago, and her election to the Board represents an important step in diversifying the Board to reflect the global make-up of member companies. One challenge identified during the meeting was broadening the ICoCA’s membership to include non-U.S. and UK companies. Currently, of the 88 member PSCs, 23 are home in the UK and 15 in the U.S. The remaining 50 PSCs are based in 29 different countries, with the UAE, Pakistan, and Cyprus being the only countries home to 5 or more member PSCs. However, the greatest growth in membership comes from PSCs headquartered outside of the U.S. and UK, and the Secretariat reported that two new applications are pending review and 34 are in process. An uptick in PSC membership should thus occur soon, as the application processing time has been reduced to two weeks.

The civil society pillar has also increased its global diversity, with the 13 civil society organizations at home on four different continents. Unfortunately, the government pillar’s six members (U.S., UK, Switzerland, Sweden, Australia, and Norway) are less geographically diverse. However, there is hope that the recently established Montreux Document Forum, with its 52 governments who have expressed support for the Montreux Document, might serve as a conduit for involving more countries in the ICoCA. The Montreux Document Forum has established an ICoCA Working Group that will liaise with the ICoCA. On a positive note, five of the governments currently participating in the ICoCA recognize in some fashion the importance of adherence to the Code in their regulations and procurement policies. With the Secretariat’s efforts to reach out to other non-state clients of the industry, such as extractive companies via its plans to join the Voluntary Principles on Security and Human Rights as an observer, one can expect continued growing interest among clients of the security industry in the verifiable provision of responsible security services.

Measuring Human Rights Impacts with Geospatial Information

Today, human rights investigators have unprecedented access to information. Access to government archives, corporate information and a range of data on people around the world abound. In recent years, human rights activists have also turned to satellite imagery as another means for collecting evidence of human rights issues. With all of this available information, the challenge is to understand what all of this means to both assessors and the people impacted by business activity.

At a recent conference hosted by the American Association for the Advancement of Science (AAAS) in Washington, DC several speakers touched on geospatial information as a source of data for identifying human rights problems. Commonly thought of as satellite mapping, geographic information systems (GIS) is a technology that has been in active use since the 1970s. As the technology for gathering geospatial information has improved, the data gathered has become readily available to the public and many new applications using GIS have been developed.

In the field of human rights, the use of GIS data has been used for identifying mass grave sites, the burning and destruction of communities, gas flaring and the after effects of aerial bombardment. In each of these cases, the scope of destruction lends itself to relatively easy identification of human harm from above, often by comparing views of a specific location over time.

In the field of business and human rights, the use of geospatial data and GIS may seem less obvious. When assessing the human rights impacts of business activities, GIS can provide valuable data on the physical impacts arising out of “footprint” projects, that is, physical business operations that can transform a community. For example, prior to the start of an open pit mining operation, an understanding of the physical environment viewed from above serves as a baseline for identifying changes brought about by the physical destruction of a given area.

For example, in 2013, the government of Myanmar entered into an agreement with a Japanese consortium to develop the Silawa Special economic Zone (SEZ). Located approximately 15 miles (25 kilometers) south of Yangon (Rangoon). Approximately 4500 people were displaced by the project. While the Japan International Cooperation Agency (JICA), a partner in the development, has argued that impacted villagers were provided land as compensation for being displaced, the impacted villagers have complained about the new, largely uninhabitable land. Satellite imagery of the area taken in 2012 and again in April of 2015, reveal profound changes to the physical environment that reveal the impact of the development project.

Thilawa SEZ 2012: Courtesy of Google Earth
Thilawa SEZ 2012: Courtesy of Google Earth

 

Thilawa2015-1
Thilawa SEZ April 2015: Courtesy Google Earch

However, interpreting this data provides a more nuanced understanding of the human rights impacts arising out of this project. When people living in the path of this project were relocated, their new land was found to be unsuitable for human habitation due to marshy conditions. By analyzing the geospatial imagery of the area, human rights assessors could identify specific impacts on the economic and social rights (right to adequate housing, right to food) as revealed by the destruction of farmland and the presence of water in marshy areas surrounding the project.

Combined with GPS tagged data collected in the community (location of homes and people, and agricultural land, water sources, and access routes), GIS data can inform a clearer analysis of human rights impacts in and around business activity. Markers inserted as layers on the GIS map that include links to photographs taken at specific locations on and near the affected site and field notes gathered can provide human rights assessors with a deeper understanding of the scope of the problems facing impacted people.

Geographic information systems are an invaluable tool for understanding the human rights implications of business activity. With the technology readily available, its use will inform a better understanding of the range of human rights concerns facing communities and aid human rights experts in their work.

 

 

ICGN: Investors and Human Rights Risk

Recently, the International Corporate Governance Network (ICGN) published an article, “Viewpoint: Human Rights Through a Corporate Governance Lens.” The crux of the piece was that human rights pose governance risk to the corporate enterprise and investors must consider human rights in assessing corporate conduct. As noted in the article, “Human rights are at once a growing business risk for companies, and they also present important questions of business ethics that both companies and investors must consider as a fundamental component of good management and long-term stewardship.” This insight by a leading voice in the corporate governance community is a promising development in the promotion of human rights protections in the course of business development. The authors, Lauren Compere and George Dallas, raise several interesting questions that all investors should ponder as human rights norms intersect with business activities throughout the world.

The first question that Compere and Dallas pose is what should investors expect of companies with regard to human rights management? Noting the UN Guiding Principles on Business and Human Rights, they recognize that companies have a responsibility to conduct the necessary due diligence to ensure that human rights risks are considered as part of business operations and that boards must hold management accountable and create a corporate culture that ensures management of those risks.

The second question raised in the Viewpoint is perhaps a more critical one for institutional investors: What should be expected of investors in companies where human rights concerns may arise? Implicit in that question is the notion that investors have some duty to respect human rights as described in the UN Guiding Principles. For readers unfamiliar with the UN Guiding Principles on Business and Human Rights, the Principles set forth a framework for governments and businesses: States have a responsibility to protect human rights in the context of business activities that may infringe on those rights; Companies have a responsibility to respect human rights in the conduct of business activity, and; There must be adequate remedies afforded people whose human rights have been impacted by business activity. In this context, investors have a responsibility to respect human rights impacted by their investments in business activities. While at first glance this notion seems tenuous in terms of passive investment and rights affected, it is becoming the norm.

For example, with the easing of sanctions against the government of Myanmar as it began to ease social and economic restrictions on its citizens, the U.S. State Department imposed its “Reporting Requirement” for investments in excess of $500,000 by U.S. companies operating in that country. Several of the initial reports from companies operating in Myanmar that fit in the definition of the Reporting Requirement made the argument that passive investment in business development in the country was exempt from the Reporting Requirement. However, the Reporting Requirement makes no distinction with respect to any investment in excess of $500,000. In another context, the ICGN authors note that the OECD National Contact Point network found that:

“[H]uman rights concerns at the South Korean steel company POSCO resulted in two prominent European investment funds facing OECD criticism on the basis that they may have applied insufficient human rights due diligence in monitoring or engaging on human rights at POSCO—even though both were only minority shareholders with relatively small stakes in the company.”

This raises a fundamental question as to what institutional investors should do to address human rights concerns. ICGN suggests that investors should (1) develop proportionate due diligence with respect to their investments; (2) develop appropriate strategies with respect to their investment policies and practices; (3) public disclosure of investors’ human rights policies; and (4) engage in public policy and multi-stakeholder initiatives in order to extend their influence in regard to business and human rights.

All of the actions proposed by the ICGN are not new concepts for institutional investors but what has changed is the recognition that there exists emerging international legal norms that investors must recognize as part of their obligations as investors. Shareholder engagement, appropriate due diligence with respect to their investments and transparency with respect to investment policies are all subjects that have been discussed by responsible investors for some time. What has changed is the recognition that institutional investors cannot remain on the sidelines as human rights pose ever-increasing risks for companies throughout the world. The traditional view of investors and the corporate enterprise wherein investors are only liable to the extent of their investment is rapidly giving way to the recognition that non-financial risks, including human rights impacts, transcend those 20th century views.

 

 

Human Rights and the Institutional Investor

As businesses and governments operationalize the UN Guiding Principles on Business and Human Rights, their application to a wider range of business activities is becoming more apparent. This is true when applying the Guiding Principles to institutional investors faced with an array of investments. In this article, we propose several ways to consider how institutional investors can go about integrating the UN Guiding Principles on Business and Human Rights into their investment processes.

For those unfamiliar with institutional investors, this broad group includes public and private pension funds, public institutions including Universities and other educational institutions, local state and national governments, sovereign wealth funds, insurance companies, mutual funds and other large investors. In a 2005 study, the Bank of International Settlements estimated the worth of institutional investors in the U.S. at almost $22 trillion and the combined value of institutional investors in 18 countries including the U.S., total in excess of $46 trillion. Nine years later, this number has no doubt risen significantly.

While an increasing number of institutional investors are beginning to consider non-financial factors in their investment processes, including human rights implications of investment decisions, the vast majority of institutional investors simply do not consider human rights as part of this process. However, out of necessity, institutional investors will eventually face the realities of a changing world and steps must be taken to address this issue.

For those unfamiliar with the UN Guiding Principles on Business and Human Rights (UNGPs), the underlying rubric for applying human rights principles to business activities falls within the “Protect, Respect, Remedy” framework. In particular, the responsibility to respect the human rights of people falls on companies whose operations impact affected individuals and communities. In addition, a number of voluntary principles have been developed that establish responsibilities for financial institutions in a variety of situations. The Equator Principles is one such example, in that they establish “a risk management framework [that is] adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects and is primarily intended to provide a minimum standard for due diligence to support responsible risk decision-making.” In addition, the Thun Group of Banks, an assemblage of U.S. and European banks met in Thun, Switzerland in 2013 and released their paper, UN Guiding Principles on Business and Human Rights: Discussion Paper for Banks on Implications of Principles 16–21, which laid out an interesting starting point for discussion about financial institutions and their responsibilities with regard to respecting human rights.[1] The process of adopting human rights policies and procedures in the context of the financial sector is in its infancy but is progressing as these institutions develop a better understanding about how they should go about establishing these policies and procedures to the unique circumstances of the financial sector.

Given that the financial sector is in the early stages of adopting the UN Guiding Principles, we would argue that institutional investors must look at human rights in their investment decisions in two ways. First, they must consider the human rights implications for various asset classes. Second, their investment management providers, whether in-house or as is most often the case, outside professional advisors retained to provide these services.

Human Rights and Investments

With regard to applying the Guiding Principles to asset classes, it is important to understand what those asset classes are: Equities (stocks), debt (bonds), real estate, alternative investments (hedge funds, derivatives) as well as an array of other investment vehicles. Within each of these broad classes is any number of sub-classes of investments. For example, real estate includes direct ownership of domestic and/or foreign land, agricultural and commercial property financing, infrastructure investments and the like. In addition, indirect ownership through pooled investments and by other means must be added to the mix. Each of the other asset classes also has many specific types of investments within those categories. This makes the task of applying the U.N. Guiding Principles much more difficult and time consuming since different approaches to human rights due diligence is required for each of these different kinds of investments.

An Assessment Methodology

To simplify this process, we propose a methodology for addressing human rights due diligence for institutional investors. First, investors must look at how their service providers address human rights as part of their investment decision-making. Second, specific due diligence approaches to the broad classes of investments must be developed, if for no other reason than to begin a discussion about the application of a human rights rubric to a range of investment products. This approach is implicit in the analysis laid out by the Thun Group paper and is expanded upon below.

With regard to applying a human rights due diligence framework to the selection of investment management professionals, institutional investors face a seemingly intractable problem. This problem is manifested in part by investors’ fiduciary duty to the beneficiaries of the investments made on behalf of the institutional investor (pension beneficiaries, mutual fund share owners, etc.). The concept of fiduciary duty has been the subject of many years of debate with the predominant view being a vary narrow reading that can be summarized in the phrase, “maximizing investor return.” What this means in practice is that advisors to institutional investors argue that the safest way to ensure that representatives of institutional investors act within legal norms is to invest in those assets that maximize a risk-adjusted rate of return for that asset class. For example, a conservatively managed pension fund containing an aging beneficiary base may not want to invest in a real estate venture in Zimbabwe with an annual rate of return of 30%, opting instead for a similar investment in real estate in New Zealand, where the estimated rate of return is much lower.

Fiduciary Duty vs. the Responsibility to Protect

The practical reality is that institutional investors, saddled with the responsibility to act prudently with respect to their investment decisions at the risk of personal liability will more often opt for the safer investment route. In addition, their investment managers, investment consultants, legal counsel and other professional advisors all approach the investment decision in s similar narrowly defined fashion. That is not to say that specific investment advisors do not consider other factors. Examples abound with regard to socially responsible investors who consider non-financial factors in their investment decisions but do so up front and with the understanding that investor rates of return will reflect for these additional considerations. However, the predominant approach with regard to fiduciary duty is the more narrow view.

With regard to investment managers, they are also constrained by pressures from a variety of constituents, some of who are not concerned about human rights as part of their investment decisions. In addition, many investment managers are part of larger financial institutions that provide a range of services to an array of clients, including the very companies that they invest in through various means: equities, debt instruments, capital lending and so on. This mix of client interests and pressures places investment management professionals in a quandary. As one senior manager at a prominent Wall Street firm once told me, “I don’t want to read about my investment decisions on the front page of the New York Times.”

From an investor perspective, applying the UN Guiding Principles to their investments is a complex exercise and cannot be effectively done within the operational and financial constraints of the institution. However, this problem is circumvented in other contexts through the development of guidelines that their investment professionals are obliged to address as part of their investment responsibilities. For example, with the growing concern by investors that they must address a range of corporate governance issues by way of voting their proxies received through their equity holdings, Proxy Voting Guidelines[2] have been developed that set forth a range of policies for voting proxies in a variety of circumstances, e.g. executive compensation, social responsibility, director elections, and so on. An analogous approach could be taken by requiring that investment management firms establish human rights policies with an accompanying demonstration of operationalizing those principles within the company.

Asset Class Guidelines

A more significant challenge faces institutional investors when they try to apply the UNGPs to specific asset classes. Here, institutional investors, along with investment management professionals and human rights and business experts must come together and begin to develop asset-specific approaches to the application of the UN Guiding Principles.

Applying the Guiding Principles to specific asset classes won’t be easy but there are a few starting points for moving this effort forward. For example, investors should require their equity managers to evaluate the policies established by their portfolio companies with respect to human rights due diligence. While investment managers may be constrained in their buy/sell decisions to include human rights policies as part of the decision-making, the managers should report back to their investor clients whether those policies are in place for the equities held in the client portfolios. Extending this precatory approach to other asset types, institutional investors can begin to send a message to their clients, industry and to the capital markets that human rights considerations are on the rise as part of their overall investment processes.

[1] See also, Domiano De Felice, Banks and Human Rights: The Thun Group and the UN Guiding Principles on Business and Human Rights, 2014, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2477126, which is a critique of the Thun Group paper.

[2] As an example, see Glass Lewis & Company, Guidelines: 2015 Proxy Season, 2014, http://www.glasslewis.com/assets/uploads/2013/12/2015_GUIDELINES_United_States.pdf.

Risk Becomes Reality When Companies Fail to Respect Human Rights

Recent headlines are a reminder to companies operating in complex environments that failure to respect human rights can result in legal, financial, and reputational liabilities. There are very real risks and costs associated with not fostering a company culture and management processes that ensure that personnel are adequately vetted and trained on human rights standards. Human rights policies and procedures need to be endorsed and supported at the highest levels of management to be effective.

This is a lesson CACI International has had to learn as it continues to fight allegations that its personnel were involved in the torture at Abu Ghraib. On June 30, the U.S. federal court of appeals for the fourth circuit ruled that a civil suit against CACI could proceed. At the time the torture and other rights abuses occurred, CACI was providing interrogation and other services at Abu Ghraib. CACI has been staunchly fighting the suit for years which was brought on behalf of four Iraqis by the Center for Constitutional Rights.

The court of appeals’ ruling is significant for what it means for other companies accused of complicity in human rights abuses that occur overseas. The civil suit was brought using the Alien Tort Statute, which allows foreign nationals to bring suit in U.S. courts for gross human rights violations occurring outside of the United States. Last April in Kiobel v. Shell/Royal Dutch Petroleum, the Supreme Court ruled that “there is a presumption against extraterritorial application of the ATS, and that presumption can be overcome when the matter ‘touches and concerns’ the United States with ‘sufficient force’.” The appeals court ruling overturned a previous district court ruling that had foreclosed the possibility of a lawsuit because of lack of jurisdiction based on its interpretation of Kiobel. The court of appeals found that human rights abuses committed by a U.S. corporation under a U.S. government contract at a U.S.-controlled prison does “touch and concern” the United States sufficiently to allow the case to proceed.

Another company, Titan, now called Engility Holdings, which had provided translation services at Abu Ghraib, settled a lawsuit last year for $5.28 million that had accused its personnel of complicity in rights abuses.

The company formerly known as Blackwater is also back in the headlines. The company no longer exists after having changed its name to Xe, and then re-forming as Academi under new ownership. Academi recently merged with Triple Canopy under the ownership of Constellis Holdings, but will continue to operate as a separate entity. Despite the fact that Blackwater no longer exists, the company’s poor human rights track record continues to haunt Academi, which is in the position of having to frequently issue press releases distancing itself from Blackwater. Last month, the trial against four Blackwater guards began for their involvement in the shootings at Nisour Square in 2007 that left 14 dead and 18 others wounded. One guard is charged with first-degree murder and the other three face charges of voluntary manslaughter, attempted manslaughter, and gun charges. In 2010, Xe had settled a series of seven civil lawsuits brought against the company by families of victims who had been shoot by Blackwater guards at Nisour Square and elsewhere. The New York Times broke a story on June 29 that the State Department had begun an investigation of Blackwater’s operations in Iraq just weeks before Nisour Square, but that the investigation was dropped after the company’s top manager in Iraq allegedly issued a death threat against the lead investigator.

The failure of CACI, Titan, and Blackwater personnel to respect human rights have created real legal, financial, and reputational liabilities – for the personnel and for the companies. The human rights risks are high for companies operating in complex environments. For this reason, it is imperative that companies ensure that they embed respect for human rights throughout their global operations. Finally, while companies face liabilities if they do not ensure that their personnel respect human rights, so too do those contracting with companies when they do not exercise adequate oversight. State Department Under Secretary of Management Patrick Kennedy currently is facing Congressional scrutiny for inadequate contract management in the wake of the New York Times story. It is equally imperative that the clients of private security companies demand that their providers demonstrate respect for human rights before entering into contracts with them.

Tangguh Panel Offers Hope for West Papua

Courtesy of BP
Courtesy of BP

Last week, I had occasion to attend a briefing from two members of the Tangguh Independent Advisory Panel (TIAP), Pak Augustinus Rumansara and the TIAP Chair Tom Daschle. Held at the law offices of DLA Piper in downtown Washington DC, the purpose of the briefing was to inform the public about the progress and challenges facing a consortium led by BP in Bintuni Bay located in West Papua. Mr. Rumansara and Senator Daschle shared their findings contained in the recently released FIRST REPORT ON OPERATIONS AND PROPOSED EXPANSION OF THE TANGGUH LNG PROJECT, which can be found here. By way of background, the Tangguh gas field lies in Bintuni Bay, in the province of West PapuaIndonesia. The natural gas field contains over17 TCF of proven natural gas reserves, with estimates of potential reserves reaching over 28 trillion cubic feet. Production began in June 2009.

According to the report, the TIAP, which has been in existence since 2002, “focuses on matters relating to security, human rights, governance, revenue management, the political environment and the broader issues relating to how Tangguh affects the people of Bintuni Bay and Papua and how the Project is perceived by them.” BP’s goal is to make Tangguh “a world-class model for development.” In addition, the TIAP provides advice about non-commercial aspects of the Tangguh LNG Project and to provide assurance to external stakeholders on the standards BP is following. Since it is difficult for international media or international NGO to enter the area of Papua, having an independent panel that makes independent reports makes it easier for BP in managing dialogue with international NGOs, especially in London and Washington DC – the panel provides an independent view of Papua and Tangguh Social Performance.

The TIAP’s work is shaped by a number of business and human rights standards, among them the OECD Guidelines for Multinational Enterprises, the Voluntary Principles on Security and Human Rights, the UN Guiding Principles on Business and Human Rights, and the IFC Performance Standards on Environmental and Social Sustainability.

As noted in the report, “TIAP focuses on matters relating to security, human rights, governance, revenue management, the political environment and the broader issues relating to how Tangguh affects the people of Bintuni Bay and Papua and how the Project is perceived by them. These factors relate directly to whether BP can achieve its goal of making Tangguh a world-class model for development.” As part of its evaluation of the project, the Panel seeks to promote “best practices, including adherence to the Universal Declaration of Human Rights; the Organization for Economic Cooperation and Development (“OECD”) Guidelines for Multinational Enterprises; the International Labor Organization Convention Concerning Indigenous and Tribal Peoples in Independent Countries; the World Bank Operational Directive with respect to indigenous peoples and the U.S. – U.K. Voluntary Principles on Security and Human Rights.”

This is the Panel’s third full report and it comes as BP has just completed the public consultation phase for the social and environmental impact statement (“the AMDAL”)  as expansion of the facility gets underway. Tangguh’s third line, known as a train, is projected to start production as early as 2018 after construction begins in this year. The facility will cost $11 billion and produce as much as 3.8 million metric tons a year of the fuel. What I found of interest in the report were the challenges facing the company and the project. First, the macro-level political risks emanating from a resource nationalism that resulted “in antagonism toward foreign investment in the natural resource sector and its impact on the company and the Tangguh project. It is an election year, and it is possible that some of this rhetoric is political and will not translate into policy. But nearly every candidate for President, even those most supportive of foreign trade and investment in the past, has voiced a theme of natural resource nationalism that is critical of the status quo on resource development,” reports BP. Second, the report points out BP’s continuing progress on balancing its ongoing security needs at the facility while remaining sensitive to potential human rights implications arising from activities at the facility. BP is providing its own security for the project because it doesn’t want to have to pay big protection fees to guards from the Indonesian Defense Forces (TNI). Also mindful of its international image, BP doesn’t want any soldiers based at Tangguh lest it suffer the fate of other multinationals, such as FreeportMcMoRan and ExxonMobil, which have been accused of complicity in human rights abuses perpetrated by their military guards. BP has recruited at least 82 guards from local villages for its Community Based Security Program and plans to hire a total of 250 over the coming years when construction work peaks. The company says the project has also begun recruiting and training Papuan employees to operate and maintain the expected offshore production platforms. This sensitivity to human rights in the context of plant security and the surrounding communities would appear to be paying off. There were only 38 grievances or concerns submitted by the community in 2013, substantially fewer than the 115 grievances filed in 2011. I find the Tangguh operation to be an interesting case study in doing it right and hope that we will see similar approaches on development projects in the future.

New Private Security Monitor Commentary on Draft ISO Standard for Security Operations

Image courtesy of Private Security MonitorHuman Analytics’ Rebecca DeWinter-Schmitt has written a commentary for the University of Denver Private Security Monitor website. Private Security Monitor is a one-stop shop with a wealth of information related to the use and regulation of private military and security services throughout the world. The commentary, A New Twist to Management Standards, Bringing in Human Rights, discusses the new International Organization for Standardization (ISO) management standard for security operations currently under development, which has at its core the need for security service providers to respect human rights throughout their operations. The commentary also discusses different perspectives on the relationship between the new ISO standard and two other existing standards for private security providers: the International Code of Conduct for Private Security Service Providers and the ANSI/ASIS PSC.1 – 2012: Management System for Quality of Private Security Company Operations. You can read the full commentary here.

New ISO standard for private security services under development

Private security contractors go into some of the most dangerous situations in the world to protect civilians. Photo: Aegis
Private security contractors go into some of the most dangerous situations in the world to protect civilians. Photo: Aegis

The May-June issue of ISOfocus, the magazine of the International Organization for Standardization, features an article, Policing Private Security, which highlights one of ISO’s current standard setting efforts to develop a management system standard for provision of private security services. An international management system standard will help security providers manage the risks associated with their operations, and ultimately contribute to the respect for human rights.

The article was written shortly after the first meeting, held in Montreux, Switzerland, of the international Project Committee tasked with writing the standard under the leadership of Marc Siegel. Siegel previously led the effort that resulted in the US national standard ANSI/ASIS PSC.1 Management System for Quality of Private Security Company Operations. The new ISO standard will build on PSC.1, as well as two other international standards: the Montreux Document on Private Military and Security Companies and the International Code of Conduct for Private Security Service Providers. Human Analytics’ Senior Managing Director, Dr. Rebecca DeWinter-Schmitt, attended the meeting in Montreux in an independent expert capacity as chair of the delegation representing the United States. In the article, she calls for greater civil society involvement in the development of the standard, noting that, “This International Standard will be the first of its kind to address the human rights risks of an industry through a management system process, and it is important to identify and bring on board human rights expertise.” The ISOFocus article can be found here.

 

UN Working Group Survey of Companies Reveals Some Counterintuitive Results

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The UN Working Group on Business and Human Rights, which was tasked by the UN Human Rights Council with promoting dissemination and implementation of the UN Guiding Principles on Business and Human Rights, recently released a draft report with results from a survey of 153 companies. The survey is meant to help the UN Working Group: 1. understand progress in the dissemination of the UNGPs; 2. highlight implementation motivations and challenges; and 3. understand the support companies need to meet their responsibility to respect rights. While the survey used a snowball sampling method based on the existing networks of the business associations involved in the survey (rather than a representative sample of companies), a wide range of small and large companies from 39 countries and an array of sectors were represented.

Interestingly, some of the findings run counter to conventional wisdom about companies’ commitment to respect human rights. One often hears that many companies are unaware of the GPs, with the exception of large, brand name companies in high profile sectors, such as extractives, ICT, apparel, and food and beverage. However, the survey found that three quarters of the respondents had heard of the Guiding Principles and that three out of five have a public policy statement on human rights. This result may be linked in part to the sampling methodology – and disappointingly only a little more than half of the companies had engaged in any effort to actively respect human rights. While three quarters of respondents have dedicated corporate responsibility/sustainability departments responsible for implementation of their human rights policies, nearly one in two companies indicated that moving from policy to practice remains a challenge.

Counter to popular belief that companies require a business case to respect human rights, when asked what motivates them to address human rights, “it is the right thing to do” – an ethical justification – ranked in the top three answers. Equally as interesting, and contrary to the idea that companies only act in response to public scandals, few respondents selected a negative issue in the company’s past as a driver of behavior. Finally, contrary to the popular belief that companies shun mandatory regulation in favor of voluntary regulation, over 45% of respondents indicated that government enforcement of local laws would support their efforts to respect rights, and one out of five indicated that legally mandated human rights due diligence requirements would be of value. Four respondents even indicated they would find value in a binding international treaty.

The bottom-line is that despite methodological shortcomings this survey assists in the development of a more nuanced understanding of what motivates companies to respect human rights and what challenges they face when attempting to do so. Relying on conventional wisdom will not get us far in fostering the dissemination and implementation of the Guiding Principles.

SEC Conflict Minerals Filing Deadline Fast Approaching

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Credits: Missionary Oblates of Mary Immaculate

On August 22, 2012, the Securities and Exchange Commission (SEC) issued a final rule on Section 1502 of the Dodd-Frank Act relating to the use of  conflict minerals (defined as tin, tantalum, tungsten or gold from the Democratic Republic of the Congo (DRC) or an adjoining country).  The provision requires U.S. – publicly traded companies to disclose annually if an issuer’s conflict minerals originated in these areas and, if so, to submit a report to the SEC that includes a description of the measures it took to exercise due  diligence on the conflict minerals’ source and chain of custody.  Companies have until June 2nd, 2014 to submit their initial filings to the SEC.

To accomplish the goal of  helping end the human rights abuses in the DRC caused by the conflict, Section 1502  uses the securities laws disclosure requirements to bring greater public awareness of the  source of issuers’ conflict minerals and to promote the exercise of due diligence on  conflict mineral supply chains. In the final rule the SEC determined that Congress’s main purpose for Section 1502 is “to attempt to inhibit the ability of armed groups in the Covered Countries to  fund their activities by exploiting the trade in conflict minerals. Reducing the use of such conflict minerals is intended to help reduce funding for the armed groups contributing to the conflict and thereby put pressure on such groups to end the conflict.”

On May 14th, 2014, the U.S. Court of Appeals for the District of Columbia Circuit refused to block a June 2 deadline for issuer’s filings to the SEC.  According to the Wall Street Journal, “the SEC said companies still had to determine whether any conflict minerals are necessary for their products and then investigate the origin of those minerals. Certain details about investigative efforts by companies are still due to be reported to the SEC.”