Monday, March 21, 2011

China’s Multinational Enterprises in Latin America and Norway’s Sovereign Wealth Fund—Public Power and Private Markets in the Global South

One of the most interesting consequences of economic globalization is the way in which it tends to collision of distinct governance and economic projects that might not appear to have much to do with each other. For this essay I highlight one of those collisions, between China’s Go Global policies and its accelerated investment in developing countries, especially in extractive industries, and the responsible investment framework of the Norwegian Sovereign Wealth Fund with its emphasis on the use of private market investment to influence the behavior of private entities (even state controlled enterprises).

I have suggested that China’s Go Global policy would put Chinese enterprises in a potentially uncomfortable position, one once occupied by the European and the United States in the exploitation of resources and markets in smaller and more dependent states. Larry Catá Backer, Courting Africa--21st Century China Africa Investment and Cooperation Forum, Law at the End of the Day, Aug. 7, 2010; Larry Catá Backer, China and Neo-Colonialism in Africa: A Warning from South Africa, Law at the End of the Day, Dec. 15, 2006 (  I have also suggested that the combination of projections of state power to such areas in the form of aid and private power in the form of state directed investment, could raise issues of subordination and compliance with international obligations. More specifically, I argued that in the absence of substantial care in the management of its Go Global policies, the Chinese might en counter growing resistance, and public embarrassment, as it effectively turns its investments in these areas, and those states, into a system of global plantations for the benefit of the Chinese homeland. While these issues have been most visibly raise din connection with China’s recent efforts to develop a coherent and comprehensive investment strategy in Africa, it is also an issue in other parts of the world.

More importantly, the Go Global policy (走出去战略), and aggressive moves by Chinese companies into the developing world, will also tend to expose Chinese enterprises to the sort of scrutiny, and the behavior standards, long applied to companies from developed states.  Global civil society has little interest in the ideological base or the nationality of large multinational corporations.  They will tend to  engage with those companies as they have with those from Europe and the United States.  Tot he extent that Chinese enterprises are unprepared for this sort of scrutiny, and more importantly, unprepared for effectively responding in accordance with emerging global standards, they will encounter a substantial amount of problems that may eventually have significant financial effects. For Chinese companies unused to dealing in the global environment, and unfamiliar with the patterns and strategies of non governmental organizations, media elements and global consumers and investor communities, the lessons will come hard.  More importantly, perhaps, they will also produce an engagement by Chinese companies with other public actors who are also pursuing public goals through engagements in private markets.  Principal among these may be sovereign wealth funds from developed states or such funds sensitive to the sensibilities of investors in the West.

On March 4, 2011, the China Economic Review posted a “News Brief” entitled “Zijin Accused of Violence, Breaching Environmental Laws in Peru.” China Economic Review, March 4, 2011, 2011. The news brief noted that 
China’s largest gold producer, Zijin Mining Group (2899.HK) has been accused of failing to disclose pollution problems, and of violence and deaths at its Peruvian copper mines, the South China Morning Post reported. Four environmental organizations—the Lima based CopperAcción and Ecumenical Foundation for Peace and Development, as well as Friends of the Earth in the US and Belgium’s Catapa—sent a letter to the Hong Kong Stock Exchange on Thursday urging it to ensure that Zijin discloses recent events. It alleges that Zijin not only breached environmental laws, but also failed to obtain approval from local communities and did not fully disclose incidents of torture and the killing of community leaders before the company bought the mine. (Id.).
Zijin is no stranger to environmental issues. The same report also noted that “Last year, Zijin—which also mines copper, zinc and iron—was fined US $4.5 million for hazardous waste leaks in Fujian province.” (Id.).

As a consequence, Zijin had already come to the attention of global civil society.  Among them is Friends of the Earth.  According to Javier Jahncke of Peru’s Ecumenical Foundation for Peace and Development (Fedepaz), who works with the communities, “Polluting this area could bring about an environmental disaster for the entire region.”
Zijin has already been fined for violating local environmental laws and recent clashes with community members have brought about casualties on both sides.  Adding to Zijin’s woes, the Rio Blanco Mine was never authorized by local communities, as required by Peruvian law,and the mine’s previous owner, UK-based Montericco Metals, which Zijin acquired in 2007, is on trial in the UK for the torture and killings of local community members in 2005.
Despite its conflict with communities in northern Peru, in July 2010 Chinese media reported that Zijin would seek to increase its investment in the Rio Blanco Mine.  Controversy seems to be defining Zijin’s attempts of late to expand abroad.  Also in 2010, the company was seeking to invest in the Tampakan Gold and Copper Mine in the Philippines and a mine in the Democratic Republic of the Congo, both of which are fraught with social and political opposition.  Ultimately, these deals did not go through, but expanding Rio Blanco remains on the table.  (From FOE and Peruvian allies call on Zijin mining company to come clean, ).
The actual factual context of the latest accusations sugegst both environmentalk issues as well as issues relatring to violaitons of human rights generally and of the rights of indigenous people specidfically.

Rio Blanco mine in Peru
The Rio Blanco Mine, which Zijin acquired in 2007 from UK-based Montericco Metals, poses a particularly high level of political, economic, and cultural risk. Many serious environmental and social issues existed with this project before Zijin bought the interest, and those issues have continued under Zijin’s poor management. Below we describe how the company has 1) failed to obtain proper authorization from local communities prior to commencement of operations on community land; 2) breached environmental laws; and 3) been associated with torture and killing of local people.
Failure to obtain community authorization. Under Peruvian law, mining companies must obtain the two-thirds approval of local community assemblies before entering community land to do exploration or other activities.1 Zijin Mining Group Co. Ltd via its local subsidiary Mineria Majaz S.A. failed to obtain this legal authorization when it entered the Rio Blanco project area in 2003. Further, a legal referendum held in September 2007 clearly displayed community members’ strong opposition to the project, with 97% of voters from the districts in which the project would be developed voting against the project. Thus its presence in the area does not comport with existing legal requirements, a point that has been sustained by Peru’s national Public Defender’s office and by the Peruvian Congress.
The illegality of the company’s presence in the project area is contributing to suspicion and resentment toward the company amongst the local population. The company has not taken action to address this issue despite repeated efforts by local stakeholders to raise this concern with company and government officials.
Breaches of environmental law. In February 2008, the Peruvian government fined Zijin
US$100,000 for noncompliance with the Environmental Evaluation Study approved by the government for the initial phase of exploration.22 Among the issues cited by the government in assessing the fine were:
• Carrying out a greater number of drilling perforations than had been approved in the EA
(129 vs. 60).
• Modifying its exploration project without having the necessary environmental studies required by the Ministry of Energy and Mines.
• Exceeding limits for liquid metallurgic effluents in its exploration activities, including copper, zinc and acidity.
• Improper disposal of waste material.
• Inadequate implementation of remediation measures, including erosion control and closing off of access roads no longer in use.
Torture and killings of local people. The Rio Blanco project has been the site of a number of violent incidents, including the killing of four community leaders and three company personnel, since 2004. In August 2005, 28 people were detained after protests at the project site and brought by security forces to the mining camp where the individuals were tortured. According to Peru’s National Human Rights Coordinator and Peruvian human rights organization FEDEPAZ, members of the company’s security force, private security contractors, and the Peruvian National Police (PNP) were involved in the torture.
Evidence of the torture was made public in early 2009 when photographs taken of the incident were released by a journalist who had also been tortured. These incidents could amount to a violation of the victims' rights to personal security and to not be subjected to torture as established in the UN Universal Declaration of Human Rights and the UN Convention Against Torture, both of which Peru has ratified. Violations of these rights by contractors or police working directly for or at the behest of the company could implicate the company in the violations. In 2009, the UK High Court froze GBP 5 million in assets of Monterrico Metals, a subsidiary of Zijin, in response to torture allegations brought against the company by victims of the 2005 incidents.
Although Zijin was not involved in the Rio Blanco project when violent conflicts initially broke out in 2004, the company has not taken the appropriate steps to rectify complaints made by the communities and violence has continued. In November 2009, three company workers were killed in an attack on the project site by unidentified assailants. In December, two more people were killed and eight injured in a conflict with local police as police tried to arrest a suspect in the November attack. In September 2008, members of a local civil association that had made false accusations of terrorism against 35 people, including local authorities, community leaders and environmental and human rights activists, stated to government prosecutors that they had received financing by Rio Blanco Copper for their activities.
Despite these unresolved social conflicts and environmental violations, Chinese media
announced in July 2010 that Zijin will seek to increase its investment in the Rio Blanco Mine.3
1 Article 89, paragraph 2 of the Peruvian Constitution;  Law 24656 on Native and Peasant Communities; Law 26505 on Private Investment in EconomicDevelopment.
2 Resolucion de Gerencia General Organismo Supervisor de la Inversion en Energia y Mineria OSINIGERMIN, No.444-2008-1-OS/GFM. February 7, 2008.
3 “紫金矿业:考虑追加秘鲁白河铜钼矿投资预算,”Capital Week, July 6, 2010.
(From Letter to Christine Kan, Hong Kong Stock Exchange, March 2, 2011).
Rather than pursue strictly legal avenues of redress--action in local courts, the civil society actors pressing the matter chose a soft law approach--relying on an obligation to disclose in the markets in which Zijin securities are traded, for the purpose of affecting Zijin's relations with its investors, and the markets in which Zijin trades.   For a discussion of the effectiveness of this strategy, see, e.g., Larry Catá Backer, From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations. Georgetown Journal of International Law, Vol. 39(4):591-653, 2008.

In this case, though, it is not clear how effective the tactic will be.
A Hong Kong-based analyst covering the stock said Zijin had communicated to investors that its Peru mine may face many delays due to conflicts mentioned in the letter. He has not included the project in his earnings forecast.

Until it makes a major acquisition, Zijin is not subject to specific disclosure requirements on environmental, social and safety issues under listing rules for mining firms that came into effect last year. But Zijin is required to disclose information necessary for "the public to appraise the position" of the firm under rules that cover all listed firms.
Zijin's supervisory committee said in its 2009 annual report that its overseas investments face challenges including "social and environmental protection in local society, higher political, economic and cultural risk for overseas investments". It did not give further details. (From Eric Ng, Global green groups attack mainland miner, South China Morning Post, March 4, 2011)

Friends of the Earth Understood these limits.  "Although Zijin, as a listed company, does not need to comply with these IPO regulations, the Exchange clearly recognizes that environmental and social information can be material, especially for mining companies operating in foreign jurisdictions. Companies should continue to disclose such risks in annual and periodic filings." (From Letter to Christine Kan, Hong Kong Stock Exchange, March 2, 2011, citing to Article 18.05(6) of the “Amendments to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited”).  However, FOE argued that general disclosure rules (Art. 13.09(1), applied.  "Companies should continue to disclose such risks in annual and periodic filings. The Exchange broadly recognizes the importance of information disclosure through its general rules for listed companies" (Id.).

The objectives are clear of a strategy grounded in disclosure.  If Zijin is forced to disclose then that disclosure might affect share price.  Such an effect might force the company to change its behavior.  Alternatively, disclosure might serve to provide the authoritative evidence that local people might require to invoke the dispute resolution processes of Peru and commence legal action in the host state. Failure to disclose might also hurt share priuce (and thus pressure Zijin).  Alternatively, failure to disclose may interfere with Zijin's relationship with the Exchange and potentially affect the ability fo the company to trade it shares.  The attendant publicity of any of these responses will cast a strong light on the company and the charges.  That, in turn might affect the willingness of other companies to deal with Zijin (to avoid being tainted by association).  That may be particularly important for companies with strong consumer markets in jurisdictions where media publicity could substantially affect consumer demand. 

Beyond this action, are there any other soft law regimes that could be invoked to pressure Zijin, that is to invoke sanctions for violations of other affected regulatory regimes?; or, as Friends of the Earth asks: So what will compel Zijin to improve its governance of existing and potential projects? ((From FOE and Peruvian allies call on Zijin mining company to come clean).  The answer might come in the form of a collision between the Norwegian Sovereign Wealth Fund's responsible investment program and the activities of Zijin.

The Norwegian Sovereign Wealth Fund, the Government Pension Fund Global (NSWF) is a peculiar commercial creature of state. It's object is to project the Norwegian state's commercial power abroad, that is to participate in private securities markets in a manner similar to that undertaken by private investment firms, but to do so in conformity with the public policy of the Norwegian state. That public policy is memorialized in statute and regulation, and implemented by its fund managers and those governmental entities charged with the management of the NSWF.  The Norwegian Sovereign Wealth Fund (NSWF) investment program is overseen by the Ministry of Finance, which manages the work of the fund manager, the Norges Bank and its operational department, Norges Bank Investment  Management (NBIM).  The management charge from the Finance Ministry consists of two parts:  first, the obligation to achieve the highest possible return  and second, the requirement that investment decisions be made independently of the Ministry. The substantive or values based regulatory framework of fund management is grounded in the application of a set of Ethical Guidelines--Guidelines for the observation and exclusion of companies from the Government Pension Fund Global’s investment universe -- adopted by the Norwegian Legislature, and through a policy of active shareholding and ethical behavior norms.  Active shareholding is undertaken through the funds manager, the Norges Bank NBIM. Voting at annual general meetings, Shareholder proposals, Dialogue with companies, Legal steps, Contact with regulatory authorities, [and] Collaboration between investors."  Ministry of Finance, Government Pension Fund Global:  Responsible Investment (Brochure) at 22).  Currently, Norges Bank focuses  on issues of equal treatment of shareholders, shareholder influence and board accountability, standards for well functioning and efficient markets, children's rights,climate change and water management.,  (Id., at 24).    

An Ethics Council charged with determining whether a company should be excluded from investment by the NSWF.  The Council investigates individual companies and makes  recommendations for exclusion to the Mionsitry of Finance.  The Council’s mandate is to recommend exclusion of companies whose activates are in conflict with section 4 of the Fund’s Ethical Guidelines. The Fund’s ability to influence company tends to play a secondary role for the Council, if at all, after the paramount concern for the application of the Guidelines to individual cases.  Political considerations tend to be undertaken at the Ministry level.  Consider in that context  The work of the Ethics Council has produced the beginnings of a coherent jurisprudence of ethics for corporate investment.  That jurisprudence may contribute significantly to the development of transnational social norm standards,  to the incorporation of international soft law standards into domestic law, shape the character of shareholder engagement with corporate governance, and indirectly influence both formal and informal corporate governance norms.   For a discussion, see, e.g., Larry Catá Backer, Part I: Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model, Law at the End of the Day, Feb. 1-28, 2011; Backer, Larry Catá, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment (May 4, 2009). Georgetown Journal of International Law, Vol. 41, No. 2, 2009.

In addition, the Norwegian Fund has been used to extend Norway's influence of corporate conduct touching on environmental issues.
The NOK3trn (€385bn) Norwegian Government Pension Fund says it now has more than NOK25bn (€3.2bn) in environmental assets under management – up from NOK7bn a year ago. . . . Three of the nine mandates were for investments in water management, another three relate to environmental technology while three were for investments in clean energy.
NBIM has awarded environmental mandates to internal and external managers since 2009, stressing that they are “subject to the same profitability requirements” as its other investments.
“They also tie in well with the fund’s role as a responsible investor, which includes safeguarding long-term financial returns through sustainable economic, environmental and social development,” NBIM states. (From Daniel Brooksbank, Norwegian Global Fund’s environmental assets exceed €3bn: Giant investor now has nine environmental mandates, Responsible, March 18, 2011).

None of this is of particular concern to Zijin except that the Norwegian Sovereign Wealth Fund has invested in the company.  As of the most recent report, Global Pension Fund Global Holdings of Equities at 31 December 2010, the Fund had a holding of 139,250,621 shares equating to a .17% voting stake and a .17% ownership stake. Assuming that the Norway Fund's stake remains unchanged, then the actions of Zijin become a matter of regulatory concern for the Norwegian state through the governance regimes of the Sovereign Wealth Fund.

The issues raised in the FOE letter fall squarely within the framework within which an Ethics Council investigation might be warranted--and may be likely.  A prior determination of the Ethics Council may prove a useful guide here:  Recommendation of November 20, 2006, on exclusion of the company Monsanto Co , [09.09.2008]. In addition, the environmental determinations of the Ethics Council suggests that exclusion is a possibility if the allegations made in the FOE letter are determined to have a sufficient basis.  See discussion in Larry Catá Backer, Part XII: Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model, Law at the End of the Day, Feb. 12, 2011.
In virtually all the determinations the companies were found to have violated the law of the host state in some way.  The Council makes the point clear that while many of these companies were in direct violation of domestic law, the host state country did nothing to stop the violation of its own law and at timers supported the companies in their work.  In this context, the Ethics Council applied a standard grounded in the law of the home state as well as international consensus standards, rather than ground its determinations on the law as applied of the host state.  The theories were either one of the need for projections of international norms in "weak governance zones" or that of extraterritorial application of Norwegian law (appropriately internationalized as required by the Ethics Guidelines and the responsible investment strategy at the heart of the regulations). (Id.).
As a consequence, Norway, through the Ethics Council, would be effectively mediating governance norms among Peru, China, Norway, private regulatory regimes (the Hong Kong Stock Exchange), and international normative standards.  In a sense, this is precisely what the FOE Letter to the Hing Kong Stock Exchange was also supposed to trigger, but perhaps on a more modest scale.  Application of the Ethics Guidelines in this context could advance the development of inter-systemic harmonization and multi-regime governance.  To that extent it represents a move forward in constructing the governance environment that is emerging in this century.

But it also be be a case in which the SWF's active shareholder principles may lead to result in which the Ethics Council could determine that Zijin's activities are sufficiently grave breaches of the Ethics Guidelines to warrant exclusion from the investment universe of the Fund, but in which the Ministry of Finance determines that Norway ought instead to seek to change behavior through shareholder intervention in Zijin's internal governance, which requires not exclusion but the placing of the company under observation. See, Siemens AG: Ministry of Finance Press release 24/2009; The recommendation from the Council on Ethics; The letter from the Council on Ethics   But the connection of Zijin to the Chinese state would pose a certain interesting set of issues for the SWF.  Unlike Monsanto, the relationship between Norway and the company would implicate political relations between China and Norway.  The Chinese might take the position that Norway is seeking to interfere indirectly in government policy through its efforts to manage the behavior of Zijin.  The private market and internal corporate governance stage of the conflict serves to mask the state to state actions undertaken through private market actors.  The resolution of those disputes and the pattern of conduct that emerges could have a significant effect on the direction of governance in blended (public private) situations.In any case, the Fund's stake in Zijin, like that of its stake in most Chinese companies tends to be quite small, often around 2%.  This is hardly a large enough stake to directly influence internal corporate behavior.  But the Fund's ability to generate publicity that might affect investor markets may significantly leverage the effects of even modest holdings.  Irrespective of the potential leverage, it is possible to make a strong argument that the small size of the Fund's holdings coupled with the political issues make the exclusion mechanism even more relevant, especially if it is determined that the main purpose of this action is not to influence Zijin's behavior, but rather to avoid the Fund’s participation in grave violations of norms.

Still, the fruits of these efforts will remain both soft and modest.  Zijin may be removed from the Norwegian SWF investment universe (or may be subject to shareholder lobbying by the Norwegian state as owner). The soft effects may be more profound but harder to gauge--embarrassment, some effects on global reputation, an increased quantum of monitoring by civil society and greater interest in its activities by the global press.  These may produce collateral effects--from effects on Zijin's risk profile for lenders, to value determinations by investors, to a reluctance of supply chain participants to continue to do business (especially if such business effects downstream consumer demand).  Yet these may provide precisely the sort of pressure that Zijin may not ignore.  Lastly, for Zijin, and assuming that the charges are unfounded, these actions suggest the value of the human rights due diligence framework of the proposed "Protect, Respect, and Remedy Guiding Principles or the reporting regimes developed for the private sector by the Global Reporting Initiative.  See, Larry Catá Backer, Inter-Systemic Regulatory Coherence: GRI and the Operationalization of the OECD's Guidelines for Multinational Enterprises Framing Governance for Business and Human Rights, Law at the End of the Day, March 18, 2011.


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