Inter-Systemic Regulatory Coherence: GRI and the Operationalization of the OECD's Guidelines for Multinational Enterprises Framing Governance for Business and Human Rights

I have been writing recently about the move to formalize the U.N.'s three pillar Protect, Respect and Remedy Framework for business and Human Rights under the direction of John Ruggie as Special Representative of the U.N. Secretary General for Business and Human Rights.  See, Larry Catá Backer, An Introduction to and Analysis of the Draft Guiding Principles for the United Nations 'Protect, Respect, and Remedy' Framework, Law at the End of the Day, March 1, 2011.  

One of Professor Ruggie's most useful insights has centered on the notion of policy coherence.  See, e.g., John Ruggie, Report to the 14th session of UN Human Rights Council: "Business and Human Rights: Further steps toward the operationalization of the 'protect, respect and remedy' framework"  (The 2010 Report).  He has described policy coherence as one of the “five priority areas through which States should strive to achieve greater policy coherence and effectiveness as part of their duty to protect: (a) safeguarding their own ability to meet their human rights obligations; (b) considering human rights when they do business with business; (c) fostering corporate cultures respectful of rights at home and abroad; (d) devising innovative policies to guide companies operating in conflict-affected areas; and (e) examining the cross-cutting issue of extraterritorial jurisdiction.” (d., at ¶ 19).  Professor Ruggie emphasized the importance of policy coherence  both in the development and implementation of the rules of a state's domestic legal order.  

My work on investment is part of examining the role of states in regulating and adjudicating corporate activities vis-à-vis human rights, as requested in my initial mandate.  All throughout this examination I have found a lack of policy coherence within and among states in dealing with business and human rights issues. The domain of human rights policy tends to be segregated within its own conceptual and (typically weak) institutional box—kept apart from, or heavily discounted in, other policy domains that shape business practices, including commercial policy, corporate law and securities regulation.  Investment policy also fits into that list.
As we’ve seen in a number of recent cases, the investment regime can have a significant impact on human rights issues. Our drawing attention to this nexus has engaged constituencies that have not generally been active in business and human rights before—such as private law firms, international organisations like UN Commission on International Trade Law, the International Finance Corporation, and even civil society organizations like IISD itself. (From An interview with Professor John Ruggie, United Nations Special Representative of the Secretary General on Business & Human Rights, Investment Treaty News, October 1, 2008).

The Guiding Principles that distilled the Three Pillar "Protect, Respect and Remedy" Framework emphasized coherence issues.  General Principle 3 touches on issues of horizontal policy coherence within states ("States need to take abroad approach to managing the business and human rights agenda aimed at ensuring both vertical and horizontal domestic policy coherence--Commentary to GP 3) and General Principle 4 touches on vertical coherence between state policy and international norms (States should retain their policy and regulatory ability to protect human rights in their relationships with other states and with international bodies-Commentary GP 4).  (Draft report by Special Representative Ruggie with full text of Guiding Principles & commentaries [PDF]).   General Principle 13 applies a similar coherence standard on the internal governance of corporations as well, which speaks to embedding a policy to respect human rights  throughout the enterprise.  (Id.). 

But substantially less attention is paid to the critically important aspect of coherence--inter-systemic coherence. Inter-systemic harmonization, and the coherence notions underlying it, suggests that as multiple centers of governance become more established, and develop their own normative frameworks for governance, it will become increasingly important to develop frameworks for communication (structural coupling) among these systems.  The object is to seek functionally equivalent outcomes through the operations of diverse governance frameworks.   On the rising importance of inter-systemic harmonization, see, Larry Catá Backer, "Inter-Systemic Harmonization and Its Challenges for the Legal-State," in The Law of the Future and the Future of Law (HiiL Law of the Future Series, The Law of the Future and the Future of Law, Sam Muller, Stavros Zouridis, Laura Kistemaker and Morly Frishman, eds., The Hague, Netherlands: Torkel Opsahi Academic Editor, forthcoming 2011). In the case of the governance of business and human rights, it is critically important to develop a mechanics for the coordination of state-centered human rights law regimes with corporate systematization and opereationalization of a human rights sensitive governance regime grounded in their autonomous obligations.   

Recently the Organization for Economic Cooperation and Development (OECD) and the Global Reporting Initiative (GRI) moved to bring a measure of coherence between the private governance forms of reporting and disclosure and public governance values of international public soft law frameworks is what may become a useful template for other soft law systems.  

OECD-GRI announce partnership to help multinational companies operate responsibly Companies worldwide will be given greater guidance and support on how to conduct their business responsibly and report on their sustainability performance thanks to a partnership

between the Global Reporting Initiative (GRI) and the OECD.

This partnership will help companies make greater use of the OECD Guidelines for Multinational Enterprises

and the GRI Sustainability Reporting Framework

, bringing increased coherence and consistency to their efforts to act more responsibly and be more transparent about their sustainability. The GRI Framework provides guidance on how to measure sustainability performance, and the OECD Guidelines provide a benchmark to assess such performance. Both are based on and promote the same internationally agreed standards and principles for responsible business conduct, including social and human rights and economic and environmental matters. 

(From the OECD Civil Society Newsletter March 2011). The bridge between the public law system and the private norm system  is grounded in the mechanics of reporting and monitoring at the heart of the GRI system.  

Sustainability reports based on the GRI Framework can be used to demonstrate organizational commitment to sustainable development, to compare organizational performance over time, and to measure organizational performance with respect to laws, norms, standards and voluntary initiatives.
GRI promotes a standardized approach to reporting to stimulate demand for sustainability information – benefitting both reporting organizations and report users. (From GRI, About GRI, Benefits of GRI Reporting)

These notions are at the heart of the "Protect, Respect and Remedy" Framework's human rights due diligence principles as well, though, like the GRI program, embedded within the autonomous corporate social-norm system. (General Principles 15-19). On the value of reporting as a mechanism for enforcing corporate social-norm obligations, see, generally,  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.

"The Global Reporting Initiative's (GRI) vision is that disclosure on economic, environmental, and social performance become as commonplace and comparable as financial reporting, and as important to organizational success." (From GRI, What is GRI, Vision). The GRI system is drawn from the social norm governance framework beyond the state and conventional law based rules.  It is developed to serve as an autonomous but effective form of corporate compliance with norms beyond those created through law. GRI describes its reporting Framework as

developed through a process of systematic, consensus-seeking dialogue with a large network of individuals from over 60 countries, representing stakeholder groups including business, civil society, academia, labor and other professional institutions. The process is open, inclusive and takes a global perspective on the growing understanding of good reporting on key sustainability issues.

The Framework is continuously improved and expanded as knowledge of sustainability issues evolve and the needs of report makers and users change.

The Guidelines should be used as the basis for all reporting. They are the foundation upon which all other reporting guidance is based, and outline core content for reporting that is broadly relevant to all organizations regardless of size, sector, or location. The Guidelines contain principles and guidance as well as standard disclosures (including indicators) to outline a framework that organizations can voluntarily, flexibly, and incrementally, adopt.

Protocols are the "recipe" behind each indicator in the Guidelines and include definitions for key terms in the indicator, compilation methodologies, intended scope of the indicator, and other technical references.

Sector Supplements respond to the limits of a one-size-fits-all approach and capture the relevant issues essential to sustainability reporting in a specific sector, which may not appear in the GRI Guidelines.

Sector Supplements are a version of the GRI Guidelines tailored for a sector. A Sector Supplement contains integrated commentary and new Performance Indicators for the sector, ensuring that sustainability reports cover the sector’s key issues.

Like all GRI products, the Reporting Framework is continuously improved as experience evolves and better practices emerge.

The core Guidelines are in their third generation (“G3”) and were released in October 2006 following a three year, innovative development period that engaged more than three thousand individuals from diverse sectors, worldwide. (From GRI, What is the GRI Reporting Framework?, How is the Framework Developed?).

The GRI framework operates in parallel, to some extent at least, with the objectives of institutionalizing systems of human rights due diligence developed in the "Protect, Respect and Remedy" General Principles Framework (General Principles 15-19).  But like the GRI framework, the  principles of Human rights due diligence produces a measure of coherence within the normative framework of corporate supra-state governance with little enhanced connection with the domestic legal orders of states in which corporations operate or within which they are domesticated.

The OECD brings in public sector soft law.  It is a limited multilateral effort to construct a rules system that, if adopted and enforced by each of its members can be transformed from international soft law to a harmonized system of functionally equivalent  domestic law.   Yet, as soft law, it also serves as a bridge  and a contributor to the social-norm system that makes up the rules governing business conduct outside the law of states.  A principle element of this governance framework is embodied in the OECD's Guidelines for Multinational Enterprises. "The Guidelines are recommendations addressed by governments to multinational enterprises operating in or from adhering countries. They provide voluntary principles and standards for responsible business conduct in areas such as employment and industrial relations, human rights, environment, information disclosure, combating bribery, consumer interests, science and technology, competition, and taxation." (From OECD Directorate for Financial and Enterprise Affairs, Guidelines for Multinational Enterprises).  The OECD system is grounded in the idea that adherence to the framework will eventually produce effective haerd law within states from the application of soft law frameworks developed among adhering states.  "The OECD Guidelines for Multinational Enterprises are the most comprehensive instrument in existence today for corporate responsibility multilaterally agreed by governments. Adhering governments - representing all regions of the world and accounting for 85% of foreign direct investment – are committed to encouraging enterprises operating in their territory to observe a set of widely recognised principles and standards for responsible business conduct wherever they operate."  (From OECD Guidelines for Multinational Enterprises).

But while the current new arrangement should be viewed as a substantial step forward, more than partnership is likely required. The ability of governance regime systems to penetrate each other, in the sense of acknowledging the legitimacy of actions undertaken within each governance regime and providing a measure of recognition and perhaps even of incorporation within the systems, can further strengthen the functional objectives of each in the regulation of behavior with human rights impacts.  That, in turn, can serve as a useful template for inter-systemic relations in other areas.  That movement, though, will also require some restraint.  States, and the international public law system created to serve it, tends to succumb to the temptation to absorb governance systems and to subordinate such systems within their legal orders.  Inter-systemic harmonization is grounded in the recognition that multiple systems may exist simultaneously and autonomously within their respective jurisdictions (sometimes great, in the case of states, and sometimes more modest, in the case of enterprises).  The movement for cooperation between the OECD and GRI speaks positively to such development.

Legal Information Institute of India

Graham Greenleaf AM, Professor of Law & Information Systems, University of New South Wales (UNSW), faculty of law, recently described the launch of an important new free access web site containing materials of law from India.  

The Legal Information Institute of India (LII of India - http://www.liiofindia.org) was officially launched in Delhi on 9th March, 2011, followed by the first regional launch in Hyderabad on 11 March. Further regional launches will take place in Bangalaru and Kolkota over the next fortnight. Each launch is hosted by a partner National Law University.

The official launch in Delhi was by Dr (Shri) M Veerappa Moily, Union Minister of Law and Justice, Government of India. Other Guests of Honour to speak at the launch included Dr Lachlan Strahan, Australian Deputy High Commissioner, Chief Justice Dipak Misra of the Delhi High Court, the Justice V P Reddi, Chairman of the Law Commission of India, and Prof Ved Prakash, Chairman of the University Grants Commission, as well as representatives of LII of India and of AustLII. The Delhi launch, at the Vigyan  Bhavan, was hosted by the National Law University, Delhi (NLUD).

The Hyderabad launch was by Justice M Jagannadha Rao (former Justice of the Supreme Court of Indian and Chairman of the Indian Law Commission), and the Bangalaru launch will be by Justice Malimath, Chairman, Karnataka Law Commission and Former Chief Justice of Kerala.

LII of India now has 108 databases (plus 8 virtual databases), with the recent additional of 59 databases of State and Territory legislation. It currently provides  free  online  access  to  Indian legislation (63 databases), treaties (2 databases), case law (41 databases), law reform (1 database) and legal scholarship (9 databases). Further databases are being added.

The LII of  India  was initially a  joint project of  the National Law Schools of Hyderabad (NALSAR), Delhi (NLUD), Bangalore (NLSIU),and Kolkata (NUJS), plus the law school at IIT Kharagpur (RGSOIPL), in conjunction with the Australasian Legal Information Institute  (AustLII). LII of India has received initial  funding assistance  from AusAID. The Indian technical base of LII of India is at NALSAR.

Three new Partner Institutions have now joined LII of India: Gujarat National Law University, Gandhinagar (GNLU); Tamil Nadu Dr Ambedkar Law University, Chennai (TNDALU); and Rajiv Gandhi National University of Law, Patiala (RGNUL). The Parliamentary Research Service (PRS) is also a Supporting Institution.

LII of India is the 34th member of the Free Access to Law Movement.  (http://www.bespacific.com/mt/archives/026772.html#026772).

 From World Legal Information Institute (WorldLII)

Access to free and authoritative information is critical to human social, economic, cultural and political development.  It is also a fundamental basis for participation in society.   This is especially critical with respect to access to information about law--statutes, regulation, judicial proceedings and the like.  Rule of law governance cannot be implemented in the absence of this sort of access to lawyers, officials, civil society elements and the public.  It provides no more than the ability of people to contribute to the function ing of the state and the social order in accordance with its terms and to participate in its development.  No state, whatever its political foundation, ought to be threatened by the availability of information about its official actions and rules.  See also  World Legal Information Institute (WorldLII), described in William F. ("Bill") Heinze has produced a potentially useful list of information sites that may serve as a resource.  See William F. Heinze, Free, Independent, and Non-Profit Access to Worldwide Law, I/P Updates, Jan. 21, 2005 .

Norway's SWF Adds Another Tobacco Producer to its Excluded Universe and the Rehabilitation of a Former Cluster Bomb Component Maker

The Norwegian Sovereign Wealth Fund has excluded companies form its investment universe  if they engage in the production of certain products, with the connection to production sufficient to trigger exclusion defined distinctly with respect to each product.  The Norwegian Ministry of Finance recently announced that it has added a company to its excluded universe because one of its subsidiaries  was involved in the production of tobacco.  It also revoked the exclusion of another  now determined no longer to be involved in the production of cluster bomb components.  

The most interesting element of this story is not the action taken--tobacco and cluster bombs have been exclude for some time and the determinations were made in conformity with prior decisions and the  provisions of the Ethics Guidelines.  Rather, in the case of the tobacco exclusion, Norway is now moving more decisively against Chinese companies.  This may eventually set up an interesting public-private political confrontation.  That conflict will pit Chinese interests in sovereign investing abroad against Norway's objectives in responsible investment.  Both countries seek to project their power (and public policy) abroad through private markets, and both use private market mechanisms for the purpose to develop international norms in ways that further domestic political goals.  The time may be coming when Chinese interests abroad, and their  relationship to law, may confront an opposing Norwegian public policy effectuated through its responsible investment rules.     

 From Shanghai Industrial Holding, Ltd., Corporate Governance.  良好的企业管治对企业发展至为重要，上实控股一直致力维持高质素的企业管治，透过内部设置的监察机制，加强业务营运的透明度和问责性，确保有效监控营运风险和财务风险、业务合规运作，使股东权益得到保障。现时公司的董事会组成及企业管治架构如下 (rough translation: "Good corporate governance is crucial to the development of enterprises, the  holding is committed to maintaining high quality corporate governance, implemented through internal monitoring mechanisms that enhance the transparency of operations and accountability in order to ensure effective monitoring and operational risk and financial risk, compliance business operation, so that shareholders interests are protected. At present the company's board composition and corporate governance structure is as follows:")

Here is the press release (Ministry of Finance, News Story: Tobacco company excluded from the Government Pension Fund Global – and a defense company re-included, March 15, 2011):

The Ministry of Finance has excluded the Chinese company Shanghai Industrial Holdings Ltd. from the investment portfolio of the Government Pension Fund Global on account of its tobacco production. The Ministry has also decided to revoke its decision to exclude a US company that no longer produces components for cluster bombs.
The decision was based on the recommendations of the Fund’s Council on Ethics.
In October 2009 the Council on Ethics submitted a recommendation to exclude 17 companies that produce tobacco from the Fund’s investment portfolio. All the companies were classified as tobacco producers by the Fund’s index provider. The recommendation stated that there might be companies in the Fund’s investment portfolio that are involved in several different industries including tobacco production, but that such companies would still have to be excluded even when tobacco production represented only a small proportion of their total activities. In a review of the Fund’s portfolio with the aim of identifying such companies, the Council found that Shanghai Industrial Holdings Ltd. might have been involved in tobacco production, and in a letter in September 2010, Shanghai Industrial Holdings Ltd. informed the Council that its wholly owned daughter company Nanyang Brothers Tobacco Company Ltd. did in fact produce tobacco. The Council has therefore recommended that Shanghai Industrial Holdings Ltd. should be excluded from the Fund’s investment portfolio.
No longer a producer of cluster munitions
The decision to exclude the US company L-3 Communications Holdings from the Fund’s portfolio has been revoked because it no longer produces components for cluster munitions.
On 16 June 2005, the Council on Ethics advised the Ministry of Finance to exclude companies that produce cluster munitions from the portfolio of the Government Pension Fund Global, and one of the companies to be excluded on these grounds was the US company L-3 Communications Holdings Inc. The Council regularly reviews the activities of excluded companies to establish whether the grounds for exclusion still apply. In this case it received information indicating that the company no longer produces components for cluster munitions, and the company has confirmed this. The Council therefore considers that the grounds for excluding L-3 Communications Holdings Inc. no longer apply.
Read more:

• The recommendation from the Council on Ethics - Shanghai Industrial Holdings Ltd.
• The recommendation from the Council on Ethics - L-3 Communications Holdings
• The Council on Ethics of the Government Pension Fund Global
• A list of all the companies that have been excluded from the Fund’s investment universe

Online Schools--Web Resources for Students Covering Public Policy Issues

The monopoly position of law faculties as the most privileged, and sometimes only, source of authoritative information about issues of law and policy is beginning to give way to a more open textured environment.   The mas democratic movements of the political sphere, most recently in evidence in the Muslim Mediterranean, has penetrated a variety of areas of human organization.   New organizations, academies and other collectives are now increasingly serving an important role in the production and dissemination of information to students and others.   

From World Bank

One of those is Online Schools, which has created a series of online schools, and which provides information about accredited online universities.  They have recently published to their website "50 Resources of Students Attending Online public Policy Schools." 

Students who are studying public administration have a keen interest in the world around them and understand how public policies and regulations effect the public on both a local, state and federal level. The resources listed below will assist a student in finding information, forming opinions, and getting a better understanding on how public policy intermingles with almost every other aspect of life. From defining public policy, to locating cartoons that reflect the political, economic and healthcare issues both in the United States and around the world, these resources should provide plenty of information for a student.

The resources indexed (mostly blog and essay sites) include online resources organized as follows:

What is public policy?

What is public administration? 

What is public policy management?

Pubic Policy

Public Policy Politics

Public Policy Issues

Public Policy Polling

Public Policy Political Cartoons.

Final Draft of U.N.Guiding Principles on Business & Human Rights Submitted

This press release was posted on March 7, 2011.  

Special Representative of the Secretary-General for Business and Human Rights
SRSG Submits Final Draft of Guiding Principles on Business & Human Rights

New York/Geneva (March 7)—Today, John Ruggie, Special Representative of the United Nations Secretary-General for business and human rights, submitted the final draft of the Guiding Principles on implementing the United Nations 'Protect, Respect and Remedy' Framework for business and human rights.
In accordance with United Nations rules and procedures, the document will be made public by OHCHR once it has completed the processing. The Human Rights Council will consider the Guiding Principles at its June 2011 session.
In submitting the Guiding Principles, the Special Representative wished to acknowledge ““the extraordinary contributions by hundreds of individuals, groups and institutions around the world, representing different segments of society and sectors of industry, who gave freely of their time, openly shared their experiences, and debated options vigorously. Their engagement provided the basis for a successful mandate: establishing universally applicable and yet practical Guiding Principles on the effective prevention of, and remedy for, business-related human rights harm.”
The Special Representative’s mandate was created in 2005 in order to move beyond what had been a deeply divisive doctrinal debate over the human rights responsibilities of companies. Professor Ruggie’s goal was to build shared understanding and consensus among stakeholders by convening consultations around the world and by conducting extensive research. Out of that process came the ““Protect, Respect and Remedy”” Framework, which was unanimously welcomed by the Human Rights Council in 2008. The Council then asked Ruggie to continue working in the same manner to operationalize the Framework. The Guiding Principles were developed in response to that request, and to take the next step of providing concrete guidance and recommendations to states and businesses, as well as benchmarks by which their performance can be assessed by other stakeholders.
While the Guiding Principles are intended to be universally applicable, Professor Ruggie added that “they are not intended as a tool kit, simply to be taken off the shelf and plugged in. The means for their implementation will reflect the fact that we live in a world of 192 United Nations Member States, 80,000 transnational enterprises, ten times as many subsidiaries and countless millions of national firms, most of which are small and medium- sized enterprises.
Since the establishment of his mandate in 2005, the Special Representative has held 47 international consultations, on all continents, and he and his team have made site visits to business operations and their local stakeholders in more than twenty countries. The Special Representative received feedback on a draft of the Guiding Principles from 22 November 2010 through 31 January 2011. Submissions came from all over the world, including from governments, individual companies and business associations, civil society, investors, academics, international organizations, law firms, and interested individual, and extensive feedback from governments was also received in an informal session with the Human Rights Council. A special online forum attracted 3,576 absolute unique visitors from 120 countries and territories, with an average of 88 visits per day. In addition, written comments were invited for posting on the Special Representative’s web portal (www.business- humanrights.org/SpecialRepPortal/Home). Some 100 submissions were received by the deadline. On the basis of these many inputs, the SRSG drew up the Guidelines’ final draft.

*******************

On March 24, 2011the United Nations released the "Guiding Principles for the Implementation of the UN Protect, Respect and Remedy Framework", by UN Special Representative on business & human rights John Ruggie.  The UN Human Rights Council will consider formal endorsement of the text at its June 2011 session.  The Guiding Principles and press release are available here: 

http://www.business-humanrights.org/Links/Repository/1005021

An Introduction to and Analysis of the Draft Guiding Principles for the United Nations 'Protect, Respect, and Remedy' Framework

I was recently invited to give a presentation discussing the scope, content and philosophy of the United Nations 'Protect, Respect, and Remedy' Framework at the invitation of the UNA-USA organization of Centre County and the Penn State School of International Affairs. The title of the presentation was "Protect, Respect, and Remedy: The United Nations, Corporate Responsibility and Human Rights." It was presented on Wednesday, February 23, 2011 at the new Katz Building Auditorium of the Penn State School of International Affairs before a lively audience. 

From UN consultation on "Protect, Respect and Remedy" human rights in business framework

The issue considered was presented in this form:

Globalization has made it possible for large multinational corporations to avoid national regulation. Can the United Nations successfully step into the void? This talk examines one of the more important efforts to create a global governance framework - the United Nations “protect, respect, and remedy” framework. The three parts of the framework - the state duty to protect, the corporate responsibility to respect, and the access to remedies - seek to create a new form of governing corporations based on law and social norms tied to international human rights. The focus will be on how this system is supposed to work, and what it may mean for corporations, investors, and consumers in the United States.

From Melissa Anderson, The UN Releases Draft Principles on Corporate Responsibility, Evolved Employer, Jan. 18, 2011.

Here is a short abstract of the presentation.

The advent of contemporary economic globalization has substantially altered the regulatory environment in which economic enterprises operate. Once assumed to be creatures of the states that recognized and regulated their existence, economic enterprises today are increasingly capable of arranging their activities beyond the regulatory scope of any state or groups of states. That gap between operational and regulatory capacity has produced a sustained reaction at the national and international levels. States have sought to extend their power over corporations beyond their borders. International organizations have sought to develop supra national legal governance frameworks. This paper examines one of the more important efforts to elaborate a transnational regulatory framework for transnational corporations and other business enterprises - the United Nations “protect, respect, and remedy” framework. The three parts of the framework - the state duty to protect, the corporate responsibility to respect and the access to remedies - posits a system in which national legal orders incorporate and apply national and international human rights norms as enterprises implement global systems of institutionalized social norms, and both provide mechanisms for remedy of breaches of these overlapping but not identical legal and governance systems within their respective jurisdictions. The conceptual grounding of the framework is first explored on its own terms. The framework’s viability as a transnational autonomous regulatory soft law system is then explored. The resulting issues of implementation under the framework are then examined, as national systems transpose international legal obligations in the governance of enterprises that are themselves independently subject to global systems of social norms, both of which are bound up in a remedial matrix. The paper ends by examining the implications for the regulation of corporations raised by the proposed construction of this polycentric multilevel law-governance system.

The POWERPOINT SLIDES of the talk may be accessed here.

The WEBCAST OF THE PRESENTATION may be accessed here.

 

Above, from left:  Ambassador , Permanent Representative of India to the United Nations in Geneva, Professor John Ruggie, Special Representative of the UN Secretary General on Business and Human Rights, and Ambassador Arcanjo Nascimento, Permanent Representative of Angola to the United Nations in Geneva.  From UK Foreign and Commonwealth Office, Protect, respect, remedy - an embraced framework for business and human rights? Jan. 21, 2011 ("Last week, a Wilton Park conference reflected on an important emerging development in the ongoing struggle to protect human rights around world - a proposed new United Nations Framework on Business and Human Rights (WP 1074). Professor John Ruggie, the UN Secretary-General’s Special Representative on business and human rights  has made significant progress since 2005 when at the start of his mandate a Wilton Park conference (WPS 05-33) debated the nature and scope of business responsibilities concerning internationally recognized human rights standards.").

 

For my discussion of the process leading up to the drafting of the Guiding Principles, see. Backer, Larry Catá, On the Evolution of the United Nations’ 'Protect-Respect-Remedy' Project: The State, the Corporation and Human Rights in a Global Governance Context (June 3, 2010). Santa Clara Journal of International Law, Vol. 9, No.1, 2010, which can be downloaded here:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1619939

 

 

Part XXVIII: Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme.  The Ruminations Series in 2009 produced a series of aphoristic (ἀφορισμός) essays, meant to provoke thought rather than explain it. The hope was that, built up on each other, the series would provide a matrix of thoughts that together might lead the reader in new directions. Ruminations continue to be produced form time to time.  For 2010, this site introduced a new series--Business and Human Rights.  The series took as its starting point the issues and questions raised by John Ruggie, the United Nations Special Representative of the Secretary-General (SRSG) on business and human rights, in a global online forum. 

For 2011, this site introduces a new series of integrated essays--Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model.  The object of this series to to consider the work of the Ethics Council of the Norwegian Sovereign Wealth Fund.  The thesis of this series is this:  The Norwegian Sovereign Wealth Fund (NSWF ) investment program is grounded in the application of a set of Ethical Guidelines adopted by the Storting (the Norwegian Legislature) and enforced through an Ethics Council charged with determining whether a company should be excluded from investment by the NSWF.  The work of the Ethics Council has produced the beginnings of a coherent jurisprudence of ethics for corporate investment.  That jurisprudence may contribute significantly both to the development of transnational social norm standards and  affect the way domestic corporate law is understood. This is Part XXVIII of the series.

 

Although the Norwegian fund is largely based in oil and gas, it is likely to expand into property and green energy. Photograph: Robert Garvey/Corbis, From Gwladys Fouché, Norway's sovereign wealth fund: £259bn and growing, Guardian UK, Sept. 20, 2009.

Part XXVIII: Ethics and a Jurisprudence of Responsible Investment:  Summing Up and Looking Forward.

Sovereign investing has become an important new element in emerging  patterns of governance in this century. It represents efforts by states to manage their authority, and to project it, in accordance with changing realities of power and governance forms in a world defined by the logic of economic globalization.   Sovereign investing takes a number of forms.  Two fo the most innovative and dynamic are those of the People's Republic of China and of the Kingdom of Norway.

This month long project has sought to consider in some detail a critical aspect of the organization of the sovereign investing project of Norway.  Undertaken through its sovereign wealth fund, Norway is seeking not merely to project public wealth into private global markets.  Norway appears to be attempting the construction of a complex rule-of-law centered framework that blends the imperatives of a state based public policy with a rules based governance system that incorporates domestic and international norms.  To this Norway adds a policy oriented use of traditional shareholder power to affect the behavior and governance of companies in which the Fund has invested.   The object is not merely to maximize the welfare of the funds ultimate investors, the people of Norway (through its state apparatus), but also to use the fund to advance Norwegian public policy in the international sphere and within the domestic legal systems of other states to achieve a measure of horizontal harmonization of corporate governance. Norway has developed a tool box to effectuate its policy centered investment strategy consisting of both the traditional forms of regulatory governance, and a policy centered invocation of shareholder power, both within the corporation and, as a large investor, as an advocate for change within those foreign states where those companies are domiciled. In effect, Norway acknowledges three intertwined but autonomous governance realms. The first is the traditional territorially based law-state.  The second is the governance sphere of the corporation--affecting not only relationships within its operations but also the rules that reflect the choices it makes about how it deals with others.  The third is the international governance sphere,where common traditions are developed that have a direct and indirect effect on both domestic legal orders and corporate behavior choices.  Norway has sought to operate within and between these three governance realms, and to some extent affect their content, through the investment strategies of the NSWF.

The Ethics Council plays a critical role in this complex governance machinery. It is the primary vehicle for applying and elaborating the substantive standards of investment that are at the heart of the Norwegian regulatory effort.  It operates in the form of a court, in part to enhance the legitimacy of its pronouncement.  The Ethics Council is meant to operationalize the substantive provisions of the Ethics Guidelines by serving as a more formally constituted vehicle for applying its provisions to individual companies under unique sets of facts and circumstances. At the same time it also serves as a tool of Norwegian public policy, both long term general policy, and short term political objectives.  These are effected through the interaction between the Ethics Council and the Ministry of Finance. It is also served through the interplay between the exclusion determinations of the Ethics Council and the Norges Bank's active shareholder engagement program.

These essays served as a first attempt to organize more systematically my thinking about this framework and to provide a more organized basis for theorizing its construction, operation and effect.  Ultimately the object will be to consider whether the system can be generalized and adopted elsewhere and also whether the framework represents a new form of public-private transnational enterprise that will help reshape the  fabric of governance for this century.    I started with an introduction of the series theme and thesis.  I then considered the structure and operation of the Norwegian sovereign wealth fund.   The Ethics Guidelines were then introduced and considered. This provided the context for a consideration of the structure of the Ethics Council itself.  The bulk of the essays then considered the exclusion determinations themselves.  After an overview, the essays considered the cases.  These were divided along the lines suggested by the Ethics Guidelines themselves, first exclusions based on products and then the cases based on conduct.  The essays then looked to aggregate the case determinations.  What emerged from those aggregations was both the impact of the decisions and their scarcity. The Ethics Council has not issued a large number of determinations--though the investment universe of the NSWF might have suggested otherwise.  Each of the cases appeared to be chosen to maximize its leveraging effect--leveraging media interest and impact through wide dissemination of the "rule" extractable from the exclusion determination.  But the cases also suggested the large number of potential determinations that might be made in the future. It was not clear, however, whether those determinations would be systematically undertaken. Nonetheless, a sufficient number of determinations had been made to provide at least a partial picture of what the characteristics of the excluded universe.  The cases do more than that.  They also begin to define a jurisprudence with its own standards and rules that not merely deepen the rule of law legitimacy of the Ethics Council process but also expand the scope of the standards in the Ethics Guidelines.  The essays than turned back to the context in which the Ethics Council operates--considering again, and now in more depth, the relationship between the Ethics Council's role and that of the Norges Bank and its active shareholder program. That consideration is used as a basis for re considering the implications of the Norwegian responsible investment project.  The essays end with a consideration of work that is left to be done.  This is considered in two respects, first with respect to gaps in information available, and second with respect to the comprehensiveness and cohesion of the responsible investment policy (in general) and the Ethics Council's role (in particular). 

Michel Foucault, looking at the transformation of the ideology of the state and the forms of resistance to its construction before the 20th century, explained: "History is no longer the State talking about itself; it is something else talking about itself, and the something else  that speaks in history and takes itself as the object of its own historical narrative is a sort of new entity known as the nation." (Michel Foucault, "Society Must be Defended": Lectures at the Collège de France 1975-1976 (David Macey, trans., New York: St. Martin's Press (Picador), 2003), 18 February 1976, at 142). Substitute  the idea of "nation" broadly conceived, with that of community (economic, social, cultural. etc.) and the dynamic of this century emerges more clearly.  Whatever the final form of the Norwegian effort, what clearly emerges in a new form of governance in which the state seeks to harmonize autonomous governance frameworks while attempting to contribute to the development of each of them.  It is not the only one, of course.               



Index:


Part I:  Introduction of the Series Theme and Thesis.

Part II: The Structure of the Norwegian Sovereign Wealth Fund. 

Part III: Framing a Operational Structure for Responsible Investing:  The NSWF Ethical Guidelines.

Part IV: Operationalizing the Ethics Guidelines--The Structure and Functions of the NSWF Council on Ethics.


Part V: Responsible Investment Through the Ethics Guidelines--Overview of the Exclusion Determinations.

Part VI: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 1. Weapons production, a.  land mines.

Part VII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 1. Weapons production, b.  cluster munitions.

Part VIII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 1. Weapons production, c.  nuclear arms. 

Part IX: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 2. Weapons Sales to States, a.  Burma.

Part X: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 3. Tobacco Production.

Part XI: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 1.  Serious or systemic human rights violations. 

Part XII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 2.  Environmental damage.

Part XIII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 3.  Serious Violations of Ethical Norms. 

Part XIV: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 4.  Serious Violations of Individual Rights in War or Conflict.

Part XV: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 5.  Corruption.

Part XVI: Ethics and a Jurisprudence of Responsible Investment:  The Cases--III.  Non-Exclusion Actions, 1.  Observation of Companies.

Part XVII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--III.  Non-Exclusion Actions, 2.    Other Forms of Interventions by the Ethics Council.

Part XVIII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 2.  Environmental damage (new case).

Part XIX: Ethics and a Jurisprudence of Responsible Investment:  The Statistics--Part I. 

Part XX: Ethics and a Jurisprudence of Responsible Investment:  The Statistics--Part II.

Part XXI: Ethics and a Jurisprudence of Responsible Investment:  First Run at the Characteristics of Companies in the Excluded Universe.

Part XXII: Ethics and a Jurisprudence of Responsible Investment:  The Statistics--Part III.

Part XXIII: Ethics and a Jurisprudence of Responsible Investment:  The Statistics--Part IV.

Part XXIV: Ethics and a Jurisprudence of Responsible Investment:  Summary of Ethics Council Standards developed from the Determinations.

Part XXV: Ethics and a Jurisprudence of Responsible Investment:  The Statistics--Part V.

Part XXVI: Ethics and a Jurisprudence of Responsible Investment:  The Relationship Between the Ethics Guidelines and Active Shareholder Principles.

Part XXVII: Ethics and a Jurisprudence of Responsible Investment:  The Ethics Guidelines as Quasi-Judicial System--What is Left to be Done.

Part XXVIII:  Ethics and the Jurisprudence of Responsible Investment:  Summing Up and Looking Forward.

 

  

Part XXVII: Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme.  The Ruminations Series in 2009 produced a series of aphoristic (ἀφορισμός) essays, meant to provoke thought rather than explain it. The hope was that, built up on each other, the series would provide a matrix of thoughts that together might lead the reader in new directions. Ruminations continue to be produced form time to time.  For 2010, this site introduced a new series--Business and Human Rights.  The series took as its starting point the issues and questions raised by John Ruggie, the United Nations Special Representative of the Secretary-General (SRSG) on business and human rights, in a global online forum. 

For 2011, this site introduces a new series of integrated essays--Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model.  The object of this series to to consider the work of the Ethics Council of the Norwegian Sovereign Wealth Fund.  The thesis of this series is this:  The Norwegian Sovereign Wealth Fund (NSWF ) investment program is grounded in the application of a set of Ethical Guidelines adopted by the Storting (the Norwegian Legislature) and enforced through an Ethics Council charged with determining whether a company should be excluded from investment by the NSWF.  The work of the Ethics Council has produced the beginnings of a coherent jurisprudence of ethics for corporate investment.  That jurisprudence may contribute significantly both to the development of transnational social norm standards and  affect the way domestic corporate law is understood. This is Part XXVII of the series.

From The Conscious Shift in Consumer Behaviors,  LOHAS.  ("So what brands do New Affluents find meaningful, authentic and relevant? Apple, Sony, BMW and Ralph Lauren, unsurprisingly. But Crate & Barrel, Ikea, Whole Foods and Levi's, too. Porsche, Lexus, Chanel and Viking. And Target, North Face, Volkswagen and The Gap. Missing from this segment's 75 favorites list are classic luxury brands like Cadillac, Gucci, Louis Vuitton, Armani and Versace who have yet to demonstrate how they are keeping up with emerging trends.")

[almost done]

Part XXVII: Ethics and a Jurisprudence of Responsible Investment:  The Ethics Guidelines as Quasi-Judicial System--What is Left to be Done.

We have been considering the system that is the administration of the Ethics Guidelines. We have posited that the Ethics Guidelines system is an essential element of the Norwegian state's efforts to construct what will eventually serve as an international standard for responsible investment. We have come to understand responsible investment as a three pronged program consisting of: (1) a political-regulatory element derived from the Norwegian state apparatus (Storting and Ministry);  (2) an economic-private element derived from the position of the Norwegian state as a shareholder-investor in publicly traded companies; and (3) a quasi-judicial element derived form the Ethics Guidelines and implemented through the Ethics Council.  Together the three prongs apply national and international law in the public sphere and the private markets, and in the process seek to contribute the the development of the international law they develop and seek to domesticate that international (and national) law and regulatory framework into the operations of corporations (and the regulatory programs of corporate home states) through shareholder action.  

The Ethics Council plays a critical role in that process, standing between the state and the private sector.  It transforms politics into a set of predictable standards of conduct that are then applied on a case by case basis, to the investment universe of the NSWF. 

This short essay considers the limits of the Ethics Council's system in the context of the responsible investment construct. The suggestion here is that, while the Ethics Council system provides a respectable foundation for its operation, the Ethics Council system remains open to further refinement in line with its objectives and in the face of the task to which it has been charged.

"The level of transparency comes from the Truman index; the form of government from the Economist Intelligence Unit’s democracy index; the estimates of the fund’s size come from Standard Chartered."  From Brad Setser, Regulating sovereign wealth funds: does the US have any leverage?, Council on Foreign Relations, Feb. 26, 2008.

Where can more information be obtained about the size of divestments for companies where it was not listed in the recommendation? (i.e. tobacco and a few others)



Why was Rio Tinto excluded two years after Freeport since the violation in question is over the same mine of which they were both part owners?



Was Siemens ever excluded from the Fund? Is it still under observation status?



Why were various Council members changed in 2008/09 and what is the typical cycle for Council members?



As noted on Page 13 of the 2009 Annual Report the Council has a "Watch-list" is this interpreted as companies under observation?



There has been skepticism about adding other states to the criteria for being excluded (in the same manner Burma was), are there any plans to do this? (i.e. the DRC)



With what appears to be insurmountable evidence against the company through sources that the Council has cited before, why was Total never excluded?



Was the Minister of Finance overstepping their bounds by putting Siemens AG under observation instead of taking the Council's recommendation of excluding the company? (Cite Section 3 Article 1 of the Ethical Council's Guidelines)



Other than the Monsanto recommendation has there been any other cases of "active ownership"?



Is the Council looking to add any additional type of exclusions?



Was Rheinmetall ever excluded from the Fund?



Does the Council look at companies who are invested in equities more than companies that are invested in fixed-income assets?



As the Fund looks into developing into real estate, will the Council be participating much in that field?



Currently is the Council only looking at the Ottawa Treaty as their basis for excluding companies in violation of manufacturing anti-personnel landmines and the Oslo Convention for companies manufacturing cluster munitions, or are they taking into consideration other criteria?



How do people get nominated for the Council of Ethics?



Does the Council look at any source who writes to the Council on allegations against a company?



The Council's website states that they employ staff to translate in many different languages, does language pose a problem when evaluating a company?

Part XXVI: Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme.  The Ruminations Series in 2009 produced a series of aphoristic (ἀφορισμός) essays, meant to provoke thought rather than explain it. The hope was that, built up on each other, the series would provide a matrix of thoughts that together might lead the reader in new directions. Ruminations continue to be produced form time to time.  For 2010, this site introduced a new series--Business and Human Rights.  The series took as its starting point the issues and questions raised by John Ruggie, the United Nations Special Representative of the Secretary-General (SRSG) on business and human rights, in a global online forum. 

For 2011, this site introduces a new series of integrated essays--Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model.  The object of this series to to consider the work of the Ethics Council of the Norwegian Sovereign Wealth Fund.  The thesis of this series is this:  The Norwegian Sovereign Wealth Fund (NSWF ) investment program is grounded in the application of a set of Ethical Guidelines adopted by the Storting (the Norwegian Legislature) and enforced through an Ethics Council charged with determining whether a company should be excluded from investment by the NSWF.  The work of the Ethics Council has produced the beginnings of a coherent jurisprudence of ethics for corporate investment.  That jurisprudence may contribute significantly both to the development of transnational social norm standards and  affect the way domestic corporate law is understood. This is Part XXVI of the series.

From NBIM submits shareholder resolutions to four US companies 2009.

Part XXVI: Ethics and a Jurisprudence of Responsible Investment:  The Relationship Between the Ethics Guidelines and Active Shareholder Principles

The Ethics Guidelines provide only one part of the complex governance and regulatory structure of the NSWF's responsible investment framework. 

The term «responsible investment practice» has begun to take hold as a recognised and applied concept in the global investment community. It springs historically speaking from the idea that business has an ethical and social responsibility that extends beyond directives to comply with laws and regulations.

At the same time the debate about what constitutes responsible investment practice has gradually moved back to the core of investment management: managing capital with the aim of achieving the highest possible financial return within an acceptable risk, in line with shareholders" interests. There has been a move away from a purely philanthropic or ethical point of view to greater awareness of self-interest. From a perspective of ensuring a long-term return on capital values, many investors consider the following questions relevant: What ensures the companies" assets in the long run? What risk factors must a broadly diversified, long-term investor consider? Are there sufficient converging interests between owners and managers of the capital? Should companies demonstrate that they take due account of environmental and social factors, so as to convince investors that they create value over time? (Ministry of Finance, Report No. 10 (2009-2010) The Management of the Government Pension Fund in 2009, Section 10.1).

The Ethics Guidelines project presents the regulatory and gatekeeper function of the NSWF investment framework.  The private regualtory role is tasked to the Norges Bank and its active shareholder project.  

“We are increasingly attaching importance to Norges Bank’s active ownership,” says Minister of Finance Sigbjørn Johnsen. The new guidelines for Norges Bank include a new, ambitious requirement of generally integrating considerations of good corporate governance and environmental and social issues into investment activities. This reflects international developments, says the Minister of Finance.
Norges Bank participates in a variety of formal and informal initiatives in collaboration with other investors. The new guidelines emphasise the importance of this by stipulating that the bank actively contribute to development of good international standards within responsible investment practice and exercise of ownership rights. New requirements have also been defined regarding transparency and reporting in Norges Bank. (Norway, Ministry of Finance, New guidelines for responsible investment practices in the Government Pension Fund Global (GPFG) Press release, 02.03.2010, No.: 11/2010. )

The Guidelines on active ownership are worth a careful read.  See Norway, Ministry of Finance, Guidelines for Norges Bank’s work on responsible management and active ownership of the Government Pension Fund Global (GPFG) Adopted by the Ministry of Finance on 1 March 2010 pursuant to Act no. 123 of 21 December 2005 relating to the Government Pension Fund, section 2, paragraph 2, and section 7. The Guidelines declare the "Bank’s primary goal in its active ownership is to safeguard the Fund’s financial interests."  Id., Sec. 2(1).  It then ties the substantive principles of active governance to an important set of transnational voluntary governance codes. "Active ownership shall be based on the UN Global Compact, the OECD Guidelines on Corporate Governance and the OECD Guidelines for Multinational Enterprises. The Bank shall have internal guidelines for its exercise of ownership rights that indicate how these principles are integrated in its active ownership."  Id., Sec. 2(2).  The last two might well be understood to constitute an important component of the transnational constitution of corporate governance.  See, Larry Catá Backer, Transnational Corporate Constitutionalism?, Law at the End of the Day,  Sept. 21, 2009.   It also mirrors the thrust of the Ethics Guidelines, but now applied internally to specific corporations in which the NSWF has an interest under rules of private governance.

Avctive ownership is tied to the NSWF's notions of universal ownership.

An important prerequisite for influencing companies to change their behaviour is that such a change is also in the companies" interest, if not the results may soon become arbitrary. Where it is difficult to find a solution in isolation at the company level, a broader industry approach may be relevant. An example of successful ownership work in this context is the GPFG"s initiative in India which contributed to a new industry standard for combating child labour.

The most appropriate form of sustainable, long-term and predictable solutions to global problems will often be through regulation. In this case, the GPFG will primarily be interested in influencing global authorities in the direction of integrating the external effects with the economy, either directly or in partnership with portfolio companies and other investors. Work on climate change or regulation of the financial markets so that risk-taking is more in line with long-term interests are good examples of issues where global solutions are most appropriate. (Ministry of Finance, Report No. 10 (2009-2010) The Management of the Government Pension Fund in 2009, Section 11.4).

The universal ownership principles suggests the ways in which the state can access non-law based avenues of regulation through its shareholder power.  "The Fund is a universal owner by definition and should therefore have a concrete approach to what this means in practice. Such an approach should look at the need and possibilities for reducing the short- and long-term welfare losses by «lifting» the quality of the investment universe. It should also look at the dynamic need to «adapt» to the issues through changes in the investment strategy." (Id., at 11.6).

 

Active ownership is not meant to be applied only internally to the constitution of corporations.  It is also meant to have regulatory effects.  But the Guidelines are not merely the imposition of passive transnational standards. "The Bank shall actively contribute to the development of good international standards in the area of responsible investment activities and active ownership." Norway, Ministry of Finance, Guidelines for Norges Bank’s work on responsible management and active ownership of the Government Pension Fund Global (GPFG), supra, at Sec. 3.  Thus for example,

The Ministry of Finance and the Council on Ethics for the GPFG take part in a project coordinated by the UN Global Compact, where the goal is to develop a set of guidelines that provide guidance for responsible corporate and investment practice in conflict areas. Such guidelines are hoped to provide investors and companies a greater degree of insight into each other"s experiences and perspectives, contribute to better and more efficient use of suitable tools when companies operate in such areas, as well as raise awareness and clarity about what is acceptable, responsible behaviour. (Ministry of Finance, Report No. 10 (2009-2010) The Management of the Government Pension Fund in 2009, Section 10.3).

Together these incremental changes to the conventional Norwegian position reminds us of the importance of pubic policy in the operation of the private investment activities of the Norwegian sovereign wealth fund.  They provide a sophisticated mechanism for regulating extraterritorially not through law but through the governance mechanics of investment.  It also serves as a reminder of the substantial irrelevance of international efforts to draw a strong connection between public and private investment in private markets through instruments like the Santiago Principles.