"There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game..." 2
So said Milton Friedman in 1970, rejecting the notion that businesses should pursue “social ends”, such as eliminating discrimination and avoiding pollution, beyond their legal or regulatory obligations. To do so, he argued, could be viewed as an undemocratic tax, potentially giving rise to unintended economic consequences for shareholders, amongst others.
Whether or not one agrees with this, applying it to today's globalised economy is more complex than ever before and the "rules of the game" are changing. States, finance providers and corporates face increasing social, political and contractual pressure to observe international standards of best practice, including in relation to human rights, even where (and often more where) there is no established national legal framework which requires them to do so. Soft law (ie, voluntary, non-legally binding rules of conduct, which invariably encompass the requirements of international laws) is useful in this respect, as it can provide detailed guidance on how to incorporate human rights practices into business models. Consequently, many international oil and gas businesses are turning to soft law, in addition to statutory and regulatory requirements, to inform their operational policies and to protect their business performance.
Soft law can help you to win resource rights
Owing in part to growing public awareness of the human rights impacts that multinational organisations can have on regions in which they invest, in recent years we have seen a mushrooming of standards of practice issued by international organisations, including industry bodies, NGOs and state-backed institutions, which incorporate human rights elements.
Significantly, on 16 June 2011 the UN Human Rights Council endorsed Guiding Principles on Business and Human Rights, implementing the “Protect, Respect and Remedy” framework for states and businesses, formulated by UN Special Rapporteur on Business and Human Rights (and Harvard professor) John Ruggie. The framework promotes the principles that: (i) states have a duty to protect against human rights abuses by businesses, including multinational companies investing in their jurisdictions or investors which rely on public agency financial support; (ii) businesses have a role to play by complying with applicable laws and respecting human rights; and (iii) there is a need for effective mechanisms to enable victims of human rights abuses to seek redress.
The Guiding Principles encourage countries to “set out clearly the expectation that all business enterprises domiciled in their territory and/or jurisdiction respect human rights throughout their operations”. They warn states which fail to adopt adequate measures to prevent and punish businesses’ human rights abuses that they might be in breach of their human rights obligations under international law, such as the International Bill of Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work.
Whilst several factors will inform the decision to award resource rights, not least cost and profit oil calculations, national contracting agencies may increasingly take into account human rights factors when assessing bids and negotiating host government agreements (given the legal and political pressure which states face to ensure that businesses operating in their jurisdictions do not commit or permit human rights abuses). Companies which already have integrated measures in place (eg, due diligence, auditing and grievance mechanisms) which observe the international standards with which they themselves must comply may be at a competitive advantage in this respect.
An awareness of the duties imposed by states under the Guiding Principles may provide an insight into what to expect from future negotiations with host states. For example, Guiding Principle 9 provides that "states should maintain adequate domestic policy space to meet their human rights obligations when pursuing business-related policy objectives with other states or business enterprises, for instance through investment treaties or contracts." This opens up the potential for states to seek wider carve-outs in stabilisation clauses, on the basis that they need to retain flexibility to enact human rights legislation which will be effective against all investors, old and new.
Furthermore, Guiding Principle 25 states, "As part of their duty to protect against business-related human rights abuse, states must take appropriate steps to ensure, through judicial, administrative, legislative or other appropriate means, that when such abuses occur within their territory and/or jurisdiction those affected have access to effective remedy." Accordingly, we may increasingly see the incorporation of covenants in host-investor agreements requiring investors to sign up to and comply with OECD Guidelines and/or other soft law standards with mechanisms for mandating corrective actions, reporting and, where appropriate, the provision of compensation, as this is one way in which states could deliver recourse for victims of human rights abuses.
With increasing competition for oil and gas block awards coming from NOCs looking to invest further afield (and which can offer attractive aid incentives) demonstrable human rights compliance is one way in which IOCs can distinguish themselves. According to a recent AIPN research paper on business and human rights, the world’s largest oil and gas businesses have already taken this on board, with the majority of those with public listings having adopted human rights-focused policies.3 Conversely, relatively few of the largest state-owned oil and gas businesses have sought to implement such policies.
Furthermore, some states already seek to benchmark bidders for state contracts using sustainability reporting mechanisms, such as the UN Global Compact and the Global Reporting Initiative, which both incorporate human rights standards. Accordingly, bidders may benefit from signing up to such instruments.
Companies which incorporate human rights principles and drafting into their standard contracts (eg, joint operating agreements and service contracts) may make themselves more attractive to co-venturers, which have adopted (or recognise the need to conform with) similar obligations.
Banks and other financial institutions which provide financing for international projects have equally been under pressure to ensure that borrowers can demonstrate compliance with human rights principles. This is set to increase with the publication of the third iteration of the Equator Principles (EPIII – see box), the draft of which includes new human rights measures and extends the application of the EP to certain project-related corporate loans.
Following the publication of the UN Guiding Principles on Business and Human Rights, the EP Association announced a strategic review of the EP with a view to producing EPIII. Amongst other things, changes are proposed to reflect the inclusion of human rights requirements in the revised IFC Performance Standards. Significantly, the draft of the third iteration of the EP proposes that, in non-OECD countries and OECD countries not designated as high-income, projects with adverse impacts on indigenous people will require their free, prior and informed consent.
Key soft law standards which incorporate human rights principles
UN Guiding Principles on Business and Human Rights (UN Guiding Principles)
- The UN Guiding Principles were adopted in June 2011 by the UN Human Rights Council and are based on three principles: that governments have a duty to protect human rights, including from corporate-related abuse; businesses have a responsibility to respect human rights; and that appropriate and effective remedies are required when rights and obligations are breached.
- The UN Guiding Principles are aimed at helping companies to assess, address and monitor their potential impact on human rights.
- The European Commission has commissioned a project team which has published draft guidance for the oil and gas sector on implementing the UN Guiding Principles.
- At the time of writing, it is anticipated that the final version of the guidance document will be submitted to the European Commission later in spring 2013. In addition, an AIPN-funded report has recently been published in the Journal of World Energy Law and Business on the impact of the UN Guiding Principles on the oil and gas sector.
The Equator Principles (EP)
- The EP form a banking industry framework covering environmental and social risks on project financing. Since their launch in 2003, over 70 financial institutions, including major international banks, have signed up.
- The EP deal with issues such as pollution prevention and abatement, community health, safety and security, land acquisition, and involuntary settlement, and reflect the International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability.
- EP financial institutions may only provide financial backing to applicable global projects which comply, or are able to comply, with the EP. The EP Association estimates that the EP apply to over 70% of international project financed debt in emerging markets.
ISO 26000 Guidance on social responsibility
- The ISO 26000 is a standard published by the International Organization for Standardization, which counts over 160 national standards organisations in its membership.
- It was developed by representatives from governments, NGOs, industry, consumer groups and labour organisations and provides practical advice for sustainable development.
OECD Guidelines for Multinational Enterprises
- The OECD Guidelines set out specific guidelines and requirements relating to human rights, environmental matters, employment conditions and industrial relations.
- They contain a formal complaints process, by which those with grievances against enterprises (or NGOs acting on behalf of those with grievances) can register a complaint with a National Contact Point, eg, in the OECD country where the enterprise is headquartered, even if the activities relating to the complaint are overseas.
- A finding of non-compliance with the guidelines could have knock-on consequences for current and future financing and on the business’ operations elsewhere in the world.
IFC Performance Standards on Environmental and Social Sustainability
- International Finance Corporation requires the businesses it invests in (including corporate and project finance provided through financial intermediaries) to comply with the Performance Standards to manage their social and environmental risks.
- The IFC Performance Standards are widely accepted standards of international best practice in relation to safety, health, environment and community matters, including human rights.
- They provide guidance on how to identify and mitigate risks, including through stakeholder engagement, in order to enable companies to do business in a sustainable way.
Deviation from soft law infringements may also affect the future sale of a project. Banks are likely to be wary of human rights legacy issues which would be inherited by a borrower, and will generally require assurance through due diligence and covenants reflecting the EP and other relevant soft law standards.
In addition to restrictions on bank financing relating to human rights compliance, the UN Guiding Principles encourage states to use their "state-business nexus" to protect against human rights abuses by businesses which receive financial support from state agencies, such as export credit agencies, for example by requiring human rights due diligence. Accordingly, more state-backed export credit agencies may well adopt EPIII or similar soft law codes of practice in future.
Soft law can help you do business in less developed jurisdictions
The viability, and therefore the bankability, of projects will be influenced by the risk of project disruption. This can be caused by legal challenges on human rights grounds. We have already seen a number of common law claims being brought against multinational organisations in UK courts, as well as in the US, where it is possible for foreign nationals to bring claims in the US courts regarding breaches of international law occurring overseas under the Alien Tort Statute of 1789 (with the potential for substantial settlement amounts or damages). In addition, as mentioned above, NGOs are often able to bring complaints on behalf of local communities using soft law mechanisms such as the OECD Guidelines for Multinational Enterprises' National Contact Point Reporting Mechanism or the World Bank's Compliance Advisor Ombudsman where the IFC or World Bank is a finance party.
In frontier jurisdictions, it can be difficult, without a clear and established legal framework to know how to protect investment from future legal and soft law challenges brought by the host government and international organisations, such as NGOs. Some companies are finding that soft laws can be used as a tool to mitigate investment risk in jurisdictions where domestic law is less developed. One area that is particularly important for project developers is to ensure that the supply chain also signs up to and observes human rights obligations; an appropriate contractual framework and monitoring programme is essential.
"A breach of soft law… can have real and serious consequences for a corporation that affects its bottom line."
Needless to say, site disruption as a result of strikes, protests and vandalism, including major damage to pipelines or project infrastructure, can also affect project revenue streams, particularly as many hydrocarbons operations take place in countries with high levels of social and economic disparity, unemployment and poor labour relations. Soft law provides useful guidance on how to engage with local communities and deal with their grievances appropriately. Following such guidance may help to mitigate the risk of disruptive activity and ultimately increase productivity of the operating asset.
Soft law is turning into hard regulation
If the reasons above are not inherently convincing, then it is worth noting that some governments have started to bring in binding human rights-related legislation requiring companies to report on activity which could have human rights implications. For example in the UK, it is expected under proposed reforms to the Companies Act 2006 that from 1 October 2013 quoted companies will have to include human rights issues in their annual narrative report. In addition, the US Dodd-Frank Act reforms have introduced new disclosure obligations for certain US companies with the aim of reducing human rights abuse associated with the exploitation and trade of conflict materials in the Democratic Republic of Congo.
Businesses wishing to stay ahead of such legislative developments have already begun paying closer attention to incorporating human rights compliance based on soft law in their global operations and supply chains.
For the reasons given above, both hard and soft law on human rights is an increasingly important consideration for multinational corporations, including oil and gas businesses. Given the ability of financial institutions and states to incorporate soft law-based covenants, and the ability of NGOs, amongst others, to take action under soft law instruments, there may be hard consequences for those who fail to observe them.
On an optimistic note, what is becoming increasingly apparent is that soft law principles on human rights can be used as a commercial tool to improve balance sheet performance. Adopting soft law principles can help businesses to compete for resource rights, to do business in trickier jurisdictions and to stay ahead of the game.