4 Norwegian corporate engagement abroad – challenges and dilemmas

Increasing internationalisation means that Norwegian companies are operating to a greater extent than before in countries where there is little respect for human rights. Working conditions are often unacceptable and child labour is used in production processes. There is discrimination in the workplace on the basis of gender, religious belief or ethnic background. Too little account is taken of environmental impacts; corruption may be widespread. Often these conditions are related to deficiencies in legislation, weak enforcement or a lack of sanctions.

In many cases the individual company thus faces a number of fundamental questions. Should we, or should we not, become engaged in the country? What can reasonably be required or expected of our company, and how can we meet these expectations? Which requirements are reasonable, and which are better addressed by the authorities in the host country or in Norway? How can we reconcile the different expectations? How should we operate in cases where our competitors are not applying the same strict codes of conduct?

There are no simple answers to these questions. Standards do not remain static – the values of companies and societies change over time. Requirements may vary from country to country, sector to sector and company to company. In today’s society, Norwegian companies are assessed not only on their financial results but also on the impacts, positive or negative, of their activities on the local community and the environment. This calls for dialogue between the relevant stakeholders, both in Norway and in the host country.

The Government believes that Norwegian companies should also engage in countries where political values and standards differ from ours, and where they will face ethical dilemmas. In such cases it is important that the individual company is aware of the challenges and dilemmas it will en­counter.

Many companies have an active approach to these issues. They conduct systematic assessments of challenges they may encounter in actual and potential projects. Country assessments, impact assessments, consultations with stakeholders and dilemma training can help to prepare companies to deal with challenging situations.

4.1 To engage or not to engage?

The question of whether a company should operate or become involved in a project in an area of conflict seldom has a straightforward answer. Nor is it apparent that a company that is already engaged in such an area should withdraw. It is not necessarily right for a company to refrain from operating in or to withdraw from a country because it is undemocratic or corrupt. Neither is it clear that the company should remain in such a country, or in an area of conflict, because it may positively influence the situation and the local conditions. There will always be a need to evaluate the situation at hand, the conditions in the country, the type of activity in which the company is engaged and expectations for future developments.

Since there is no straightforward answer to the question of the role a company should play, the question of whether or not it is problematic that Norwegian companies set up operations in countries with weak governance, widespread corruption and inadequate environmental legislation and enforcement will remain.

It is unlikely that a unilateral decision by Norway that companies should not conduct business with a particular country for political reasons would have a significant impact on the conditions in the country concerned. Refraining from engagement will normally neither benefit the people nor positively affect economic and political development. Isolation often does more harm than good, causing suffering among the civilian population. Withdrawal of multinational enterprises also reduces access to information and knowledge of local social and humanitarian conditions and weakens the possibility of exerting concerted international political pressure.

One of the consequences of a unilateral decision that Norwegian companies should not engage in certain countries on grounds of principle could be that the Norwegian petroleum industry would have to limit its international activities considerably. This would reduce the opportunities for disseminating technology and for industrial activities, and consequently reduce opportunities to contribute to economic development. In cases where Norwegian companies do not engage in economic activities in a country, their place is usually taken by companies from other countries. These may be companies that may take their social responsibility far less seriously than the Government expects Norwegian companies to do.

The Government does not intend to politicise the engagement of Norwegian companies abroad by recommending their presence in particular countries or regions as opposed to others, by regulating their presence or by exercising ownership rights. This would be tantamount to making a political choice to sell a particular product in one country and not another, differentiating prices according to country or linking product sales to other Norwegian interests.

It is not the task of the public authorities to regulate an individual company’s commercial decisions. It is up to the company itself to decide where and in what way it will conduct its business. However, CSR must be an important factor in a company’s decision to set up operations, and should remain a central consideration once operations have been established.

This raises the question of whether or not a company should point out human rights violations or serious environmental harm caused by another country’s government. In many cases the company’s sphere of influence does not extend this far. The company itself will have to decide how best to deal with issues of this nature.

Companies that invest with a long-term horizon are concerned about the political stability of the host country. Stability and predictability may be prevalent in two very divergent political systems: on the one hand, well-functioning democracies, and on the other, undemocratic regimes that practise strong government control and show little respect for human rights and labour standards. Should companies adopt an active or passive attitude to rights violations by governments or other actors?

The Norwegian Government does not expect companies to act as the most prominent advocates of human rights or environmental matters vis-à-vis the local authorities. This is primarily a role for the Norwegian authorities or civil society organisations. The existence of unacceptable local conditions is a matter that should be raised by the Government in a bilateral or multilateral context. However, this does not mean that a company should not become actively involved in such situations if given the opportunity. Norwegian companies may for instance report unacceptable conditions encountered in the course of their operations to the Norwegian authorities. This may give the Norwegian Government a better basis for raising such matters with the host country government.

An example of this process of deliberation was in relation to a decision made by Statoil in 2004. In a letter to Statoil, the Norwegian branch of Amnesty International expressed its grave concern over the human rights situation in Iran and asked the company to raise the matter with the Iranian authorities. Statoil responded that it considered itself responsible for respecting human rights within its own sphere of influence, but that it had no legitimate position from which to raise human rights issues with another country’s government. The company pointed out that this was the task of national governments or international organisations.

Although the Norwegian Government generally views economic activity as desirable because of the possibility of making a positive contribution, particular situations will arise from time to time where Norwegian companies should refrain from conducting business in a particular country or area, for example due to conflict in the area or because the humanitarian or human rights situation is especially serious.

In these matters the Government follows the line taken by the UN and engages in broad international cooperation. Norway has long held the view that the decision to impose sanctions should have broad support, and preferably be adopted by the UN Security Council. Examples of this are the sanctions that were imposed on the trade in rough diamonds from Sierra Leone and Liberia, and the current sanctions on the Côte d’Ivoire rough diamond trade. The Government does not consider it desirable to develop an exclusively Norwegian system that involves Norwegian companies refraining from trade with or investment in problematic areas or countries. At present there are only two exceptions to this rule: Norwegian companies are advised not to engage in commercial activities in Western Sahara due to its status as a disputed territory, or in Burma due to the political situation.

4.2 Conducting business in conflict-affected areas

The presence of companies in zones of conflict, where there are hostilities, or where there is a threat of war or civil war raises particular questions and requires vigilance on the part of the companies regarding responsibilities and non-financial risks.

Conflicts undermine the effectiveness of government control, and commercial actors may take advantage of this. Guerrillas, arms smugglers, drug cartels, human traffickers, terrorist networks and others involved in organised crime may use conflict and war to enrich themselves. The substantial profits derived from the exploitation of natural resources such as petroleum, diamonds, minerals and tropical timber can be used to promote development and a more equitable distribution of wealth, but they can also be used to finance crime and protracted conflicts.

Illicit trade in natural resources from conflict zones is a major global problem. Under international law, natural resource management in conflict-affected areas must be practised in accordance with the interests of the local community. Beyond these requirements it is difficult for the international community to reach consensus regarding what action to take when national governments are directly involved in conflicts, and it has also proved difficult to reach agreement on a definition of «conflict goods». However, one or more of the following features are generally emphasised:

• The income from trade in these goods is used to finance conflict or is linked to armed conflict;

• Military/rebel groups are involved in the extraction process;

• Some or all of the transactions relating to the goods concerned are illegal.

The UN is addressing these problems to an increasing extent in relation to peace operations and sanctions regimes. A resolution (55/56), adopted by the UN General Assembly in 2000, led to international cooperation on reducing the flow of conflict diamonds through a certification scheme known as the Kimberley Process (see Box 4.4).

Apart from the aforementioned sanctions, there are few rules in this field that are binding under international law. This has resulted in a governance gap or deficit that is spawning new partnerships between actors that normally play very different roles. Industry, government and civil society have come together to solve specific problems and challenges by means of schemes based on voluntary participation and cooperation. These partnerships are in part based on the recognition that there are limits to what can be achieved by regulation and legislation.

4.2.1 Guidelines in zones of conflict

Although many companies wish to conduct business in a responsible manner, there are no binding international rules that define what is expected of them. How can companies engage responsibly in zones of conflict?

A company’s area of operations may significantly influence the degree to which it should exercise vigilance. Is the production or trade with a particular actor/organisation in the area in any way linked with or supporting an emerging or existing conflict? Vigilance is especially important if the client is involved in the military or with the defence industry, or if there is any uncertainty about who the client actually is or how the product will be used. The main consideration here is to avoid in any way increasing military capability in the country. This applies not only to defence materiel and military products but also to a large range of civilian goods. In such cases the company could be suspected of complicity and at worst held legally responsible. Norwegian companies are required to follow specific regulations regarding the export of defence materiel and other products that can be used for civilian and military purposes. A separate licence is required for every shipment and may only be obtained after careful assessment by the authorities. 1

Companies operating in conflict zones have been criticised a number of times because of abuses perpetrated by private security personnel. A set of principles known as the Voluntary Principles on Security and Human Rights was drawn up as a result of a continuing dialogue between governments, companies in the extractive and energy sectors and civil society. The initiative was taken by the UK and the US in 2000, and Norway became a participant in 2002. Norsk Hydro and StatoilHydro are also participants.

The Voluntary Principles serve as a guide for companies in the extractive and energy sectors who face a dilemma between the legitimate need for security services and respect for the human rights of the local population. According to the principles, companies are to conduct a thorough assessment of the risks in their operating environment, both normal security risks and risks posed by conflict in the area. They should consider the potential for violence in the region, the human rights practices of public security forces, the causes of local conflicts and the responses of the authorities to allegations of human rights abuses.

According to the Voluntary Principles, in relations with public and private security providers, companies should:

• hold consultations and communicate their human rights policies, use their influence to promote principles regarding how and when force may be used, and respect the right of individuals to exercise freedom of association;

• demand that private security providers do not use individuals who have been implicated in human rights abuses;

• support efforts to provide human rights training and promote UN principles on the use of force and law enforcement;

• report allegations of human rights abuses to the appropriate authorities and monitor the status of investigations;

• actively monitor the use of equipment provided by the company.

The Voluntary Principles also serve as a guide to companies outside the petroleum and extractive industries and are applicable outside conflict zones. Participants are expected to submit annual reports on their efforts to implement the Principles. There is also a mechanism whereby a participant can raise concerns regarding an alleged lack of effort on the part of another participant to implement the Principles.

The OECD Risk Awareness Tool for Multinational Enterprises in Weak Governance Zones shows how the OECD Guidelines for Multinational Enterprises can be applied in such areas by addressing risks and ethical dilemmas that companies may encounter. Another such tool is the OECD Guidelines on Helping Prevent Violent Conflict, which indicate how companies can play an important role in conflict zones, and show how it could be in the interest of companies to support measures that prevent, mitigate or avoid aggravating conflicts.

4.3 Natural resource-based enterprises

A number of issues, considerations and activities related to responsible conduct apply to all companies that operate internationally, regardless of sector. However, natural resource-based companies more frequently have to deal more directly with issues relating to local releases of pollutants or human rights than for instance companies in the financial sector or trade in goods.

Natural resource-based industries are to be found in sectors such as oil and gas, hydropower and other renewable energy sectors, fishing and aquaculture, agriculture, forestry and mining. The effective utilisation of natural resources is essential in all these sectors to secure a profit, and for many of them sound management of biological resources is an essential basis for long-term operations.

4.3.1 Local communities and the rights of indigenous peoples

Natural resource-based enterprises also have to deal with particular challenges with regard to local communities. Their activities may affect large areas of land and may involve moving people or other interventions in the way of life or rights of the local population.

Given indigenous peoples’ dependence on the natural environment and resources, environmental considerations and respect for the rights of the indigenous population must weigh heavily in areas where indigenous peoples live. There have been a number of instances where Norwegian business interests have come into conflict with the use of the environment by indigenous groups. It is therefore vital to consult and involve indigenous and local communities when planning activities that may affect their interests.

Source George Osodi/Panos Pictures/Felix Features.

Large population groups depend on forests and forest products for their livelihoods. Timber is also a financially profitable commodity in international trade, and there are usually no technical barriers to trade in this sector. Norwegian companies that manage or exploit forests in other countries have a special responsibility to see that their activities are in accordance with international law, that they are based on ethical standards, and that considerations regarding long-term resource management are taken into account

Clarifying the rights of the local population and establishing a system for leasing or other forms of access to forests or other land-based natural resources provides local communities with the opportunity to assert their property rights and rights to land-use and management. This will also help to ensure that indigenous communities and women have the opportunity to participate and assert their rights.

4.3.2 Transparency in the extractive industries – EITI

Many developing countries are rich in mineral and petroleum resources. Utilising these resources in a way that benefits the population is a challenging task for a country. The quality of institutions and legislation in these countries varies. This calls for particularly strict requirements for companies participating in the extraction of natural resources.

Oil and gas extraction yields high revenues. Since financial flows from the extractive industries to government authorities are often not disclosed to the public, countries rich in natural resources are particularly vulnerable to corruption. This means that the revenues from these resources are not used to promote sustainable economic and social development. In many cases this leads to destabilisation and provides a basis for social unrest and conflict, a phenomenon that is known as the natural resource curse. Revenues that are not subject to democratic control may be used to finance armed conflict, which in turn is an obstacle to development. This shows how important it is for countries with natural resources to develop sound and effective frameworks to ensure that the resources benefit the country and its inhabitants. It also shows how important it is that companies are aware of these potential problems and exercise vigilance.

Over the last few years a number of organisations have urged petroleum companies to widen their sphere of responsibility to include national challenges related to the development of the petroleum sector. Studies have shown that countries rich in petroleum resources tend to lag behind other developing countries on social and humanitarian issues. This is mainly due to corruption and weak institutional development, lack of transparency in government budget processes and national accounts, the use of petroleum revenues for military rather than social purposes and repeated violations of human rights. Some civil society organisations have gone so far as to accuse the petroleum companies themselves of contributing to this unacceptable situation because it is being maintained by the revenues from taxation of companies’ activities.

It is not always easy for a company to deal with such challenges on its own. Confidentiality concerning the flow of money is often part of the contractual agreement with the authorities in the host country, and companies that have led the way in publicly disclosing payment figures have been met with threats of sanctions. In such cases cooperation and coordinated action between companies, the authorities and civil society can often help to resolve the situation.

The Extractive Industries Transparency Initiative (EITI) is an international initiative that seeks to improve transparency and accountability concerning the flows of money in the extractive industries. The goals are that transparency concerning revenues from natural resources should become a global norm and that a greater proportion of the income from these resources should be used to promote social and economic development.

Governments, companies, civil society groups, investors and organisations participate in the EITI. It has resulted in a set of standards for companies to report what they pay and for governments to disclose what they receive from the extractive industry. This promotes public accountability concerning government revenues and expenditure and informed public debate on the equitable and sustainable utilisation of the country’s natural resources. In September 2008 the UN General Assembly adopted a resolution on strengthening transparency in industries, providing strong support for the EITI. The resolution notes the efforts of countries that are participating in initiatives to improve transparency and accountability in industries, and encourages them to share their experience with interested Member States. Norway was a driving force in developing the resolution.

National ownership is vital for implementing the initiative. As of October 2008, 23 developing countries are in the process of fulfilling EITI transparency criteria, and a further 20 countries are considering implementing the initiative. This brings the number up to over half of the world’s natural resource-rich countries, defined as countries in which the extraction of natural resources accounts for more than 25 % of GDP. Hydro and StatoilHydro have supported implementation of the initiative since 2003. StatoilHydro’s payments to the governments of most of the countries in which the company is engaged in extractive activities are published in its annual report. The EITI has the political support of the G8 countries and is financed by contributions from a number of countries including the UK, the US, Germany, Canada, Italy and Norway.

The Government actively supports the EITI, and has hosted the secretariat since the autumn of 2007. Norway is the only Western country that has declared that it will fulfil the EITI criteria. This will help to eliminate any suspicion that the Western countries have a hidden agenda in their insistence on transparency in the financial flows from the strategically important extractive industries. Norway also plays a central role in the Multi-Donor Trust Fund for the Extractive Industries Transparency Initiative managed by the World Bank, which supports countries’ efforts to implement the EITI.

Norway already practises transparency concerning the payments from petroleum companies to the government authorities. EITI compliance means that companies must report payments to an independent EITI administrator, and that the government authorities must report receipt of payments to the same body. A multi-stakeholder committee must also be appointed to monitor the implementation of the EITI criteria. The first meeting of the committee was held in October 2008, where a proposal for how to implement the criteria and draft regulations governing implementation in Norway were presented. A public consultation will be held on the regulations once the committee has evaluated these proposals.

The Government’s aim is for the entire validation process to be completed in the course of 2009. The Storting will be kept informed of the progress of the work. Norway’s efforts to implement the EITI criteria have been favourably received by the international community.

Other forms of cooperation or partnership between petroleum companies and multilateral organisations such as the World Bank and the regional development banks have also been established. The aim is to address what are known as collective action problems that may arise in oil provinces where a company may decide to give less priority to social issues out of fear of losing out in the competition for government licences.

The government considers that partnership between the authorities, the private sector and civil society is a sound way of addressing challenges relating to natural resource-based industries. Such partnerships may also prove useful in streng­thening transparency and accountability in other sectors.

4.3.3 The Government

• expects Norwegian companies involved in the extraction of natural resources to continue their work on best practices for taking social and environmental considerations into account as their guide and goal;

• expects Norwegian companies involved in the extraction of natural resources to respect the rights of indigenous communities;

• will implement the EITI criteria, seek to ensure that more countries join the initiative and help these countries to implement it successfully;

• will promote the development of transparency initiatives in other sectors;

• considers that partnerships between the authorities, the private sector and civil society are useful in addressing challenges related to natural resource-based industries; and

• calls on Norwegian companies to participate in relevant partnership initiatives that aim to address sector-specific challenges.

4.4 Business engagement in vulnerable natural environments

Value creation in many sectors, for example fishing, aquaculture and tourism, depends on the use of natural resources. Natural resource-based commercial activities are also important for economic development in developing countries and for creating jobs at the local level. However, if commercial activities are to be viable over time these industries are dependent on sound natural resource management. Sustainable use of natural resources is therefore also a precondition for future growth and prosperity, especially in developing countries.

The conservation and protection of the natural environment should ideally be ensured by international agreements and laid down in national legislation. However, although international agreements and legislation exist and are being enforced, in several environmental areas they often impose only minimum requirements. Although there is no international agreement on ambitious environmental goals or global requirements for rain forest management or releases of hazardous substances, Norwegian companies should take account of necessary environmental considerations in their activities and should require their subcontractors to do the same. In the absence of binding international commitments, the willingness of the private sector to voluntarily assume responsibility is essential for addressing these problems.

There are more than 114 000 protected areas in the world, and they cover approximately 13 % of the earth’s land surface. These areas have been given protected status in order to protect and maintain biological diversity and the natural environment. Knowledge of the individual area is required to safeguard the values represented by such areas. In cooperation with the International Union for Conservation of Nature (IUCN) and the private sector, including StatoilHydro, UNEP’s World Conservation Monitoring Centre has developed a web-based information system for the world’s protected areas. This means that lack of knowledge no longer prevents companies from taking account of protected areas when planning to establish activities in new areas. Companies should seek to avoid having direct or indirect negative impacts in protected areas and should therefore always take these issues into account when engaging in new areas.

Particular caution is required when planning commercial activities in vulnerable habitats such as wetlands, mires, rivers and lakes and marine areas, since ecosystem integrity may otherwise be disturbed. Moreover, the areas may contain very important or rare species. Commercial activities in such areas may directly or indirectly put further pressure on the environment due to more intensive use of land and living resources, the development of physical infrastructure or increased industrial activity and transport.

Biodiversity

In Global Biodiversity Outlook 2, the UN concluded that the pressures on biodiversity are increasing so rapidly that they threaten the very basis for sustainable development. The IUCN Red List provides an overview of threatened species. Companies that operate in vulnerable natural environments should take account of possible negative impacts on biodiversity on the basis of the Red List.

Activities in the petroleum and mining sectors often involve major disturbance of the natural environment and particular caution must be exercised in the planning stages.

The development of hydropower may also have major impacts. Changes in water flow affect living organisms and species diversity in rivers and lakes, and the diversion of water to hydropower production may also compete with other uses of the water, for example for irrigation and drinking. This may also have an impact on tourism and other industries.

The tourist industry is one of the world’s largest industries. Tourism in vulnerable natural environments may cause wear and tear on the land and disturb animal life. On the other hand, close cooperation between tourism and conservation interests may provide a secure income base that benefits both parties.

The United Nations Environmental Programme (UNEP) cooperates with the tourist industry, NGOs and interested countries on promoting sustainable tourism, based on improving coastal zone planning, reducing impact on the climate and channelling funds to the protection of areas of natural environment. By supporting these efforts, Norwegian tourism operators can help to ensure that the development and operation of tourism activities contribute positively to development in the host country.

Source Paul Lowe/Panos Pictures/Felix Features.

In many cases it is impossible to prevent commercial activity from harming the natural environment. Mechanisms, known as biodiversity offsets, have been developed to compensate for such negative impacts and reduce the total harm. This means that by ensuring sound, long-term management in other relevant areas, loss of biodiversity can be mitigated in a wider perspective. A growing number of companies are realising that biodiversity offsets can help to reduce their ecological footprint and that employing such mechanisms improves cooperation with the authorities and other stakeholders. The Business and Biodiversity Offsets Programme is a broad-based partnership for exploring biodiversity offsets and testing them in the form of practical pilot projects.

Ideally, national authorities should require environmental impact assessments in the case of major projects that will affect the natural environment, especially vulnerable habitats. However, in a number of countries, especially countries with weak governance, the authorities do not require this, which means that in practice it is often up to the company itself to perform such assessments. There are a number of tools that companies can use in such cases. The most widely used of these are environmental impact assessments and strategic environmental assessments. There are also tools for specific sectors on particular environmental issues. An example of this is the Natural Value Initiative, an international partnership between financial institutions, NGOs and business schools promoted by the UNEP Finance Initiative. The aim is to assist the financial sector by developing a set of tools for assessing biodiversity and ecosystem services investment risks and opportunities.

Use of genetic resources by the private sector

In 2002 the Conference of the Parties to the UN Convention of Biological Diversity (CBD) adopted the Bonn Guidelines on Access to Genetic Resources and Fair and Equitable Sharing of the Benefits Arising out of Their Utilization. Use of the guidelines is voluntary, but they may be used as a basis for national legislation and agreements between countries and companies.

The aim of the guidelines is to assist users and suppliers in matters relating to access to genetic resources and benefit-sharing. They contain a recommended procedure by which applicants for access to genetic resources can obtain prior informed consent from the host country. It is a requirement that indigenous and local communities are involved in the decision-making process when indigenous knowledge of natural resources is needed. Source countries will be able to make use of the CBD and the Bonn Guidelines to impose more stringent requirements on foreign companies that wish to engage in bioprospecting, i.e. searching for valuable biochemical and genetic resources from living organisms.

The guidelines serve as a framework for the practical implementation of the provisions of the CBD concerning benefit-sharing with regard to the results of research and development and the utilisation of genetic resources. This is to be based on terms and conditions negotiated in each case. More equitable sharing of benefits from the products derived from processing genetic resources will serve as an incentive to developing countries to conserve biodiversity.

An international regime on access and benefit-sharing under the CBD is being negotiated, which will build further on the Bonn guidelines. The negotiations are scheduled to be completed in 2010.

4.5 The Government

• expects companies to conduct the necessary risk and impact assessments when establishing activities in vulnerable habitats and ecosystems;

• expects Norwegian companies to take threatened species and protected areas fully into account in their operations, for example using the IUCN Red List of Threatened Species and overviews of protected areas.

4.6 The need for vigilance

Companies engaged in commercial activities in countries with weak governance, poor legislation, widespread corruption or absence of the rule of law face special challenges and dilemmas. As there are no absolute answers to how they should address these issues, companies must gain thorough knowledge of national and local conditions. Important sources of such information are other companies, employers’ and employees’ organisations, embassies and NGOs.

A systematic approach is important when difficult choices have to be made. Risk and impact assessments can reduce uncertainty and provide the company with a better basis for decision-making. Dilemma training will also raise awareness among company employees and prepare them for dealing with specific situations. However, a company will never be able to obtain a complete overview of all the possible consequences of its activities. It is therefore essential that the company and its employees have a sound value base for their assessments and actions.

Although the individual company itself has to make the final decision about its activities, problems can also be addressed in cooperation with other actors. Social problems such as corruption are often so widespread that they require joint efforts by a number of different actors. Voluntary principles and partnership initiatives such as the EITI are examples of how companies, civil society and the authorities can cooperate on addressing the challenges specific to various sectors.

Although the challenges are complex, trade with and investment in developing countries are vital for economic and social development in these countries and in local communities.