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Legislating Global Transparency

2/24/2015

1 Comment

 
Shining Light on Global Supply Chains,[1] an article by Galit A. Sarfaty, is a worthwhile article that looks at the effectiveness of a country’s legislation on global supply chain transparency, particularly in the context of human rights and labor practices. In general, the results are positive. As the author states in the article, “Supply chain regulation is an avenue by which states can transmit human rights norms to third-party suppliers and their host governments via multinational companies.”

This type of legislation is an emerging strategy in several industries. Examples of such legislation include the U.S. Section 1502 of the Dodd-Frank Finance Reform Act (U.S. conflict minerals legislation) and the California Transparency in Supply Chain Act. Legislation of this sort is challenging to implement effectively, and has the potential to affect a wide range of actors throughout supply chains globally.

The author presents important realities that should be considered when designing and implementing legislation that requires companies to conduct due diligence to identify or address illegal human rights or labor practices.

In addition, as the article discusses, the implementation of strategies that businesses must undertake to comply with these mandates is challenging and indirectly impacts how these mandates are often regulated by non-regulatory bodies (e.g. voluntary standards bodies, non-governmental organizations (NGOs), private auditors). Such efforts to comply with mandates that are regulated by non-regulatory bodies is a new model of “transnational new governance.” Important considerations that the author acknowledges include the complexity of multi-tiered supply chains with dynamic relationships between buyers and suppliers, and limited monitoring and enforcement capacities of the regulated entities. Seven or more layers of actors are often involved in a supply chain between a mine and the final product, and as many as 50 supply chain actors could be involved for a given product. These supply chains can quickly lead to hundreds of thousands of suppliers across an end brand’s various supply chains. Many of these actors are reluctant to disclose information about the source of their raw materials or operations. Brands often have limited interaction with or knowledge about suppliers beyond their first tier (direct) suppliers.

As companies and industries conduct due diligence on their supply chains to comply with Section 1502 of the Dodd-Frank Act, California Transparency in Supply Chain Acts, or similar mandates, many entities, including industry or human rights “watch dogs,” recognize the challenges involved. They agree that companies must prioritize their efforts to map and complete due diligence across and down their supply chains. In addition, there is an increasing acknowledgement by most engaged stakeholders that there must be some flexibility and other forms of incentives for suppliers to participate in these efforts.

Although this approach provides more flexibility, and inspires more participation, innovation, and cost-effective approaches that fit within various local contexts than traditional mandates, these new governance models may raise accountability concerns as regulations are increasingly monitored and enforced – at times through private sector actions rather than legal penalties – by private consultants who may have alternative motives.

The significance of Dodd-Frank Section 1502 over other legislation (such as California Transparency in Supply Chains Act) is two-fold: 1) the scale of affected companies (estimated at 6,000 that are directly affected and thousands more suppliers who will be indirectly affected), and 2) there are penalties for not complying in good faith, specifically liabilities for false claims and misleading statements under the U.S. Securities Exchange Act.

These domestic mandates can also put pressure on other host governments who may, in turn, develop legislation and strengthen their rule of law to avoid global companies from shifting to regions with more effective governance. For example, The Democratic Republic of Congo passed a law requiring all mining and mineral trading companies in the country to undertake due diligence in accordance with OECD Due Diligence Guidance on all levels of their supply chains. Efforts are also under way in other consumer countries (e.g. Canada, European Union) to enact legislation similar to Section 1502.

Often more important than simply stating what is required of companies is the need for the regulators or standards setting organization to assist companies in taking steps to meet the legal requirements and spirit of the law. In the case of conflict minerals, the OECD Due Diligence Guidance is the leading framework to which companies can look. The OECD Guidance provides steps that companies can take to put effective policies, management systems, due diligence measures, and grievance mechanisms in place, and to strengthen engagement with suppliers.

In the end, the impact of these emerging mandates on business is significant. For example, the cost to the industry to comply, which the SEC estimates to be between $3 billion and $4 billion initially, and between $207 million and $609 million each subsequent year. The good news is that the positive impact these mandates have had on the human rights violations they aim to address is also significant, although harder to quantify.

While I recognize that these mandates must be supported with additional efforts by policymakers, industry associations, companies, NGOs and others, I concur with the author’s conclusion that these mandates can shape corporate culture, which is a critical prerequisite for making change in their supply chains. While we have a long way to go, I think that well designed policies and resources and programs that support such policies are a good first step.

[1] Sarfaty, Galit A., Harvard International Law Journal (October 2014).
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Green Industrial Policy

2/12/2015

2 Comments

 
I believe global industries are strong engines for poverty alleviation and other social benefits. These benefits to society must not come at the expense of the environment and those that benefit the environment. This is where green industrial policy comes into the picture. Green industrial policy refers to any policy that supports the development of industries that produce “green” goods (e.g. improved environmental performance, address environmental problems). These policies should be strengthened and improved.

Green Industrial Policy and the World Trading System, a brief paper from the International Institute for Sustainable Development (IISD), shares lessons for policy makers in the context of supporting green industries, as well as adjustments to trade rules and green industrial policies that address climate change and provide public goods.

The author of the paper, Aaron Cosbey, posits that industrial policies and special trade rules that support emerging green sectors, including those that provide global goods such as mitigating climate change or fostering development in least-developed countries, may be warranted.

However, Cosbey also cautions policy makers that:
  • Industrial policy must be designed with care. The tools must address a specific market failure that can be implemented in existing reality,
  • Industrial policy requires technical and sector-specific knowledge, and it is subject to intense pressure from prospective beneficiaries, and
  • Subsidies may be an appropriate tool, but rules that ensure sensible use and avoiding their misuse will be required.
 The author suggests that industrial policy should be a strategic collaboration between governments and the private sector to better understand what advantages exist. Policies should be limited to addressing market failures and tailored to each country’s needs (e.g. technical capacity, infrastructure, geography, trade flows).

Some lessons the author shares that I found most interesting include:
  • Entities are not fully compensated for investments or innovations that provide societal benefits such as the fiscal impact of mitigating climate change. Governments can incentivize investments by providing subsidies for investments in efforts such as research and development or worker training. Governments can also facilitate financing with loan guarantees and direct financial support, or create subsidies, feed-in tariffs or purchase mandates (e.g. renewable energy, biofuels).
  • Established businesses or industries may have a more competitive position, especially those that have reached a scale that provides optimal efficiencies. Governments can help new companies or industries enter a market at a more competitive position and support their growth to a more competitive size.
  • Investors can be risk averse. As a result, they often invest in incremental change to an existing technology over one that is not yet developed. Governments could help lower the cost of investing in new technologies – and minimize risks.
  • As seen with electric cars and their need to have a network of charging stations, some innovations  may require a supporting infrastructure that the government should support.
  • Existing subsidies that create more competition to new green technologies or innovations should be removed if possible. If counter subsidies are required, unintended effects should be avoided.

Cosbey also cautions that trade barriers or protections tend to be the least desirable instruments. While subsidies can be appropriate, they can also be difficult to phase out or eliminate because vested interests can put enormous pressure to keep them in place in perpetuity.

The author agrees with Harrison and Rodriguez-Clare’s conclusion in a 2010 paper that so-called “soft” industrial policies that provide broad improvements to the investment climate are more effective than “hard” industrial policies that target specific sectors and activities[1].

Examples of “soft” policies include:
  • Creating special economic zones with lower infrastructure costs
  • Investing in transportation-related infrastructure designed to increase trade
  • Providing credit and insurance specifically for exporters, and
  • Promoting export clusters (without sectoral discrimination).
Examples of “hard” policies include:
  • Protective import tariffs on final goods
  • Lower tariffs on specific inputs
  • Subsidies to specific sectors: outright grants, land grants, low-interest loans, R&D support, tax holidays, etc., and
  • Domestic-content requirements.
Lastly, it is important that the benefits of policies outweigh the costs, and that beneficiaries can compete unsupported over time. Otherwise, these policies would simply be charity.

[1] Harrison, AE and Andres Rodriguez-Clare (2010), Trade, Foreign Investment, and Industrial Policy, Handbook of Development Economics.
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Key Points to Consider in Protecting Human Rights in Fisheries

2/12/2015

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In October, I participated in two complementary multistakeholder workshops hosted by the Moore Foundation. Participants included Fish Wise, Environmental Justice Foundation, Verité, Costco, Safeway, World Wildlife Foundation, and Fair Trade, among others. We discussed opportunities to address human rights, illegal, unreported, and unregulated fishing (IUU) – fishing conducted in violation of national laws or internationally agreed upon conservation and management measures in oceans around the world – and traceability in the fisheries industry. The attendees were interested in working together on developing an initiative to address human rights, IUU and sustainability in fisheries.

Although I don’t currently work in the fisheries industry, I have conducted research into the current state of existing protection efforts and legal frameworks that address human rights and IUU in the fishing industry (see my April 2014 blog). In addition, I have extensive experience working directly and indirectly in several sustainable or ethical commodity initiatives (e.g. cotton, biofuels, minerals), and this experience has provided insights that I feel should be considered when trying to develop a scalable and effective program to address human rights and sustainability in fisheries. I would like to share with you here some of the key points that were raised at the workshops and during subsequent conversations with select participants.

The seafood supply chain is complex and involves many actors.

Fish and fish products are among the most traded commodities worldwide, with 197 countries reporting exports in 2010.[1]

I refer to commodity supply chains – such as fisheries – as “supply webs” because a multidirectional web more accurately represents the numerous connections and shifting suppliers than a linear supply chain does.  To further complicate things, different sources of fish are mixed and consolidated in several points along the web, including while at sea, which is largely lawless terrain where monitoring is extremely difficult.  In addition, fish matter is used as a feed in aquaculture, extending the supply web into other segments of the fishing industry.

The initial focus should be on IUU fishing and on forced labor and human trafficking.

Fragmented governance and weak enforcement are common issues that limit the effectiveness of international laws in many regions. Experts estimate that IUU fishing accounts for up to a quarter of the world's total catch of wild fish.[2]

IUU fishing has strong correlations with other crimes, including human trafficking and forced labor. IUU fishing is also recognized as a large contributor to the overexploitation of fisheries and an obstacle to more sustainable fishing in the industry.

Combating illegal behavior, especially IUU fishing, is a logical area to begin with because every person and business should be held accountable if they are unable to meet the minimum criteria of conducting business within the rule of law. Focusing on IUU will level the playing field by preventing some actors from benefiting from operating illegally – and from saving associated costs and being subject to catch limits. The initial focus should be on monitoring and enforcing existing laws and norms, making use of existing frameworks to the extent possible. Such a program should involve and foster coordinated, cross-border, multi-agency efforts that leverage work by other stakeholders such as non-government organizations (NGOs), United Nations agencies, law enforcement, military, and surveillance and intelligence gathering agencies. It must also be aligned and work in concert with needed policy and trade advancements.

A strong, effective system that addresses IUU could be expanded upon to address other supporting and related issues, depending on local contexts and activities (e.g. protection of fishing grounds rights, enforcement of legal catch restrictions). Additional issues or segments of the supply chain can be incorporated when the system is established and functioning. The intended outcomes (e.g. reduction in forced labor and human trafficking, healthier fishing grounds) and additional benefits (e.g. improved fisheries management, worker empowerment) can be monitored and evaluated over time, with appropriate adjustments made as needed.

While traceability should be an option, it should not be the focus of a solution.

There is a lot of interest in developing a traceability system as a tool to promote responsible sourcing of raw materials, including fish. However, we must recognize the limitations of – and cost to implement – traceability systems in complex commodity supply chains with global origins, such as fisheries. It would be best to design a program to keep fish product from entering the supply chain if it was caught, produced or processed with the involvement of any human trafficking or forced labor. The electronics industry’s conflict-free smelter program (CFSP) is an example of a program that successfully takes this approach. The goal of the CFSP is to keep conflict minerals from entering their supply chain at the first step of processing and mixing (e.g. smelters). The CFSP does not allow smelters to receive any conflict minerals if they are to qualify as a conflict-free smelter. Smelters cannot simply segregate “good” minerals from potentially conflict minerals, a practice allowed in most certification and traceability systems. The CFSP’s approach motivates smelters to take appropriate measures to ensure all of its suppliers and raw material sources are conflict-free, driving compliance further down and across the supply web.

Another feature of the electronics industry’s CFSP that could be applied to human trafficking and forced labor in fisheries is its risk-based model. The CFSP requires additional documentation as well as on the ground assessments and chain of custody systems in areas of high risk (regions surrounding conflict minerals production). A risk-based approach should hold all players to the same standard without penalizing regions and actors that are already acting responsibly.

A three-pronged approach will drive legal behavior.

Taking a three-pronged approach – one that empowers vulnerable workers, creates market drivers, and advances policy and legal enforcement simultaneously – will promote systemic change more effectively than a single approach.

While a market driven solution can be powerful and effective more quickly than policy changes, it must be implemented at an industry level, because individual brands don’t have the level of influence on the powerful processing companies. Such an effort must be well-coordinated throughout the industry, with consistent expectations, to be effective. We must recognize that buyers have limited resources and often lack specific fisheries or human rights expertise. We must develop a systems approach that takes these and other business realities into consideration. An approach that is simple, flexible, and easy to implement will likely allow for wider adoption across businesses of all sizes and regions.

Policy, legal, and – where appropriate – trade restrictions will also be an important part of the solution. Policies that ban IUU fish from entering key markets (e.g. European Union) are helpful drivers and should be expanded (to the US) and strengthened.

A future initiative should be designed to grow both in scale and possibly in the breadth of issues it addresses over time, and it should work closely with and complement existing initiatives (e.g. Marine Stewardship Council, Aquaculture Sustainability Council). It should work within – and strengthen – a wider system.

Leverage international frameworks and relevant regulations.

Several governing bodies monitor and act on human trafficking in fisheries. The International Maritime Organisation (IMO), International Labour Organization (ILO), and Food and Agriculture Organization of the United Nations (FAO) have long cooperated on the safety of fishers and fishing vessels. United Nations Office on Drugs and Crime (UNDOC), INTERPOL Fisheries Crime Working Group, and OECD High Seas Task Force are specifically addressing IUU.

Momentum to address the labor and human rights violations in fisheries is building. Some legal instruments exist in the consumer regions that could be expanded upon to encourage wider participation in the industry as well as deter illegal and unethical behavior. These include:

EU Regulation to prevent, deter and eliminate IUU and its implementation through the Control Regulation have been effective, although there is some displacement of the issue (i.e. IUU fish) to the US and China. This regulation has also led to a ban of catch by Korean vessels in New Zealand waters over concerns of illegal fishing and extensive human rights and labor abuses. It has been claimed that South Korean vessels fishing overseas have recently been required to be equipped with a vessel monitoring system.[3]

California Transparency Supply Chain Act requires retailers and manufacturers doing business in California with more than $100,000,000 in sales worldwide to publicly disclose their efforts to eradicate slavery and human trafficking in their supply chains.

The discussions at the October workshops were fruitful and there is commitment from several experienced entities and large buyers to create an effective initiative to address human rights, IUU and sustainability in fisheries. With this said, I hope the future initiative includes alternatives to traditional certification and traceability models, for reasons I have just shared.


[1] The State of World Fisheries and Aquaculture, 2012, pg 70.
[2] Monterey Bay Aquarium Seafood Watch: Wild Seafood.
[3] South Korean fish exports to face EU ban.
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