Responsible corporate behaviour for sustainable development

Financial, Fiscal and Enterprise Affairs Directorate (DAF)

The private sector is a vital component of sustainable economic growth in a global economy. But the freedom multinational corporations have to operate internationally carries with it a responsibility to help ensure that the social and environmental costs of their business activities do not outweigh the benefits.

It may be fashionable to blame large private corporations for many of the ills done to our planet over the years. Those who are tempted to do so should not forget two things: first, the private sector will continue to be a major driver of economic growth in the years ahead; and second, sustainable development, which depends on growth, will not be achieved without the private sector. The key is for private enterprises to behave responsibly, both at home and abroad, so that growth can flourish without damaging the environment or social fabric of the countries where they operate.

In the past two decades, worldwide production and consumption of goods and services have become increasingly international. In the six years from 1993 to 1999, world foreign direct investment (FDI) flows increased from just over US$200 billion to around $800 billion, and they are estimated to have passed the US$1 trillion mark in 2000. It is a similar story with international trade.

International trade and investment are important for integrating developing countries into the global economy, transferring technology to those countries and helping them to expand. Trade and investment are not the root causes of environmental and social problems, but they can amplify such difficulties unless government policies and the practices of multinational enterprises (MNEs) act to avoid or offset possible harmful effects. The environment is a case in point. On the negative side, trade and

investment liberalisation may lead to increased production and consumption of polluting goods or to an expansion in industrial activity. This can lead to over-exploitation of resources, rampant urbanisation, or damage to protected areas, posing problems for pollution control, ecological protection and public health.

But trade and investment flows can also bring new technologies that help ease pollution or reduce land-use pressures. Tighter environmental regulations at home give MNEs a strong incentive to innovate in areas that improve resource efficiency or reduce industrial waste, which firms can apply on a worldwide basis to benefit from economies of scale. FDI can also have positive spillover effects since domestic firms may imitate the technological practices of multinational corporations established in their market.

There are social impacts too, particularly on the labour market. While foreign firms create employment, the quality of that employment, and the way workers are treated, is sometimes questioned. When governments compete to attract FDI, some may be tempted to be less vigilant in enforcing laws that promote core labour standards. However, a number of recent studies suggest that fears about a lowering of core labour standards are probably exaggerated.

The private sector does not operate in a regulatory vacuum. Corporations evolve within a framework of rules, whether those of their home country, the host country, international standards, such as the OECD’s MNE Guidelines and Principles of Corporate Governance, or their own codes of corporate conduct. Some governments could be tempted to relax their environmental standards, or at least not upgrade existing low standards, in order to attract certain types of investment. Some companies, too, may be reluctant to pay the higher costs of more stringent environmental standards in one country, preferring to go elsewhere where standards are easier and cheaper to meet. However, the evidence shows that the risk of companies shifting their activities to low standard countries is rather small. In fact, what multinational enterprises generally seek is consistent – rather than lax – environmental enforcement.

Corporations and governments have come under increasing public pressure to be seen to be making an effort. Multinational enterprises in particular have worked with trade unions, non-governmental organisations and governments in recent years in a number of voluntary initiatives aimed at promoting corporate responsibility and sustainable development. Many have issued codes of conduct and designed management systems to stimulate compliance with these commitments. These corporate codes lay down a firm’s commitments in areas such as environmental management, human rights, labour standards, the fight against corruption, consumer protection, information disclosure, competition, and science and technology.

Their most common commitment is to assure compliance with relevant laws and regulations. More recently, steps have been taken to formulate standards for business reporting on non-financial performance. However, these initiatives are voluntary and significant divergences exist between companies as to what is included in their codes.

Many firms have developed management systems to implement their codes of conduct, particularly when it comes to the environment. An effective environmental management system (EMS) identifies and controls environment-related risks and increases cost savings through more efficient use of resources and energy. Some firms publish details of such efforts in order to boost the credibility of their environmental commitments. International standards have been developed which make it easier to compare performances.

But on the whole, such reporting by corporations is relatively uncommon and there are few widely accepted standards on what information should be included. As a result, high environmental impact firms differ markedly in what information they publish and how they present it.

These private initiatives often complement government-orchestrated initiatives, and they are increasingly integrated into regulatory or public enforcement strategy. This may eventually lead to greater consensus among businesses and other parts of civil society about the appropriate scope and nature of commitments in the various areas of business conduct, and about the management and reporting practices that are needed to support them.

OECD member countries have also launched several initiatives to promote responsible corporate behaviour in line with sustainable development, including the OECD Principles of Corporate Governance, the OECD Guidelines for Multinational Enterprises and the OECD Bribery Convention.

Apart from sustainable development objectives, good corporate governance regimes make good business sense too. They help to maintain the confidence of investors – both foreign and domestic – and to attract longer-term capital, which is particularly important for developing countries. The OECD Principles of Corporate Governance advocate protection of shareholders’ rights, including minority and foreign shareholders. They recognise the role that stakeholders play in contributing to the sustainability of financially sound enterprises, and that factors such as business ethics and corporate awareness of environmental and social concerns impact on the reputation and long-term success of a company.

The OECD Guidelines for Multinational Enterprises provide a government-backed standard of good corporate behaviour and help to level the playing field between competitors in the international market place. A review updated the Guidelines in 2000 so that they now encourage social and environmental accountability as well as improved environmental performance. They now cover all internationally recognised core labour standards and include recommendations on human rights, combating corruption and consumer protection. Though still voluntary, their implementation procedures were enhanced.

Sustainable development depends on fighting corruption too. Bribes can lead government officials to promote costly infrastructure projects and award contracts with scant regard for their environmental or social impact. The OECD Convention on Combating Bribery aims to stop bribery of foreign public officials in international business transactions.

These are all perhaps imperfect, but nonetheless invaluable, instruments for positively influencing corporate behaviour. As the economy goes global, so must the framework of rules to ensure truly sustainable development for all – and that means all stakeholders, whether business, government, labour and civil society, working together for the benefit of everyone, not just themselves.

©OECD Observer No 226/227, Summer 2001 

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