A Divided World? A Lesson from the Energy Charter Treaty

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This blog post was authored by Dr Dalia Palombo – Tilburg University. She was one of the organisers of the Symposium: Colonisation in, of and through Business and Human Rights, held in April 2023 in Tilburg (the Netherlands). The blog post is part of a Blog Series published on Rights as Usual.

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The morning after the Symposium: Colonisation in, of and through Business & Human Rights | Tilburg University, I tried to connect the dots between the thought-provoking presentations I heard the day before. From the need to decolonize investment or tax law to the imperialist danger entailed in mandatory human rights due diligence laws, the image of a world divided in two, the West and the Rest, started to emerge.

In extreme synthesis, countries from the Global North often argue that the corporate accountability gap depends on the inability of developing states to regulate corporate conduct in their territories (with a focus on the lack of rule of law and corrupted institutions). Instead, several Global South countries, and especially the least developed countries, argue that the bulk of the business and human rights problems originate from an exorbitant power (often resulting from colonial legacies) concentrated in a few multinational enterprises, furthering the interests of the West at the expense of the Rest. This division inevitably affects the solutions proposed to address business and human rights problems: better and more effective implementation of existing rules versus reconceptualizing and reframing the core structures of the global economy. For a clear picture of the dichotomy, one could check the declarations made, for example, by Cuba (in favour of a treaty establishing internationally legally binding obligations on transnational enterprises) and the United States (arguing that the business and human rights (BHR) treaty initiative shall not to be pursued in its current form) at the Human Rights Council Seventh Session of the Intergovernmental Working Group on Transnational Corporations and other Business Enterprises with Respect to Human Rights.

Unfortunately, the division between the West and the Rest does not only touch the BHR realm. This summer, the UN Secretary General Antonio Guterres warned at the BRICS Summit about the dangers entailed in an increasingly divided world. Listening to his powerful words, the North/South divide in BHR seems nothing other than the expression of a deeper dichotomy that is emerging in every field and risks becoming the defining fracture of the XXI century.

In response to such a dark picture of division ahead of us, I wonder what could make us embrace a different world conception. In other words, what should happen for the West and the Rest to better understand each other’s discourses to avoid living in two parallel worlds that rarely meet? Maybe it is necessary for each camp to be in the other’s shoes.

An excellent example demonstrating how the West can change its perspective when put in the Global South’s shoes is the rise and fall of the Energy Charter Treaty (the “Charter”), which indeed was discussed during the Symposium: Colonisation in, of and through Business & Human Rights | Tilburg University. The Charter is a trade agreement signed by all European Union states as well as extra-European countries, such as several post-Soviet and Middle Eastern countries. It includes Investment-State Dispute Settlement (ISDS), a mechanism enabling investors to sue states for failing to provide fair and equitable treatment or for property expropriation. ISDS is highly criticised by several scholars and NGOs for de facto preventing (often developing) countries from enforcing human rights and environmental standards that could limit corporate profit.

In 2009, Russia withdrew from the Charter, which it had signed and agreed to provisionally apply until ratification.

The withdrawal was met with sharp criticism by the other European states, given the centrality of Russia in providing energy to Europe. The European Union interpreted the withdrawal, to a large extent, as an answer to the filing of the Yukos case, that was later decided in 2014. Based on the Charter, an arbitral tribunal ordered Russia to pay the investors in the energy company Yukos over 50 billion euros in damages. In response to the Russian exit, European countries have put an effort to promote the Energy Charter outside of Europe, particularly in African countries that also provide energy to Europe. This has resulted in the adoption of the International Energy Charter, a non-binding political declaration aimed at strengthening cooperation among the signatory states.

However, other commentators interpreted Russia’s exit as part of a bigger movement initiated by developing countries to leave their investment treaties or eliminate ISDS from their trade agreements. Indeed, in those same years, Ecuador, South Africa, Indonesia and Bolivia terminated their investment treaties. Other countries, such as Morocco, Nigeria, and The Gambia adopted innovative investment treaties. For instance, the Brazilian BIT model does not include ISDS, while the Indian BIT model subjects the possibility for investors to file a request for arbitration to the exhaustion of domestic remedies.

The Charter could be considered at the very centre of the ISDS debate, facing two opposite camps: Europe in favour of ISDS and an increasing number of developing countries opposing it.

But climate change changed everything.

In 2015, after a series of environmental protests, Italy passed a law banning oil and gas drilling within 12 nautical miles of its coasts. It became clear that this, and other energy-related laws, could expose Italy to ISDS complaints under the Charter. Thus, in 2016 Italy left the Charter.

Other European states also understood that the Charter could expose them to liability when adopting laws fighting climate change. A particularly significant case (later withdrawn as part of a bailout deal) was filed by the German company Uniper against the Netherlands, alleging that the Netherlands’ plan to stop coal-fired power stations would violate the Charter.

As a result of this and several other cases, a long list of European countries decided to exit the Charter. The European Commission (EC) proposed to modify the Charter in order to take climate change into account. But European states considered this proposal not enough to guarantee they would not be subject to lawsuits for enacting laws combating climate change. As a result, the European Parliament called on the EC to establish a mechanism for states to withdraw from the Charter. This summer, the EC finally proposed a coordinated withdrawal from the Charter.

But this does not enable Europe to get rid of the Charter’s ISDS. Indeed, the Charter includes a sunset clause, meaning that states will still be subject to ISDS for 20 years after their withdrawal. Italy has already experienced the effects of such a clause. Although the country left the Charter in 2016, British company Rockhopper filed for arbitration in 2017 based on the sunset clause. Rockhopper received the award condemning Italy to pay over 185 million euros in damages for the loss of income (expropriation) resulting from Italy’s 2015 law preventing Rockhopper from drilling in the Adriatic Sea.

As evidenced by this case, the sunset clause could be a liability to European countries adopting environmental laws. If any investor can sue any European state, like Rockhopper did, for enacting laws preventing them from developing coal, oil and gas, then the costs of the energy transition might become unsustainable. This is not the first time Europe has to face the sunset clause challenge. Indeed, after a long debate, the European Union adopted the Termination Agreement, terminating all investment treaties between member states, including the effects of their sunset clauses. The question now is whether Europe can also convince third parties to remove the Charter’s sunset clause effects.

The Charter history suggests that when European countries find themselves in the shoes of developing countries, they react in the same way: they want to exit investment treaties. Once European states risked facing lawsuits from investors seeking damages, they realized they no longer wanted to be part of the Charter. Remarkably, a better implementation of the existing rules was not considered a viable solution to the Charter crisis. An increasing number of European states demanded a complete reconceptualization of the energy sector, which inevitably entailed exit from the Charter. This “radical” approach sounds very much in tune with the decisions taken by several developing countries to leave their investment treaties. Is this going to be an exception to the rule or can the Charter become an exiting model for countries to leave ISDS?

Only time will answer this question, but the Charter experience can certainly become a laboratory for the “putting ourselves in the others’ shoes” strategy. We may adopt this strategy to overcome our differences on a series of global challenges that an increasingly divided world raises.

Reality Check: Navigating the Pitfalls of Human Rights Due Diligence

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This blog post was authored by Nazrin Huseinzade. Nazrin Huseinzade is an international human rights lawyer. She currently works as Business and Human Rights Advisor at Enact, a Stockholm-based consulting firm specialised in corporate human rights due diligence. She was a speaker at the Symposium: Colonisation in, of and through Business and Human Rights, held in April 2023 in Tilburg (the Netherlands). The blog post is part of a Blog Series published on Rights as Usual.

Disclaimer: The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the official positions of any entities she represents

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Human Rights Due Diligence (HRDD) straddles a spectrum of admiration and critique. At one extreme of this debate are those who endorse with blind devotion the bible that is the United Nations Guiding Principles for Business and Human Rights, and all the legislation inspired by it. At the other are those who cast a skeptical eye, viewing HRDD as an extended arm of neoliberalism.

This post is a pragmatic blend of concurrence and dissent with both factions. HRDD is clearly not a cure to a system of international trade and investment where inequality is a structural feature, rather than a bug. However, we should still be able to appreciate it for the symptom relief it offers.

As its significance solidifies extending into both national and EU legislation, the following are some of the common pitfalls that can erode the effectiveness of HRDD, even as a palliative measure.

The myth of equal partnerships

Universality of human rights has long been challenged by TWAIL scholars both on substantive grounds, for neocolonial “efforts to universalise an essentially European corpus of human rights”, and structural grounds, due to the unilateral imposition of European/EU HRDD laws upon trading partners in lieu of an international treaty with equal participation of the Global South states.

Both of these critiques materialise in the day-to-day practices in the corporate world. As a rule, the HRDD originates in the Global North headquarters where Business & Human Rights specialists, including myself, inevitably rely on a European interpretation of international human rights standards. Under scrutiny is usually the subsidiary/supplier based in the Global South.

However, despite the contradictions of promoting a European-/Western-centric take on human rights, inaction would be an even less desirable option. Some within the corporate world still readily resort to arguments such as “our workers in factory X want to work 60 hours a week, we have to accept their work culture” or “if children work from the age of 9 in country Y, who are we to tell them otherwise?” This rhetoric shuts down or circumvents any discussion about the social costs of trade. Moreover, it dangerously conflates tolerance towards exploitation with professed cultural tolerance.

The bigger problem with HRDD legislation is that it allows an economically stronger purchaser to impose rules on a weaker seller, while implicitly also asserting moral superiority over them. In an article dedicated to the ethical compliance audits in South Indian Garment Industry, Geert de Neve (University of Sussex) writes that “at the heart of corporate ethical sourcing policies lies a set of social auditing and monitoring mechanisms through which buyers instigate a regime of control that casts western companies and consumers as knowledgeable, caring and disciplined, and their non-western suppliers as backward, uncaring and lacking self-control”.

This is a sentiment I get even today within my work, and it is supported by a willful misreading of the UNGP’s requirements on leverage and contribution, where the former (“if the business enterprise has leverage to prevent or mitigate the adverse impact, it should exercise it”) is overly stressed and the latter (“if business enterprise contributes or may contribute to an adverse human rights impact, it should take the necessary steps to cease or prevent its contribution”) is largely ignored.

Reluctance to share the costs

Standalone initiatives like Responsible Contracting Project hope to transform the way companies negotiate the terms of their relationships with their suppliers, bringing an element of self-scrutiny on behalf of purchasers and a recognition of shared responsibilities. Similarly, the text of the Corporate Sustainability Due Diligence Directive (CSDDD) contains elements of cost-sharing when doing business with SMEs (Article 7(2)d).

This is, however, far from a universally accepted standard, and the HRDD practices today still pay little heed to how the company’s purchasing practices (i.e., chasing the lowest price, irregular orders, short lead times, no guarantee of continued sourcing, unpredictable and fluctuating orders) can create an environment where upholding basic human and labour requirements is virtually impossible.

Similarly to how companies are looking for the best price-quality ratio in business negotiations, they will have to develop a habit for a good price-sustainability ratio, which will also require taking on some of the costs of compliance.

Efficiency over accuracy  

As a process, HRDD is among the “odd ones out” in the world of mainstream economics. It interferes with the natural appetite for cost-cutting and does not bring any clear financial benefits, certainly not in the short term. Relying on muscle memory from other risk management procedures, companies seek quick fixes, often relying on dubious metrics and checkbox exercises.

In the practice of businesses, the starting point for an HRDD is often a so-called ESG country index/democracy index which will automatically place any company in the Global South in a higher risk category. Such geographic bias does not allow for nuanced information that might be crucial for businesses given their operational context. For example, Sweden and Finland will be ranked “low risk”, and while statistically the majority of companies in these countries might deserve this ranking, the overreliance on country rankings will overlook the systemic challenges prevalent in industries reliant on seasonal migrants, despite investigations revealing instances of forced labor (see also here).

This is just one example of how accuracy is sacrificed for scalability and conveniency of risk management tools. Here, one could hope that the shift of sustainability into the legal compliance domain would make the cost of mistakes higher for businesses and thus push for better quality services in the ESG ratings market.

Arbitrary cut-and-run

When it comes to confirmed cases of serious human rights impacts, many companies are too ready to switch suppliers. The focus is usually shifted from rightsholders to the company’s own reputational and legal risks.

In its negotiating position on CSDDD, the Council of the EU calls for a more nuanced approach to ending business relationships, and warns against worse human rights outcomes:  “severe adverse impact could occur if workers are deprived of living wage by the termination of the business relationship with their employer in order to bring to an end an adverse impact consisting of breaching the right to collective bargaining”.

Yet, there are conflicting opinions among the unions, NGOs and businesses alike on the ethical considerations surrounding the exit decisions. For example, while the global union IndustriALL pushed the brands to withdraw from Myanmar following the military coup in February 2021, the Myanmar Centre for Responsible Business regretted the withdrawals by major businesses drawing attention to the negative impacts it would have on thousands of women workers in the country. In other contexts, such as child labour in cobalt mining (DRC), the exclusion of artisanal miners from supply chains is said to help large companies clean up the supply chains on paper and protect their reputations, while pushing those risking their lives in unregulated mines, away from the sight, further down the supply chain.

The concept of a “responsible exit” stands out as the most vulnerable aspect within the existing HRDD frameworks, given the degree of discretion the companies enjoy in interpreting it. With the UNGP’s HRDD concept gradually moving towards hard law, it seems that businesses might face greater accountability for failure to disengage rather than ever be held responsible for the negative consequences of their disengagement.

Conclusion

In summary, the take of this blog post is that HRDD, often regarded as the pinnacle of CSR, belongs within the confines of the existing neoliberal economic order rather than harbours hopes of revolutionising it.

However, as long as the current trade and investment frameworks persist, HRDD remains a valuable tool, and its effectiveness in alleviating the excesses of these frameworks depends on the collective efforts of various stakeholders, including lawmakers, strategic advocates, NGOs, and in-house sustainability experts.

A critical aspect of these collective efforts involves companies transitioning from a policing approach towards their business partners to truly engaging with them on equal grounds, assuming the cost of their own purchasing practices, abandoning oversimplified scoring exercises and enlisting expertise and time required for nuanced human rights analysis, as well as reevaluating the effects of their disengagement. Without these transformative shifts, HRDD runs the risk of devolving into mere virtue signaling aimed at appeasing domestic consumers and regulators.

The cooptation of BHR: the looming threat of ‘CSR capture’

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This blog post was authored by Prof. Dr. Florian Wettstein – Universität St.Gallen (HSG) | unisg.ch, who was the keynote speaker at the Symposium: Colonisation in, of and through Business and Human Rights, held in April 2023 in Tilburg (the Netherlands). It is part of a Blog Series published on Rights as Usual.

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Corporate social responsibility (CSR) has become an essential part of doing business. There is hardly any large company that does not publish a report on its responsibility and sustainability efforts, that does not have staff or even a department dedicated to CSR, that does not showcase its various responsibility projects and initiatives on its website. While some applaud such efforts, others have warned early on that their deeper aim has never been to transform, but rather to legitimize the neoliberal agenda. They have compared CSR to a ’trojan horse’, that is, an instrument for corporate capture, rather than for corporate change. Such ‘CSR capture’ poses a threat also to the critical potential of the business and human rights (BHR) agenda. How this plays out in practice can be illustrated with the example of companies’ opposition against mandatory BHR laws.

Of course, corporations opposing – sometimes vehemently – new restrictive regulation is not a new phenomenon. They have spent staggering amounts to lobby law makers to design regulatory instruments in their favor and they exert influence at all stages of the process in the lead up and enactment of such regulation. Hence, the mere fact that corporations similarly tend to reject new human rights due diligence (HRDD) legislation both in various domestic jurisdictions as well as at the level of the EU, is not surprising and it fits the usual pattern.

Nevertheless, there seems to be a new feature characterizing the opposition specifically against such new HRDD laws. While commonly the resistance against new regulations tends to invoke what can be called ‘efficiency-based’ arguments, companies seem to have shifted towards ‘responsibility-based’ argumentation in their struggle against BHR legislation. The former set of arguments claims that new social or environmental regulation hampers corporations’ efficiency and thus leads to reduced profitability. Often such arguments are connected, implicitly or explicitly, to a so-called ‘exit threat’, i.e. corporations threatening that they may move their operations elsewhere. This puts pressure on governments to abandon their plans for tighter regulations if they want to remain competitive as an attractive location for lucrative businesses.

Such arguments abound also in the public discussions around mandatory HRDD laws, but there is an increasingly prominent focus on the latter, responsibility-based, set of arguments in this context. Responsibility-based arguments do not emphasize the economic, but the social impact of such regulation, claiming that such laws would undermine the responsibility that companies are already adopting through their voluntary CSR efforts. One argument is that the potential liability risk attached to such legislation would prevent them from continuing their long-existent engagement with affected communities on the ground and thus be counter-productive when it comes to enhancing the position of local stakeholders. In other words: BHR laws are claimed to lead to less, rather than more responsibility.

Accordingly, companies’ position against such laws is increasingly voiced by a group of company representatives whom one would not intuitively associate with a position against BHR regulation: CSR managers. Thus, the very same people who welcomed the UN Guiding Principles on Business and Human Rights (UNGPs) and were at the forefront of implementing them early on are now taking a stance against mandating those very same provisions they earlier voiced support for. What may seem counter-intuitive at first glance, follows a certain logic at a closer look.

When the UNGPs were published in 2011, early implementation efforts by companies leveraged largely on existing CSR structures and resources. This domestication of BHR in and through the existing CSR organization facilitated the reframing of BHR along CSR lines – and it has turned CSR managers into the ‘gate-keepers’ of this newly framed BHR agenda in business practice. The conventional CSR perspective views corporate responsibility essentially as private responsibility, which companies adopt on a voluntary basis at their own discretion. It is corporate-centric, apolitical, and tends to be driven by instrumental considerations. Legal mandates and government involvement do not fit this conventional CSR agenda neatly. In fact, CSR is commonly seen precisely to address the realm beyond such mandates. Thus, the opposition against BHR legislation is not counter to but in line with a conventional CSR mindset. And because BHR has been reframed in the categories of such conventional CSR, such legislation can essentially be portrayed as running counter the BHR agenda itself. Thus, the BHR agenda has successfully been turned against itself.

This is not to say that the new mandatory HRDD laws are the silver bullet to advance the BHR agenda and that companies ought to accept any such proposition without any reservations. However, rather than rejecting them across the board, corporate responsibility would require companies to engage with them in sincere and constructive ways. If the design of current legislative proposals distracts from practical engagement on the ground, the response should be to include stakeholder engagement and the inclusion of marginal voices a requirement both in the process of designing such laws as well as in the actual mandate of such laws. After all, this is a demand that also BHR advocates have voiced repeatedly and thus where business support could secure real improvements of existing proposals and laws. In other words, the answer would be to advocate for stronger mandates, rather than to lobby against weak ones. The UNGPs ask governments to enact a ‘smart mix’ of voluntary and mandatory measures to give practical meaning to the BHR agenda. Corporations who have endorsed the UNGPs early on must play a constructive role not only when it comes to showcasing voluntary efforts, but also in advancing the mandatory part of the deal.

Blog Series: Colonisation in, of and through Business and Human Rights

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This blog post was authored by Dr Dalia Palombo – Tilburg University.

The day I finally sent the last version of my article Transnational Business and Human Rights Litigation: An Imperialist Project? | Human Rights Law Review | Oxford Academic (oup.com) to the Human Rights Law Review, I wanted to forget about anything related to human rights and imperialism for a while. Thus, I turned to my post-submission period reading list, filled with interesting articles I did not have the opportunity to read during the writing process. The first article that sparked my attention was Betting on the Wrong (Trojan) Horse: CSR and the Implementation of the UN Guiding Principles on Business and Human Rights | Business and Human Rights Journal | Cambridge Core by Florian Wettstein. I started reading it and shivered when I realised the article analyses “[..t]he colonization of CSR by neoliberal free market ideology”. Not only could I not help ending up again on the topic of colonisation and business and human rights, but the illuminating article also reminded me that, as much as I spent countless hours analysing imperialism in business and human rights, there was a very different way to understand the topic. It could also be approached from the economic corporate capture, rather than legal transnationality, perspective. I felt that the interdisciplinarity of the topic deserved further investigation.

Thus, when I joined the Netherlands Network of Human Rights Research as a coordinator of the Business and Human Rights Working Group, I discussed the idea with my colleagues, dr. C (Chiara) Macchi – WUR , Jindan-Karena Mann | University of Amsterdam – Academia.edu, and TI (Tamara) Horbachevska – WUR, and it became clear my interest was not isolated. Thanks to funding from the Netherlands Network for Human Rights Research and the Department of Public Law and Governance (PLG) | Tilburg University, we were able to launch a call for abstracts for a symposium. The volume and quality of the abstracts received, as well as the widespread participation in the actual Symposium: Colonisation in, of and through Business & Human Rights | Tilburg University, were impressive. At the end of this long journey, we felt the need to continue our collaboration on the subject. In cooperation with N (Nadia) Bernaz PhD – WUR, we are now launching the Blog series Colonisation in, of and through Business and Human Rights on Rights as Usual | human rights & business (and a few other things). The series will run for a few months, publishing 2-3 blog posts per month. To kick off the series, we have three blog posts from Florian Wettstein (keynote speaker), Nazrin Huseinzade (symposium speaker) and myself.