FDI and the Environment: From Spaghetti to Sustainability

1. FDI and the Environment:From Spaghetti to Sustainability Workshop on US-AEP’s New Investment Study April 4, 2001 Lyuba Zarsky Nautilus Institute http://www.nautilus.org

2. FDI and Environment: Linkages • Micro: Technique (technology and management) Sectoral: Composition effect Macro: Scale effect Policy/political economy effect Local Global

3. FDI and Environment: Key Questions • Rules and regime: Does openness to foreign investment push standards up or down? • Practices and performance: Do foreign companies perform better? • Corporate social responsibility: Do environmental standards ‘beyond compliance’ create value for companies?

4. Is There a System-Wide Bias? • Pollution Haven Gaps in standards have little affect on company location decisions. • Composition effect Openness reallocates investment towards higher value sectors. Environmental impact?

5. Race to the bottom? ‘Incentives-based’ competition for FDI between locales and countries keeps environmental standards ‘stuck in the mud’—standards are too low and rate of change is slow • International core environmental standards?

6. Do Foreign MNCs Perform Better? Yes: Newer, cleaner technology Better management practices Deep pockets Domestic NGO and consumer pressure Global company standards

7. No: Technology dumping MNCs follow local standards Large-scale environmental impacts Shielded from domestic consumer pressure because of lack of information/disclosure

8. Havens, Halos and Spaghetti • Question: Is FDI ‘good’ or ‘bad’ for the environment? • Evidence: Statistical studies, case studies, surveys • Answer: Yes, no, it depends.

9. Yes: Air quality improvements (e.g. recent World Bank study) No: Widespread degradation (e.g. minerals and oil—PNG, Nigeria, Amazon, Indonesia) Scale effects

10. It depends: • Technology vintage • Conditions of sectoral competition • Local regulation and enforcement • Company practice (global vs local standards, best practice) • Community pressure

11. High Tech in Taiwan: A Case Study • High level of incentives-based competition • Companies were shielded from local environmental regulation—poor waste management • ISO 14,000 certification very easy • High level of water pollution • Need to focus on supply chain management

12. How Can FDI Promote Sustainability in Asia? • Key role of Governance -- Rules and regs of government and capacity to enforce them -- Practices and norms of companies and investors

13. Enhancing the Role of FDI As a Vehicle for Sustainability • Corporate Social Responsibility • Socially Responsible Investment

14. What is ‘Corporate Social Responsibility’? • Company mission directed at producing social goods as well as adding value for owners/shareholders • ‘Triple bottom line’ - financial - social/economic - environmental • Sustainability as integrating vision and principle

15. Company internal management systems • Track environmental and social impacts (auditing, reporting) • Set environmental/social performance benchmarks • Make information available to managers, stakeholders, public

16. Community engagement: Consult regularly with stakeholders - Workers - Investors - Local communities - Suppliers - NGOs

17. Ethics by another name • Corporate citizenship • Responsible industry • Social markets • Responsible entrepreneurship • Community engagement • Enlightened business

18. Do Higher Standards Create Value? • Substantial evidence that higher standards are linked to company value • Do higher value companies have better standards or do higher standards create value? • Leaders and laggards: good environmental management as part of good overall management

19. Managing for CSR • Performance Benchmarks - quantitative/qualitative - compliance and beyond compliance - ‘best practice’ - continuous improvement • Information Disclosure • Auditing/monitoring • Social reporting - third party verification

20. Socially Responsible Environmental Management • End of pipe: Reduce water and air pollution through greater efficiency and better end of pipe treatment • Clean technology: Modify internal processes to prevent pollution and enhance efficiency of energy and materials inputs • Product stewardship: Establish systems to re-use and recycle end-products • EMS: Implement management system with performance indicators, evaluation, audit

21. Drivers of CSR in Asia • Local NGOs (e. g. Green Rating of Industry Project, Center for Science and Environment, Delhi) • US and European NGOs and labor groups (e.g. Fair Labor Agreement in textile sector) • Consumers, both locally and in Europe/US (e.g. ISO 14,001 certification for market access)

22. Drivers of CSR in Asia • Parent companies of Asian subsidiaries (e.g. Hewlett Packard) • Foreign TNCs with global standards (e.g. Intel) • Procurement/supply chain management policies of TNCs (e.g. Agilent Technologies)

23. Socially Responsible Investment • Export-import agency guidelines • International Finance Corporation guidelines and Ombudsman • SRI financial firms (e.g. NPI Global Care Asia Pacific Fund) • Shareholder advocacy (e.g. Newmont Mining; PetroChina Goldman Sachs)

24. Drivers of CSR in Asia • Asian business leaders • Increasing embrace of ISO 14,001 • Participation in local regional and international conferences (e.g. Prince of Wales Business Leaders Forum) • Is social responsibility good for business? Recent studies of TNCs suggest it is.

25. Where is CSR heading? • Uptake in Asia—tailoring the model • New roles for public policy? • Reporting framework • Mandatory disclosure • Guidelines for verification

26. Role for US-AEP? • US-AEP could play role in helping to promote CSR and SRI in Asia • Trainings, education, information in Asia • Work with domestic SRI and pension funds (e.g. CALPERS) in developing realistic screen for Asian investment