Multinational Enterprises and Environmental Standards

MA-Thesis / Master von Alexander von Taysen

Abstract:

‘Globalisation’ has been narrowly defined as ‘the free movement of capital and the increasing domination of national economies by global financial markets and multinational corporations’. The resulting imbalance in the relation of global markets on the one hand, and national regulation of socio-economic systems on the other, poses problems in all fields, not least in the protection of the environment. The activities of the oil company Shell in Nigeria and in the Brent Spar case were put in the international spotlight as high-profile examples for the environmentally damaging activities of multinational corporations. These cases not only showed the complexity of structures of responsibility in these enterprises, but also the impact of ‘naming and shaming’ campaigns by non-governmental organizations.

An enterprise becomes multinational if it realizes foreign direct investment (FDI), which occurs when residents of one country acquire control over a business enterprise in another country (by contrast to long-term portfolio investment – without the control effect – and short-term capital flows). FDI itself is ‘(1) … investment … made outside the home country of the investing company, but inside the investing company. Control over the use of the resources transferred remains with the investor. (2) It consists of a ‘package’ of assets and intermediate products, such as capital, technology, management skills, access to markets and entrepreneurship’ In 1996, the United Nations Conference on Trade and Development, the UN body occupied with, inter alia, investment issues, counted approximately 38,700 major companies with control over 265,000 affiliates abroad. Headquarters of multinational enterprises (MNEs) are seated in fifty-nine countries (8% in the United States, 11% in developing countries). The 100 biggest MNEs, however, are all seated in 13 developed countries, which are organized in the Organization for Economic Cooperation and Development (OECD).

While environmental regulation has been a constant topic in national economies, its internationalization began 30 years ago at the 1972 Stockholm Conference on the Human Environment. On the international political level, the situation is dominated by an argument between the rich ‘north’, driven by the goal of prosperity and a strong sensitiveness for environmental issues, and the poor ‘south’ claiming a right to economic development without the burden of high environmental standards. On the legal front, two regimes oppose each other, the economic regime around the WTO rules and the environmental regime in such fields as climate change and biodiversity.

Economic growth and the protection of the environment are the two ends of a debate with multinational enterprises in its center. For a better understanding of the background of the debate, some economic aspects must be presented. The operations of modern MNEs depend on an international economic order based on free trade and the free flow of investment. Open markets enable them to establish affiliates in other countries and to profit from the possibility of worldwide production. The international environmental regime has a great impact on MNEs as well. If states, in compliance with their international environmental obligations, impose stricter legislation on production methods or products, the costs of production rise. The resulting effect on profits affect the decision of MNEs where to invest. According to economic theory, countries with relatively low input costs, for example because of lower health and environmental standards, have a comparative advantage over countries with high standards and attract more capital. As a consequence, countries in need of capital would keep their standards low or even reduce the level of environmental regulation. This mechanism pulling production sites of MNEs to low-standard countries has been called the ‘race to the bottom’. The easy location of operations which consume a lot of non-renewable resources to ‘pollution havens’ is made possible by the opening of markets. Environmental activists predict a dramatic reduction of the effects of national legislation if companies can easily go to countries where less regulations restrict their operations and oppose the international economic order. Supporters of open markets and a liberal economic order claim that global market forces diffuse best management practices, as MNEs export the high standards applicable in their home states to their operations abroad. Consequently, they argue, ‘pollution halos’ are created. It seems, though, that there is only little evidence for the automatic realization of both hypothesises. While cases can be found in point for ‘pollution havens’ as for ‘pollution halos’, it is difficult to make general assumptions.

Aside from the debate among economists, there is a vivid debate among lawyers and diplomats over which regulation is most appropriate for multinational enterprises in order to ensure compliance with environmental goals. The ‘World Summit for Sustainable Development’ adresses this question but is unlikely to come up with new international regulations. According to a statement by UN Secretary-General Kofi Annan the summit aims to move the whole environmental debate from commitment to action, especially in five key areas: water, energy, health, agriculture and biodiversity.

The main problems to be discussed in this dissertation will be, first, the question whether the two legal regimes, the international law on the protection of the environment on the one hand, and the international law of trade and investment on the other, are compatible. The inseperability of trade and investment issues will allow us to focus on the precedent setting debate over the relationship between trade and environment which was subject of several cases at the Dispute Settlement Body of the World Trade Organization.

Secondly, the question will be discussed whether non-binding instruments and self-regulation can ensure compliance of economic actors with international environmental standards. Special room will be given to the presentation of innovative approaches.

The most significant regulation of MNEs stays at national level. The most changes and challenges for regulation, however, are at multinational level. This work will therefore concentrate on the treatment of the international level of legislation and dispute settlement and will deal with questions of global governance. We will start with an introduction to international environmental and international economic law, which is necessary for the understanding of the discussion of the issues at stake in chapter III.

The second part contributes questions of corporate social responsibility. This concept provides a very different perspective on the issues of the first part. It presents a bottom-up approach as a possible solution to regulatory problems encountered in the top-down approach in the first part.

Considering the restricted space of this work, the enormous scope of the issue forces us to pick out aspects which we considered as being of special importance.

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