FDI and human rights have developed separate legal systems based on international law. Though unrelated, the opportunities for the systems to intersect are growing with each new FDI project.

The range of international arbitrations engaging human rights and FDI projects is increasing annually. Legal actions based on the complicity of corporations in rights violations are on the rise and, though many of these involve natural resource projects, there have also been consumer goods (ie, beverage industry) projects that have come under the spotlight for alleged violations.

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The Ownership, Location and Internalisation (OLI) paradigm which underpins most FDI decisions is increasingly affected by human rights considerations.

Investors and shareholders are also paying increasing attention to human rights, which cannot be ignored. Divestment of companies in response to highlighted human rights abuses by host states – think Kodak in Myanmar – is a real possibility as a result of shareholder pressure. Unlike the days when human rights abuses by a state ensured a steady source of cheap and controllable labour, the growth of human rights activism has ensured that political headaches will stymie, rather than support, the labour force – a key OLI factor.

Intelligent negotiation

FDI is a major boon to host states as well as investors if husbanded properly. This requires a commitment on the part of corporations to educate themselves about human rights. From the most basic players in civil society to the UN, initiatives are under way to better define the relationship between business and human rights. This is driven largely in response to the impact, both positive and negative, that more than 3000 bilateral investment treaties (BITs) and home government agreements (HGAs) have had on local communities across the globe.

In an effort to encourage lucrative investment or because of sheer lack of planning, states have negotiated BITs and HGAs that impede social reform, due to the mandatory binding international arbitrations clauses and ‘stabilisation’ clauses that penalise states for any reforms that have a negative impact on an investment.

A recent example is the International Centre for Settlement of Investment Disputes (ICSID) arbitration, Piero Forest and Others vs Republic of South Africa. Italian and Luxembourg-based investors sued South Africa for compensation following the passage of the Mineral and Petroleum Resources Development Act 28 of 2002, which the investors claimed deprived them of their mineral rights without just compensation. Act 28 was designed to redress inequality issues according to South Africa’s international and constitutional human rights obligations. Therefore, the state’s legal human rights obligations and private FDI interests reached an impasse and led to costly arbitration and negative publicity. (The case was withdrawn before final views were taken.)

As states continue to reinforce their human rights obligations there will be an inevitable impact on FDI. Though profitability plays a key role during BIT and HGA negotiation, it no longer pays to disregard inevitable human rights issues. Both corporations and states must negotiate these agreements more intelligently and give due consideration to social reforms that are on the horizon and how they may potentially affect new FDI projects.

The ruggie framework 

Anyone in international business should be well acquainted with the name John Ruggie, the UN secretarygeneral’s special representative on human rights and transnational corporations and other business enterprises. In 2008 he introduced a framework for delegating human rights responsibilities between governments and companies, and it is fast becoming the go-to guide on the subject. The framework features three distinct but interrelated pillars: protect, respect and remedy. The first pillar focuses on the need for states to strengthen their domestic human rights policies, which would include model BIT and HGA human rights clauses, in order to protect against human rights abuses, including those by businesses. However, it is the second pillar that will impact FDI for the indefinite future, as it requires that businesses respect human rights.

‘To do no harm’ is the most basic explanation of respecting rights and is the fundamental requirement for businesses under the framework. This requires familiarisation with human rights issues and rightssensitive due diligence.

Comprehensive due diligence for a prospective FDI project goes a long way towards avoiding human rights catastrophes. There are few human rights not implicated by FDI, thus it is important for corporations to understand how rights are related to their management functions, including areas such as human resources and supply chains.

Potentially implicated rights include not only labour rights, but also non-labour rights such as the right to life, liberty and security, the right to political life and the right to peacefully assemble. Each of these can be infringed by a transnational corporation moving into a host state. Obviously corporations are bound to comply with national law, but under the framework, respecting human rights means doing so even in the absence of domestic law.

Human rights due diligence

 One of the most compelling features of the framework for FDI projects is human rights due diligence that is both inductive and fact-based. To assist corporations, Mr Ruggie outlined the following as the bare minimum necessary for a basic human rights due diligence process:

 ■ a corporate human rights policy;

 ■ human rights impact assessment;

 ■ a corporation-wide integrated human rights policy; and

■ the tracking of rights impact.

The human rights impact assessment is the most radical feature, though many corporations have been doing some form of this as part of an overall environmental impact assessment. According to Mr Ruggie, there are three sets of guiding principles to corporate due diligence and these are easily transferable into the FDI context under the OLI paradigm. First, identify the context in which the project takes place in the host country, including highlighting any specific human rights challenge endemic to the location. Second, identify what potential human rights impacts the project may have within the specific country context. Finally, determine whether the project may contribute to human rights abuse through the relationships connected to the business activities, such as with investment partners, suppliers, government agencies and non-state actors. Many states now make human rights-sensitive due diligence mandatory through their regulatory procedures and legislative measures.

This type of due diligence includes investigating the human rights situation in situ by getting advice from experts in the area, nongovernmental organisations and by canvassing the potential project site. It also involves understanding the international and domestic human rights obligations owed by the host state and whether it has the legislation in place to facilitate these obligations. Human rights-sensitive due diligence should be the natural extension of corporate risk management.

The framework and the future 

The Ruggie framework has already been referenced by various countries, including France, Norway, South Africa and the UK, during their evaluations of current business policies. The International Chamber of Commerce has also highlighted the importance of this tool for understanding the relationship between business and human rights. In April of this year, Mr Ruggie reported that five companies (Carbones del Cerrejón, Esquel Group, Sakhalin Energy Investment Corporation, Tesco and Hewlett-Packard) were already testing company-based grievance mechanisms according to the third pillar of the framework, which addresses access to remedy for alleged abuses.

The UN Global Compact, the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, and the Organisation for Economic Co-operation and Development’s (OECD) Guidelines for Multinational Enterprises also address the intersection of corporate responsibility and human rights. Though only soft law, subscription to these types of selfgoverning initiatives often facilitate the public procurement process or help investors obtain financing for international projects from banks which condition loans upon social responsibility, including respect for human rights. These instruments also provide benchmarks against which investors, civil society and other social actors may judge a corporation’s human rights impact.

The OECD and the International Finance Corporation are in the process of updating their policies on corporate performance in respecting human rights. Mr Ruggie has also lobbied the UN Commission on International Trade Law to provide greater transparency in investorstate proceedings when there is a public interest. Each of these efforts will no doubt pave the way for greater human rights considerations in formerly business-only oriented fora. Considering the recent move by ICSID to allow amicus briefs to be submitted on human rights and environmental issues surrounding the Piero Foresti dispute, a move toward transparency is possible.

There is still a long road ahead before business and human rights come together to fill the governance gaps that facilitate rights violations during business ventures, including FDI projects. But the current initiatives make clear that this meeting is not a question of if, but when.

Kasey L McCall-Smith is a doctoral researcher at the University of Edinburgh,specialising in treaty and human rights law