International environmental standards for transnational corporations.

• Author: Fowler, Robert J.

"[W]ith the exception of a handful of nation-states, multinationals are alone in possessing the size, technology, and economic reach necessary to influence human affairs on a global basis."(1)

1. INTRODUCTION

   By the early 1990s, there were almost 37,000 transnational corporations (TNCs) in the world,(2) and their influence on the global economy is enormous. In 1990, the worldwide outflow of foreign direct investment (FDI), which is a measure of the productive capacity of TNCs, totalled $234 billion.(3) In 1992, the stock of FDI had reached $2 trillion.(4) Parent TNCs have generated some 170,000 foreign affiliates, forty-one percent of which are located in developing countries.(5) Nevertheless, the reins remain firmly held in developed countries, where ninety percent of parent TNCs are headquartered.(6)

   The growth in the number, size, and influence of TNCs has been a matter of international concern, particularly to developing countries, for over twenty years. The expansion of TNCs after the Second World War resulted from a number of factors, including spiralling labor costs in developed countries, the increasing importance of economies of scale, improved transportation and communication systems, and rising worldwide consumer demand for new products.(7) By the early 1970s, TNCs had begun to attract considerable interest and concern. Critics of TNCs have argued that their post-war expansion has become increasingly focused on the exploitation of the natural and human resources of developing countries.(8) Ethical issues arising from TNC activities include bribery and corruption, employment and personnel issues, marketing practices, impacts on the economy and development patterns of host countries, environmental and cultural impacts, and political relations with both host and home country governments.(9)

   It is also frequently argued that TNCs have grown beyond the control of national governments and operate in a legal and moral vacuum "where individualism has free reign."(10) The notion of corporate nationality may become obsolete in a global economy.(11) The trend towards integrated international production and the resultant reorganization of TNC structures to establish "non-equity" arrangements which allow some control over foreign productive assets contribute to this situation.(12)

   Despite the long-held concerns about ethical and other aspects of TNC activity, promotion of FDI has been a recent global political trend. A new international consensus was reached at the seventh United Nations Conference on Trade and Development in 1987 on "structural adjustment," in the form of privatization, deregulation, and liberalization of national economies in return for the easing of the debt burden on developing countries. This has paved the way for a substantial expansion in TNC activities, particularly in the developing world.(13) This expansion has been assisted by recent regional and global free trade agreements, the principal beneficiaries of which may be TNCs.(14)

   One result of these initiatives has been a distinct shift away from earlier proposals for the regulation of TNCs. This is indicated most vividly by the United Nations, recent abandonment of its fifteen-year effort to produce a Code of Conduct for Transnational Corporations.(15) Recent policy initiatives at the international level concerning TNCs focus instead on developing guidelines to facilitate FDI,(16) with the principal issues being the development of standards for fair and equitable treatment, national treatment, and most favored nation treatment.(17)

   Environmental matters are one exception to this trend. In this area, there appears to be a broad consensus that it is appropriate and desirable to develop standards to guide or direct TNC behavior.(18) A parallel and related recognition has emerged in free trade negotiations, where the proposed global agreement emerging from the Uruguay Round of GATT and regional agreements such as the North American Free Trade Agreement (NAFTA) have been recognized to require specific, additional measures concerning environmental, health, and safety matters.(19) However, considerable uncertainty exists about how to apply environmental standards to TNCs in this new era of free trade, liberalization of national economies, and promotion of FDI. TNCs are key players in terms of development activity, and the perception that they operate in a vacuum between ineffective national laws and non-existent or unenforceable international laws has heightened concerns about the current reach and effectiveness of environmental regulation, particularly where TNCs are operating in developing countries. A considerable amount of attention has been devoted in recent years by TNCs and others to the notion of self-regulation of environmental, health, and safety matters.(20) This may in part reflect a belief that TNCs are beyond any form of regulatory control and should develop their own rules to meet public expectations. It may also constitute an effort by TNCs to anticipate further regulation, either by forestalling it or by being prepared in advance to comply with it.

   This Article discusses methods to ensure that TNCs meet environmental protection goals in the emerging international climate of structural adjustment, free trade, and enhanced conditions for FDI. In particular, it focuses on the idea that some consistent or uniform standards should be developed to guide TNC activities wherever they occur. It first examines the nature of TNCs and their FDI operations, focusing particularly on their geographical location, the allocation of FDI between developed and developing countries, and the types of activities to which FDI is directed. This information assists when assessing the usefulness of the various avenues for applying environmental standards to TNCs. There then follows an examination of some key issues relating to the performance of TNCs with respect to environmental matters. In particular, Part III discusses the exercise of double standards by TNCs when operating outside their home countries and the influence of environmental regulation on the location of TNC facilities. The existence of these types of practices is frequently used to justify regulation of TNCs. A consideration of the extent to which they are evident in practice is therefore an essential precursor to the discussion of options for applying environmental standards to TNCs.

   Against this general background, Part IV of this Article proceeds to examine the various methods of applying environmental standards to TNCs wherever they operate. The options addressed are international agreements, codes, and guidelines; unilateral, regulatory measures imposed by either host or home countries; and voluntary measures by TNCs themselves. I conclude by advancing a tentative argument for the extrateritorial application of certain types of domestic law to TNCs, in particular environmental information disclosure requirements such as the community right-to-know provisions contained in the United States Emergency Planning and Community Right to Know Act.(21)

2. CHARACTERISTICS OF TRANSNATIONAL CORPORATIONS AND FOREIGN DIRECT INVESTMENT

   Total FDI outflow expanded steadily during the 1980s, but suffered a decline in 1991 and 1992, largely due to the global recession.(22) Nonetheless, FDI inflows to developing countries during these same two years continued to grow, amounting to $40 billion in 1992.(23) The removal of foreign investment barriers in many developing countries, coupled with structural adjustment measures and a general shift towards free trade at both regional and global levels, makes it likely that FDI outflows will generally resume their previous growth rate over the next few years.

   As the agents of this growth, TNCs undertake activities which span a wide range of industries. This section analyzes how FDI is allocated among different activities to establish where environmental regulation of TNCs may be best directed. Because of the intense debate over the proper role of TNCs in developing countries, this section also provides information concerning the geographical distribution of TNC parents and their affiliates. Finally this section analyzes the overall direction of FDI as between developed and developing countries. Such information is highly pertinent in considering whether TNCs can be induced to adopt sound and consistent environmental management practices wherever they operate.

   1. The Nature of TNC Activities

      The types of activities to which FDI is directed have changed considerably over the past forty years. In the 1950s, the initial growth in FDI. occurred in the primary sector, with investment primarily in renewable resources such as agriculture, fisheries and forests and in non-renewables such as minerals, oil, and gas.(24) Subsequently, the manufacturing sector became the most prominent sector for FDI outflows and accounted for forty-five percent of outward FDI during the 1970s.(25) Although the manufacturing outflows had declined to thirty-nine percent by 1990,(26) the proportion of pollution-intensive industries within total manufacturing FDI has remained high.(27) By comparison, the share of FDI outflow attributable to the primary sector has declined from eighteen percent in 1980 to eleven percent in 1990.(28)

      By far the most rapid growth in FDI activity in recent years took place in the services sector, in which world outflow of FDI expanded from thirty-one percent in 1970 to fifty percent in 1990.(29) The United Nations predicts that FDI during the rest of the 1990s will increasingly focus in the services and technology-intensive manufacturing sectors.(30) While the services sector may at first seem to present less of an environmental threat than the manufacturing or primary sectors, it does include activities such as construction and tourism.

      The rate of FDI growth in the services sector might be slower in developing countries during the 1990s since...