Without it, US companies risk being complicit in the ethnic cleansing of the Rohingya

This article is re-posted from the Truman National Security Project Doctrine Blog. The original article can be accessed here. 

In 2017, at the onset of an ethnic cleansing campaign in Myanmar, the Trump Administration quietly eliminated the only mechanism we had to prevent multinational corporations from contributing to the slaughter. The so-called Burma Responsible Investment Reporting requirements mandated that U.S. companies report publicly on how they intended to prevent their Burmese operations from contributing to human rights violations. The program began in 2013, shortly after economic sanctions were lifted on the longtime military-led nation. As foreign investment began to flow into Myanmar, companies including Coca-Cola, Gap, Caterpillar, and Chevron reported on their protocols for managing human rights risks.

Some of the reports were terrible. Crowley Marine Services, a shipping subcontractor to oil companies, limited its reporting on human rights due diligence to a single sentence: “Crowley Marine Services maintains a comprehensive series of policies and procedures that address environmental and safety issues, as well as human and worker rights.” This was broadlymocked, and company reports became increasingly in-depth after that.

On the other hand, some reports were profoundly impactful, such as those by Coca-Cola, who spent four years on supply chain due diligence before sanctions were lifted. Such efforts, though time consuming, were necessary; as Brent Wilton, Coca-Cola’s director of workplace rights, described it: “There was no transparency there at all…there was a reticence of the government to release any information at all.” For instance, a single company could have four different names, depending whether it was interacting with Thai, Chinese, Burmese, or English speaking counterparts. In other words, Coke might think it had safely avoided a relationship with a dodgy partner, only to learn that it was in talks with that same company operating under a different name. Determining ownership of a company was equally challenging: While trying to avoid doing business with particular military leaders on U.S. sanctions lists, Coke had no way of knowing who owned various businesses because there were no public records documenting ownership structures. For example, after years mapping out its in-county partnerships before opening shop, Coke learned one year into its investment that one of its partners also ran a dodgy side business in jade mining.

When Global Witness found the jade mining connection, it had a ready listener in Coke. Wilton says that the reporting requirements “drove a lot of conversations that wouldn’t have happened otherwise,” both internally at Coca-Cola and with partner companies. For a brief period, all the right pressures were in place to expose human rights violators and enable companies to operate with respect human rights in Burma. However, that window is now closing, and the U.S. government must take some responsibility.

The end of the reporting requirements coincided with the ramp-up of a genocide campaign against the ethnic minority Rohingya population in Rakhine state, western Myanmar. When human rights risks were at their highest, the oil and gas companies who hold petroleum blocks offshore of Rakhine State no longer had to report on how they kept their investments from the military apparatus conducting the slaughters; instead, human rights advocates and financial analysts began conducting their own due diligence.

For instance, Nobel Laureates gathered in Oslo specifically to pressure Statoil to withdraw from its oil blocks in the country. Shell secretly flagged Myanmar as a reputational risk as early as June 2015, when an early rash of Rohingya killings occurred, and faced substantial public backlash when that analysis was exposed by activists. In August 2017, shareholders sent a letter to Chevron calling for a re-evaluation of its Myanmar business. Two months later, investors representing more than $53 billion in assets under management sent letters to six additional oil and gas companies asking them to “reassess their dealings” in Myanmar in light of human rights violations.

Chinese and American companies have not acted on these pressures, but this spring, Shell, Statoil (Norway), and Reliance (India) returned their petroleum blocks to the Myanmar government, partly in response to reputational risksposed by being associated with a genocidal government.

Given the recognized corporate reputational risks associated with Myanmar’s ethnic cleansing undeniable, it is not totally clear why the reporting requirement was eliminated. Coca-Cola, for one, was candid about the value of the program, writing a public letter in support of it shortly before it was canceled. 49 other organizations joined Coke, writing independently to the Department of State to publicly support the requirements; only one, the U.S. Chamber of Commerce, opposed it.

The then-incoming administration just may not have had interest — but the consequences are now clear. An estimated 700,000 Rohingya have been driven from their homes by the military, their villages burned, and their neighbors raped, tortured, and murdered. This carnage has been underwritten with the help of multinational corporations. Last week, for example, Kirin was exposed for having donated $30,000 directly to the military leaders carrying out the atrocities.

The Rohingya are not the only ones affected, however: Ethnic violence has also escalated against Shan and Kachin ethnic minorities. Meanwhile, the American Embassy’s website has scrubbed all record of the human rights reporting requirements, and the U.S. Chamber of Commerce in Myanmar is seeking to ramp up investment. At the height of the ethnic cleansing last year, it brought a delegation of U.S. bank representatives to Yangon, aiming to have the remaining U.S. sanctions removed.

Against the resounding silence from so many U.S. companies and agencies in the face of human rights violations, Coke is an exception. It remains both heavily engaged in Myanmar and circumspect about the risks. Coke has only six in-country suppliers because it cannot be confident that, for example, sugar suppliers are ethical. As Wilton points out, “The environment is not great and has deteriorated.” When Coke’s public affairs team in Yangon sought to bring aid to Rohingya refugees, authorities wouldn’t permit the company to enter Rakhine state; consequently, Coke had to bring aid through Bangladesh to reach the displaced populations.

Yet, even they have scaled-back their resources dedicated to human rights in Burma, Wilton pointed out that he just couldn’t muster the resources to write a report akin to those he wrote when reporting was mandatory; therefore, though Burma is included in Coke’s seminal human rights report, the overall report is a far cry from what it was under former reporting requirements.

The Burma Responsible Investment Reporting Requirement was a powerful tool with low cost. Yet, without so much as a platform for publishing such reports, most U.S. companies are not protecting their reputations or the lives of Burmese citizens. It would be feasible to keep this blood off our hands preemptively. It will be impossible to wash our hands of the violence after it occurs.

The Pellas are the wealthiest family in Nicaragua. They’ve been in sugar since 1890. They own the largest mill, cane farm, and distillery in Nicaragua, selling their Flor de Cana rum in 40 countries. When reporters started tracking deaths of Pellas fieldworkers, bartenders took aim at Flor de Cana. Bars stopped stocking the rum. Servers dumped their bottles in protest. Swiftly, the company revamped its whole production chain.

At the Pellas sugar mill, SER San Antonio, changes happened at all levels. Working hours at the mill dropped from 12 to 8 – working hours in the field dropped from 8 to 4. SER San Antonio took over all harvesting for all its smallholders, to make sure that the cutters harvesting cane for its mill were working in adequate conditions.

They mechanized a large amount of their harvesting operation, but they have retained 170 cutters, who are now fitted with protective gear that includes a 5L water bottle and a shade tent for mandated hourly rests. Their workdays were cut in half, from 8 hours to 5 (with 4 15-minute breaks), and their pay rate per ton of cane was boosted to accommodate the lost hours of income-generation.

These changes were necessary, but they aren’t perfect.

The state criminalizes protests, the wages, though improved, keep people in abject poverty that makes academic success unattainable for workers’ children. The access to healthcare is restricted to public facilities, which are rarely staffed and funded to address complex worker health needs, and employee healthcare access is severed when a worker is let go (i.e. when he gets too sick to work). Families affected by kidney disease are provided “basic basket” food supplies monthly, which is seen as both a major benefit and a mechanism for controlling dissent.

But a remarkable unforeseen consequence of all these changes is that, though they cost money upfront, they’ve benefitted business. Fieldworkers’ efficiency improved 40% when their hours were cut by half, and accidents and injuries decreased when mill hours workers were reduced. The shift to mechanized harvesting has improved overall harvest quality and quantity.

Human rights doesn’t always pay, but there are market benefits to not working your laborers to death. I don’t want to pretend the market totally gets this yet, but BlackRock CEO Larry Fink seems to have. Last week he penned a letter to CEOs. It’s worth a read. Fink thinks that “long-term value creation” requires companies to understand “the societal impact” of their businesses. This includes “structural trends – from slow wage growth to rising automation to climate change.”

In sugar, the “societal impact” is profound and entrenched. We’re talking about a crop with a quintessential slave history. “Long-term value creation” may involve the replacement of cane cutters with machinery, though that carries its own societal impacts.

There is no one-size-fits-all model for making sugar ethical, but there is some remarkable work being done at the field level that, we think, could be standardized. SER San Antonio has made some key changes to working conditions. A mill in the Dominican Republic has gotten its smallholder farmers to provide protective gear to laborers. A mill in South Africa has sold 49% of the company directly to the workers themselves. Malawian and Swazi farmers have “incorporated” themselves, enabling women to be shareholders in places where they’re not allowed to be landholders.

The business and human rights movement has not yet charted these problems or remedies. NomoGaia is conducting research in sugar Belize, Nicaragua, the Dominican Republic, and, coming up, in South Africa and Swaziland. We think a rights-respectful sugar supply chain might be possible, drawing from lessons learned worldwide. It’s scary new territory for us — usually we know precisely who the power-players are, and how reputational risks can alter their decisions. Those relationships are different in sugar.

We think it’s worth the risk to see if we can affect change in this commodity, though — if we can get human rights violations out of sugar, just about anything is possible.

Something is killing the sugarcane workers of Central America. In the past two decade, over 20,000 young men in Nicaragua and El Salvador have died of kidney failure – a disease previously thought to occur only in the very old. Studies have found that women and children in the area are also suffering, though less fatally. An estimated 55% of the population of one town adjacent to the country’s largest sugar mill is affected. In that town, Seventy-five percent of deaths of men between 35 and 55 years are due to kidney disease. It’s not just in Central America, though. Once the kidney failure epidemic had been identified, cases started showing up in Sri Lankan agriculture, and in the cane fields of Thailand, and beyond.

At first activists thought it was pesticides destroying workers’ kidneys, but the research was inconclusive. Further studies found occupational links: cane cutters slaved in 100-degree heat for 12-hour days without food or water. Workers were literally sweating to death, losing 2-3 pounds a day in fluids.

But data shows that better hydrated workers seem to actually suffer more. At this point, there are about a half-dozen theories about what is causing this kidney failure epidemic. One thing is clear, though: sugar cane cutters get sick the youngest and die the fastest.

If it were mine workers, we would know just what to do: we would splash the mining companies’ names in the headlines, tying them to the deaths and demanding actions. They would comply, as they did with HIV/AIDS, silicosis and tuberculosis. Some would come kicking and screaming, but investors would know which companies were on the ball. Eventually, the market would punish the bad (and late) actors.

Sugar isn’t like that. There is no one specific company to point fingers at or to shame into change. In India alone there are 550 sugar mills. Unlike chocolate companies (Nestle, Hershey, Cadbury, Mars, Barry Callebaut) which buy almost the entirety of the world’s cocoa crop every year, Coke and Pepsi purchase no more than 2% of the world’s sugar supply, often from the same small subset of refiners.  For example, Coke and Pepsi both source from the same 20 mills in India (out of 550 available), where standards are the highest. But even the mills with the highest standards are not heavily regulated. For example, of Brazil’s roughly 250 mills, about 43 are certified as ethically operated, meaning they endeavor to conserve water, reduce carbon and agrichemical emissions and abide by national labor law. A recent review found that 18 of those 43 had committed major environmental or labor violations in recent years. They simply paid small fines as penalties.

Even if regulation was strong, supply chains would still be very difficult to manage. Coke might endeavor to buy domestic sugar from Louisiana Sugar Refinery, but that refinery might source raw sugar from mills in the Dominican Republic, El Salvador and Mexico. That raw sugar, in turn, might be harvested by the mill owner, or it might be harvested by thousands of small farmers, cutting cane by hand. The white sugar in your pink C&H bags could come from the Philippines – Your Florida Crystals could come from Zimbabwe.

In short, we don’t know who to threaten or boycott to actually make a difference for cane cutters.

But there are cases where we have levers for change. The Pellas family from yesterday’s blog? That’s one. Something amazing happened when bartenders realized their mojitos were part of the problem.  More tomorrow.

I’ve been trying to write about sugar in Nicaragua for weeks now. Blogs are coming. Meantime, here’s a poem written by my host in Managua. I stayed with Elizabeth, her sister and her mother in a little house uphill from the Bonsucro conference venue.

Aun vivo a pesar que el sol y las estrellas están lejos de mi.
Aun vivo a pesar que existen mil fronteras en mi tierra.
Aun vivo a pesar que existen leyes escritas por el hombre para bien y para mal.
Aun vivo a pesar que mueren cada día miles de niños por falta de un pedazo de pan.
Y porque no seguir viviendo si lo único que no tengo es tu amor.

Elizabeth Chamorro Cabistan.

(I still live, though the sun and stars are far from me / I still live, though there are a thousand boundaries in my land / I still live, though laws are written for good and evil / I still live, though thousands of children die each day for lack of a slice of bread / And why not keep living, if all I don’t have is your love?)

NomoGaia isn’t staffed with literary scholars, but Elizabeth recited this to me when we were talking one morning about the politics of sugar in Nicaragua. She saw in our research her sentiments about the country she loves. Political divisions, inequitable laws, and grinding poverty are persistent realities, even as Nicaragua has opened for business and tourism.

If you clicked on that link, you met the Pellas family.

Powerful families and political factions have divided Nicaragua throughout history, moving its capital city at least 4 times since the country’s independence. The liberals of Leon brushed up against the Pellas family – sugar barons since the 1800s – nationalizing the Pellas holdings in 1979. But since 1990 the family has been back in business, seeing its wealth grow exponentially in Nicaragua. Carlos Pellas, the current patriarch, talks a good game about social responsibility, but conditions for his cane workers only improved once he was removed from a management role at the sugar operations.

On his watch, thousands of young cane cutters died. They’re still dying. More about that tomorrow.

This summer, the world’s largest pension fund expanded its focus on environmental, social and governance investing. Japan’s $1.26 trillion fund is so big it can actually drive the market. Immediately after the Japanese pension fund’s announcement expanding its ethical investment to 10% of its portfolio, stocks on the ESG indices spiked. In other words, pensioners and shareholders profited purely off of the ethical performance of certain companies.

A growing proportion of pension funds are going ethical – Norway, at $900 billion in assets, has long been a leader in ethical investing, as has California’s $323 billion fund, Calpers. In August, the UK Pensions Regulator warned that its trustees were creating long-term financial risk by failing to take climate change, responsible business practices and corporate governance into account when making investments. In response, the industry’s largest consultants pledged to pressure asset managers to improve ethical standards at listed companies.

Part of what makes Japan’s shift such a big story, beyond the enormity of its fund, is that the country has long been underrepresented in discussions of business and human rights. The pension fund’s move is likely to shape the business decisions of Japan’s major publicly traded companies. First, companies have an increased incentive to be listed on one of the three ESG indices the pension fund is now tracking. Since the fund has signaled a strong intention to make its investments ethical, companies that don’t meet ESG standards could rightly fear being left behind. The fund is already pouring roughly $29 billion into ethical investing – how much will that increase in the future? Additionally, the move is expected to prompt smaller Asian corporate and public pension funds, which have so far been slow to adopt ESG investments, to allocate more into such stocks.

Second, companies could face substantial reputational risk if they get cut from the indices for failing to meet ethical standards. The chief executive of FTSE Russel, which compiled one of the three indices, told Reuters he sees this as an opportunity “to improve the ESG practices of companies in Japan.”

Now that there is a major market incentive to get onto the indices, are companies going to try to game the system, or will they engage meaningfully on their human rights risks? It depends. As noted above, mere lip service won’t suffice if companies end up getting booted from the indices for poor ESG performance. However, many (western) companies have grown practiced at developing public reporting to present ethical operations, while concealing major social risks.  Two thirds of portfolio managers recently polled said they used corporate reports and statements to evaluate ESG performance – only 3% went beyond regulatory filings, corporate engagement and public information review. That makes ESG standards pretty easy to circumvent – particularly the Social standards, which cannot be legitimately benchmarked by carbon emissions figures, codes of conduct, and other internally drafted reports. What’s more, most firms (54%) outsource their ESG expertise to third parties – only 31% of portfolio managers have internal training on ESG issues in investment analysis. The FTSE index selected by the Japanese pension fund is developed by experts in ESG, but it relies on publicly available information, supplemented by company comment.  This gives companies an opportunity to refute NGO allegations, but it leaves no room for NGOs to provide a counterpoint. It has left FTSE’s ethical funds vulnerable to criticism that, in the UK, its largest holding is HSBC, the bank that laundered money in Mexico for drug cartels and manipulated LIBOR interest rates. Its second largest holding, Royal Dutch Shell, is currently mired in a $1.3 billion corruption scandal in Nigeria.

That’s not to undermine the value of ESG funds overall, but rather to stress that we do not have tried-and-true models for benchmarking actual ESG performance. To the credit of Japanese businesses, they are not looking to merely copy existing (western) approaches. Supported by consultants at EY and the Global Compact Network of Japan, some Japanese business leaders are looking to vet their own operations for risks, rather than rely solely on their CSR reports to generate good ESG scores. It will be worth watching how they approach ESG going forward.