SECURING A LICENSE TO OPERATE: THE ROLE OF CORPORATE SOCIAL RESPONSIBILITY

By Geir Westgaard, Vice President Country Analysis and Social Responsibility Statoil ASA

Remarks prepared for The World Petroleum Congress Rio de Janeiro, September 1-5, 2002 Block 4, Forum 2: Balancing Environmental and Social Responsibility with Economic Realities

The author is a former Norwegian diplomat who has served in Moscow, Vilnius, and Washington, D.C. He has also worked as a foreign policy adviser in the Office of the Prime Minister of Norway. From 1998 to 2000, Mr. Westgaard was Statoil's representative in Washington, D.C. He holds a Bachelor of Arts from the University of Oslo and a Master of International Affairs from Columbia University. He was a Fellow at Harvard Universitys Weatherhead Center for International Affairs in 199798.

Introduction How can oil, gas and mining projects contribute to sustainable development and poverty reduction? This is the question currently being probed by the World Bank Group in the Extractive Industries Review. It is also a question with which we in Statoil are familiar. It reflects a growing concern among stakeholders about the impact of our activities on people, the environment and society. It affects the general acceptability of oil as a commodity and as a business. It represents new risks for the petroleum industry, risks that could jeopardize our future license to operate unless properly managed. This paper argues that corporate social responsibility or corporate citizenship the commitment of business to contribute to sustainable development, working with employees, their families, the local community and society at large to improve their quality of life is essential for the long-term viability of multinational enterprises in general, and international oil companies in particular. Our ability to do business will be limited unless we can demonstrate that our presence, especially in the poorer countries and the emerging market economies, is a source of human progress. Corporate social responsibility (CSR) combines strong financial performance with good environmental and ecological performance and socially responsible behavior. It is about sound business practices. It is about how we earn our profits. It is about conducting business in a manner that maximizes benefit and minimizes cost. It is also about delivering what we promise to employees, to investors, to customers and to everyone with whom we do business. Corporate social responsibility is the concept that business is accountable for its impact on all relevant stakeholders. In our view, corporate social responsibility does not entail a new role or mission for business. It merely adapts the principles of accountability and responsibility to a global economy characterized by deregulation and privatization, rapid advances in communication technology and the rise in the power of the consumer. CSR can be seen as a means to achieve robust profitability, which implies striking a balance between short-term earnings and long-term growth.

Securing a License to Operate: The Role of Corporate Social Responsibility

The challenge of acceptance A license to operate depends on both access and acceptance. Access is the formal license or concession granted by governments. Acceptance is the informal license granted by societies. Acceptance - or lack thereof - is based on how stakeholders assess the economic, environmental and social impact of a company or a project in the petroleum industry. Where access and acceptance go together, mutually reinforcing one another, the license to operate is generally secure. Where there is access and little or no broader acceptance, however, the license to operate is less secure and can more easily be jeopardized. Acceptance rests on a general sense that a company or a project promotes growth and development. But the stakeholders are many and varied and perceptions differ as to what constitutes the common good. Employees, customers, investors, business partners, local communities, governments, non-governmental organizations, multilateral institutions and the public at large have diverse, sometimes even contradictory, interests and concerns. Securing a license to operate implies being able to manage different demands, expectations and constraints locally, nationally and globally all at the same time. Statoil has always viewed itself as a source of human progress. We provide some of the energy that the world needs and without which there would be no development. Our primary contribution to the communities in which we operate is measured in terms of value creation. This is the impact of our investments on employment, tax revenues, transfer of skills and technology, procurement of goods and services, and social infrastructure. Increasingly, however, we find that our economic contribution is ignored, belittled or discounted. In the public arena, our arguments about positive spin-offs and multiplier effects are largely overshadowed by concerns about the environmental and social impacts of our activities. The very nature of our business - we extract non-renewable fossil fuels raises serious environmental concerns. We live off natures capital, not its interest, and that according to some stakeholders is not sustainable. They demand to know more about how we manage and mitigate environmental risks such as the removal of soil and forest canopy; soil, air and water pollution, including impacts on global warming; and the destruction of fragile ecosystems and diminished biodiversity. They expect us to responsibly manage the life cycle of oil and oil-related

Securing a License to Operate: The Role of Corporate Social Responsibility

products from both environmental and social perspectives. Some stakeholders also find international oil companies guilty by association when the presence of major oil and gas deposits in developing countries seems linked to negative phenomena like corruption, violence, human rights abuses, environmental degradation, and continued widespread poverty. Oxfam America, for example, claims that oil and gas activity in developing countries correlates with high levels of child mortality and malnutrition, low levels of spending on health care and education, low rates of literacy, and high levels of spending on armaments. On that basis, Oxfam America concludes that the best course of action for poor states would be to avoid exportoriented extractive industries altogether. It is this perception of oil, gas and minerals as more of a curse than a blessing at least from the point of view of sustainable development that prompted the World Bank Group to launch the Extractive Industries Review (EIR). The Bank was facing strong criticism from a number of environmental, human rights and development NGOs for its financing of oil, gas and mining projects. The EIR, which is to be completed by June 2003, will examine the economic, environmental and social costs and benefits of such projects locally, regionally and nationally. This is the backdrop against which Statoil seeks to implement corporate social responsibility across the value chain and in 23 countries. And given that the legitimacy of the oil and gas industry is being questioned, we need to demonstrate - in a tangible way - that we are, indeed, a force for good, in the sense that those directly affected by our investments are better off because of our presence as well our practices. Creating value and conveying values - setting an example of responsible business conduct - go together, much as financial, environmental and social performance are inextricably linked. The key to successful implementation of corporate social responsibility is good governance - with transparency, clear accountabilities, proper and effective controls, checks and balances, and sound risk analysis and risk management. This is, of course, also the recipe for business success in general, which is why the growing number of ethical and socially responsible investors look at corporate social responsibility as simply a proxy for good management. Success, moreover, also hinges on our capability to listen to those who affect and/or are affected by our activities, to understand what is

Securing a License to Operate: The Role of Corporate Social Responsibility

happening in society, and to argue our case with anyone at any time. We should bear in mind that stakeholders are in a show me mood. They expect to see proof of performance. They cannot be bought off with smoke and mirrors. In the risk management business, a gap between words and deeds is not sustainable. Performance is key: labour rights and conditions of work Corporate citizenship begins at home within the company and has a lot to do with how we treat our employees. If we cannot manage our human resources properly, then we will be shirking our responsibility to both shareholders and society at large. Adherence to core ILO labour standards, as well as investments in the health, safety, education and training of our own people, lie at the heart of corporate social responsibility in the workplace. Freedom of association is not guaranteed in all the countries where Statoil is present. Neither is the right to collective bargaining. But all our employees have a voice in the workplace, be it through councils, committees or general assemblies. We believe this helps instil a sense of trust and belonging throughout the organization. In accordance with Norwegian law, three employee representatives currently also serve on the companys 11-member non-executive board of directors. Statoil seeks to continuously improve and develop good work practices in our worldwide operations. To that end, we also encourage feedback on how we are doing from external stakeholders. One of those with whom we have a regular dialogue is the International Federation of Chemical, Energy, Mines and General Workers Unions, an international trade secretariat with 20 million members in 110 countries. ICEM shares with us their perspective on industrial relations challenges for Statoil and the oil industry in the countries where we operate. This is an informationsharing arrangement, only. It does not replace or interfere with established local procedures for negotiating wages and settling disputes. Statoils approach to labour standards and industrial relations can be summed up as follows: We think globally and act locally. Issues of pay and remuneration, for example, are decided upon according to local conditions. How can it be otherwise? The concept of a liveable, fair, or competitive wage is a relative one. It only makes sense in the context of national or local labour markets, social legislation and costs of living. In

Securing a License to Operate: The Role of Corporate Social Responsibility

terms of dollars and cents, of course, it means that salaries for the same type of work may vary considerably from one country to another. The capital-intensive oil industry generally pays well all over the world. Oil companies like Statoil do not pursue beggar-thy-neighbour policies towards developing countries. We do not compete to pay the worst wages in appalling conditions. We are not participating in a race to the bottom as far as labour and social standards are concerned. On the contrary, we believe that we are actually helping to raise the floor by applying standards that sometimes go beyond requirements in national law. That is why we talk about having a positive, yet intangible, effect on our host communities through the example we set by conducting business in accordance with the highest ethical, environmental and social standards. Performance is key: HSE With regard to health, safety and environment (HSE) in the oil industry, the gap between global and local standards is closing. The international oil companies, Statoil among them, are leading the charge. They now apply more or less the same standards wherever they do business. The cornerstone of Statoils HSE culture is the zero mindset with its objectives of zero harm to people and the environment and zero accidents or losses. Increasingly, international oil companies also seek attestation that their entire worldwide operations meet the ISO 14001 requirements. This is now the benchmark for integration of environmental management into ongoing business processes. In terms of raising the standards of the industry, the international oil companies appear to be pulling some of their smaller partners and suppliers along. Increasingly, supply chain management also encompasses the screening of partners with regard to ethical, labour and environmental practices. We expect the conduct of our partners and suppliers to conform to our own. If we fail to detect that it doesnt and the proverbial you-know-what should hit the fan then we risk being found guilty by association. That could hurt our reputation and cost us with consumers and other stakeholders. At the same time, however, it is important to raise the question of how far multinational corporations can justifiably go in terms of demanding that their local partners and suppliers apply standards beyond the minimum requirements set by national law. International oil companies, for example, have to guard against accusations that their insistence on global

Securing a License to Operate: The Role of Corporate Social Responsibility

standards also for suppliers is merely a ploy to bypass or dilute some of the national content requirements they meet in many countries. Performance is key: environmental footprint For an integrated oil and gas company with a strong E&P focus, corporate social responsibility is very much about minimising negative impacts on the environment. Born at the time of the first United Nations Conference on the Environment in Stockholm in 1972, Statoil has been raised on strong environmental awareness and very strict environmental regulations. From the very beginning, our license to operate on the Norwegian Continental Shelf has depended on oil exploration, production and transportation not harming Norways rich coastal fisheries. Extensive environmental and social impact assessments have always been an integral part of our project development work. And doing a proper impact assessment, Statoil believes, requires stakeholder engagement. This is also the Norwegian way part of a corporatist tradition whereby a fair hearing has been institutionalised. Those most concerned or affected by a decision are to be heard. Both from a project execution and risk management perspective, Statoil finds the dialogue with stakeholders useful. However, a useful dialogue presupposes a certain level of mutual respect and trust. The parties involved must be ready to talk both to and with each other. They must be willing to listen and engage in debate. Only then can a stakeholder dialogue serve the purpose of revealing complexities in all directions. On the whole, business and civil society organizations are more ready for that kind of a relationship today than a decade or two ago. In Norway, Statoil has established a special environmental forum for engagement with the leading NGOs. At the same time, however, we share the scepticism of our colleagues in the oil industry when it comes to engaging some of the more extreme activist groups. These groups prefer to dictate rather than debate. They have chosen to demonise societys use of fossil fuels. And their objective apparently is to drive the oil industry out of business.

Securing a License to Operate: The Role of Corporate Social Responsibility

Performance is key: decarbonising the energy mix There are those who claim that an oil company cannot be environmentally responsible unless it invests massively in renewables. Statoil disagrees. Not simply because of who or where we are today, but also because we have yet to identify where to make such investments within renewables. Much of what Statoil is currently doing in renewables is R&D work. Consequently, we are not about to move beyond petroleum in a big way any time soon. In the meantime, how does Statoil answer the call from environmental stakeholders to further decarbonise the fuel mix? First, we point to our strong record on CO2 management or carbon capture. Climate change thinking has become integral to our business. On the Norwegian Continental Shelf, we have a world-class system for capturing and registering emissions. Statoil is already applying leadingedge greenhouse gas emissions technology. At the Sleipner field, large volumes of carbon dioxide are injected for underground storage. We will be using the same CO2 solution in connection with the development of the controversial Snhvit field in the environmentally sensitive Barents Sea. Statoil also participates in the World Bank Prototype Carbon Fund, which is pioneering bilateral agreements on emission reduction and trading. Second, we stress the increased emphasis on gas. Third, we highlight our efforts to develop new markets for methanol as a possible preferred hydrogen-bearer for the fuel cell market. Fourth, we refer to our work within renewable automotive fuels, bio-pellets, heat pumps, and micro power and heating. The purpose of all this work, of course, is to develop alternative energy sources and bearers that can meet the future demand of our customers. Statoil also strives to produce ever more eco-efficient energy. This reminds us that the business case for environmental responsibility is by no means limited to minimising negative impacts and managing risks. Companies that treat the environment with respect in all their operations have reduced waste output, higher quality products and services, high resource efficiency, and reduced costs of regulatory compliance.

Securing a License to Operate: The Role of Corporate Social Responsibility

Performance is key: human rights and conflict It is estimated that about 40 % of the worlds oil production comes from countries where human rights as defined by the UN conventions are either not recognized or are seriously and frequently violated. According to the United Nations High Commissioner for Human Rights, moreover, human rights have caused 35 % of the worlds 500 largest companies to abandon a proposed investment project, and 19 % to divest from a country. When Amnesty International therefore poses the question Human rights. Is it any of your business? Statoil answers in the affirmative. What has hurt international oil companies the most over the last few years, is probably their association with the security forces assigned to protect their interests in conflict-prone or conflict-ridden countries. These are usually the police or military units of repressive and exploitative regimes. They often discharge their duties by resorting to violence. Some would say that they shoot first and ask questions later. From Colombia to the Sudan to Burma, we find examples of security arrangements for oil companies gone awry in the sense that the use of force has been indiscriminate, excessive, or disproportionate and peoples human rights have been violated. What can companies do to manage this type of risk? There are no quick fixes, of course, but the most obvious place to start is with the schooling of security forces and guidelines such as the U.S./U.K. Voluntary Principles on Security and Human Rights. Because much of the worlds petroleum can be found in zones of instability and conflict, oil companies are starting to face demands that they assess the impact of their projects and operations on conflicts and human rights. Statoil has yet to conduct project-specific conflict or human rights impact assessments. In connection with our investments in Azerbaijan and Angola, however, we commissioned country analyses with a broader socio-political and socio-economic focus. The purpose of these studies was twofold: 1) to improve our general understanding of local conditions and 2) to assess how the influx of oil money was likely to affect the two countries. What the studies accomplished, moreover, was to establish a baseline for future reference and identify some key challenges for Azerbaijan and Angola as so-called petro-states.

Securing a License to Operate: The Role of Corporate Social Responsibility

Performance is key: bribery and corruption Corporate social responsibility is also about business ethics and transparency. What Lord Acton said about power also applies to money. In other words, they both corrupt. Given the big money associated with the oil industry and the weak politico-institutional basis of some of the countries in which we operate, international oil companies must pay special attention to the risks of bribery and corruption. Several elements are key in the prevention of corruption. The first is a policy of zero tolerance, clearly communicated in both words and deeds by top management. The second is awareness and understanding, created by training programs and support mechanisms such as ethical audits. The third is good financial and procurement controls - a centralized system of payments. A fourth element that has served Statoil well is cooperation sharing and jointly assessing intelligence - with like-minded oil companies. We are also seeking to engage Transparency International on some of these matters. Stakeholders increasingly expect us to fight bribery and corruption with transparency. In Angola, for example, Global Witness has called upon international oil companies to show that they are not complicit in the looting of the Angolan people by making their accounts public. Statoils response has been to point out that we apply the same standards of openness to Angola as we do everywhere else. The accounts covering our revenues and expenses in Angola are already in the public domain, lodged with the Norwegian Register of Company Accounts at Brnnysund and available on enquiry. At the same time, however, Statoil has denied a request by Global Witness that we translate our Angolan accounts into Portuguese and distribute them in Luanda. We feel that it would be both wrong and counter-productive to sign on to such a political campaign. Wrong insofar as it falls outside what we would define as the scope of legitimate action by a commercial entity, and counter-productive because it could put our access or formal license to operate in jeopardy. Performance is key: partnerships for development Social or community investments are only a tiny part of the overall contribution of corporations to the societies in which they operate. By extension, corporate giving - whether disinterested or self-interested -is

Securing a License to Operate: The Role of Corporate Social Responsibility

10

only a tiny part of corporate citizenship. Yet many people still tend to equate CSR with a particular charitable contribution or a special community project. Statoil, for example, is commonly associated with a human rights capacity building project in Venezuela, a community development project in the Niger Delta, or support for the strengthening of democratic institutions in Azerbaijan. What do these projects say about Statoils approach to community investments? 1) We have moved beyond charity and aim to contribute to sustainable development. 2) We seek to help build local capacity in the fields of education, human rights and self-government. 3) We prefer a model with tri-sector partnership. Statoil will work with and through local authorities and non-governmental organizations, supporting activities that they have initiated on the basis of detailed knowledge of local needs. We do not envision establishing a foundation and running these projects ourselves. 4) We do not look askance at projects if they also happen to build our reputation, enhance the morale of our employees, and promote our brand. The experience with tri-sector partnerships in the field and stakeholder engagement through the UN Global Compact, has spurred increased cooperation between Statoil and a select few Norwegian NGOs and international humanitarian and development organizations. Over the last 15 months, we have entered into cooperation agreements with the United Nations High Commissioner for Refugees, as well as with the Norwegian Refugee Council, the Norwegian Red Cross and Amnesty International Norway. Our civil society partners are all true champions of good causes. And there is no denying that we want to be seen as a supporter of these organizations and causes, in part because such an association can strengthen our reputation for social responsibility. However, we also want to improve our risk management by tapping into the wealth of knowledge that these organizations possess. Through these partnerships we can gain access to information that may improve our understanding of a complex situation in a faraway land burdened by instability and conflict. We will also be able to draw on the rich experience of our partners when preparing Statoil personnel for assignments in locations that require special sensitivity to the challenges of health, safety and security, human rights, and bribery and corruption. In other words, our partners can help make us better corporate citizens and businesspeople. And the corporate world needs more citizenmanagers.

Securing a License to Operate: The Role of Corporate Social Responsibility

11

A contribution to global governance Some stakeholders would like to see international oil companies assume a greater responsibility for the way in which national authorities use or abuse the revenue streams generated by the petroleum industry. But should international oil companies be telling host governments how to spend their money and run their affairs? And at what point, then, does corporate social responsibility become outright political interference? I am tempted to reply with a quote from Marina Ottaway of the Carnegie Endowment for International Peace, writing in the July-August 2000 issue of the journal Foreign Policy: Private corporations cannot reform developing-country governments; neither
can the governments of industrialized countries, the World Bank, or the NGOs. Much of the change can only come from the inside, and the process will be slow and convoluted. Outside actors can help, not by casting themselves as the agents of civilization and morality, but by themselves becoming more moral and civilized. A place to start might be for each to stop telling the others what to do and to clean up its own act instead.

I like this quote for several reasons. First, it implies that corporate social responsibility begins with the basics: sound business practices. Second, it is a reminder of the limits to what can be achieved by corporate social responsibility alone. Given all the hyperbole surrounding the power of big business in the age of globalization, such a reminder is timely. And finally it serves as a warning to business against adopting a neoimperialist approach to corporate social responsibility in developing countries. While international oil companies generally tend to act locally and think globally, their contribution to global governance is nevertheless for real. To sum up: Conducting business in accordance with the highest standards of ethics and environmental and social responsibility will help promote transparency, accountability, and good governance. By moving beyond stakeholder dialogues and entering into partnerships for development with national governments, international institutions, and/or nongovernmental organizations, corporations can help strengthen the resource-base, effectiveness, and authority of all three partners. They, in turn, can help business define its legitimate role within society. Stavanger, March-April, 2002

Securing a License to Operate: The Role of Corporate Social Responsibility

12