Chapter 19
Corporate Energy Responsibility
Chapter collaborators:Meeren Amin (WF ’12)
Stephen Bell (WF ’12)
Lea Ko (WF ’13)
Derrick Lankford (WF ’12)
Wade Sample (WF ’12)
Winslow Taylor (WF ‘12)
[LK: intro here] Corporate Social Responsibility (CSR) refers to operating a business in a manner that accounts for the social and environmental impact created by the business. As You Sow, “Corporate Social Responsibility.” CSR means a commitment to developing policies that integrate responsible practices into daily business operations, and to reporting on progress made toward implementing these practices. As You Sow, “Corporate Social Responsibility.” Energy companies, who face increasing reputational and liability risk for their operations in remote and developing regions, have embraced CSR. Bosselman, 1139.
In this chapter, you will learn about:
· The history and growth of the CSR movement
· The definition of CSR and the current relevance of CSR programs
· The duties that corporations owe to shareholders and stakeholders
· The debate regarding oil exploration in the Amazon rainforest
· The potential impact that drilling may have on indigenous populations
Chapter 19 – Corporate Social Responsibility19.1 Ethics and Corporate Social Responsibility
19.2 Oil and Gas Development in the Peruvian Amazon
19.2.1 Shell Oil Explores Camisea
19.2.2 The Project Falters and Starts Again
19.2.2.1 Pluspetrol’s Steps In
19.2.2.2 The Upstream Component of the Camisea Project
19.2.2.3 The Downstream Component of the Camisea Project
19.2.3 The Markets for Camisea Gas
19.2.4 Reducing Electricity Costs in Perdue through the Camisea Project
19.2.4.1 Re-thinking Natural Gas in Peru
19.2.4.2 The Residential Electricity Market
19.2.4.3 The Transportation Market
19.2.4.4 The Increase in Natural Gas Consumption
19.2.5 Rights of Indigenous Peoples
19.2.6 The Free Trade Protests
19.3 Ethics, CSR and Risk
19.1 Ethics and Corporate Social Responsibility
Given the entanglement between social issues and energy use in the modern economy, energy corporations today are guided by both legal rules and societal norms in operating their businesses. Bosselman, 1138; See Energy and Social Issues. Transparency and globalization have strengthened the ability of external stakeholders (including neighbors, NGOS, governments, and activists) to detect and publicize corporate wrongdoings. Bosselman, 1138. Given the juxtaposition of both legal obligations and “corporate social responsibility” in today’s business environment, corporate social responsibility has become a catch phrase in the corporate world that means many different things.
Corporate Social Responsibility (CSR or corporate conscience, corporate citizenship, social performance, or sustainable responsible business) is a form of corporate self-regulation integrated into a business model. Wikipedia, “Corporate Social Responsibility.” CSR policies function as built-in, self-regulating mechanisms whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. Wikipedia, “Corporate Social Responsibility.” The goal of CSR is to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Wikipedia, “Corporate Social Responsibility.”
The term “corporate social responsibility” came into common use in the late 1960s and early 1970s after many multinational corporations formed the term stakeholder, meaning those on whom an organization's activities have an impact. Wikipedia, “Corporate Social Responsibility.” It was used to describe corporate owners beyond shareholders as a result of an influential book by R. Edward Freeman, Strategic Management: a stakeholder approach in 1984. Wikipedia, “Corporate Social Responsibility.” Can you think of the groups that are often considered stakeholders in today’s environment? Proponents of CSR policies argue that corporations make more long-term profits by operating with a proper perspective, while critics argue that CSR distracts from the economic role of businesses. Wikipedia, “Corporate Social Responsibility.” Cynics argue that CSR is merely window-dressing, or an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations. Wikipedia, “Corporate Social Responsibility.”
The Economist divides CSR activity into three broad layers. Economist, “Just good business.” The first and most basic is traditional corporate philanthropy or corporate giving. Economist, “Just good business.” Companies generally allocate about 1% of pre-tax profits to worthy causes because giving something back to the community seems like “the right thing to do.” Economist, “Just good business.” Second, CSR may take the form of risk management. Economist, “Just good business.” This helps corporations reduce legal or reputational risk. Bosselman, 1141. Companies will often talk to NGOs and to governments, create codes of conduct and commit themselves to more transparency in their operations. Economist, “Just good business.” Increasingly, companies get together with their industry competitors in an effort to set common rules, spread the risk and shape opinion. Economist, “Just good business.” The third and most trendy layer of CSR is the idea that CSR can help to create value. Economist, “Just good business.” It involves those programs that both provide a social benefit and help a corporation save money, such as being more energy efficient, reducing the use of toxic chemicals as manufacturing inputs, etc. Bosselman, 1141. However, scholars are split on the role that CSR should play in modern corporations. Bosselman, 1141. Milton Freidman, economist and recipient of the Nobel Memorial Prize in Economic Sciences, writes “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game...” Milton Friedman, “The Social Responsibility of Business is to Increase its Profits.” Justice Richard Posner argues that CSR programs do not produce any real economic benefit by stating that “the firm that channels profits into [CSR] will not be able to recoup its losses...” David B. Spence, “Corporate Social Responsibility in the Oil and Gas Industry: The Importance of Reputational Risk,” 66. Do you agree with Posner and Friedman? Are profits and CSR really mutually exclusive?
Other scholars argue that many kinds of CSR actually advance shareholder interests; thus, they are sound strategic investments. Bosselman, 1143. R. Edward Freeman, American philosopher and professor at the University of Virginia’s Darden School of Business, writes “Building and leading a great company is about managing for stakeholders... the company that manages for shareholders at the expense of other stakeholders cannot sustain its performance.” R. Edward Freeman, “Managing for Stakeholders: Survival, Reputation, and Success.” Do you agree with this statement? Should a corporation achieve maximum benefits for its stakeholders or shareholders?
Some commentators argue that CSR programs are unfair to shareholders and result in expenditures that should instead be returned to shareholders. Bosselman, 1142; See Robert Craven, “CSR.” In contrast, in other countries like in Europe, stakeholders are often given seats on a corporation’s Board of Directors. Bosselman, 1142. Thus, businessmen and academics alike are split on the proper role of the “Sustainable Corporation.” The ultimate fairness of a CSR program rests on the viewpoint that one takes with respect to the corporation’s role in society. What role do you think corporations should play in society? Should they act only to maximize profits or should corporations work with other stakeholders to maximize both profits and better the overall social welfare?
Most Fortune 500 companies publish CSR reports annually. Bosselman, 1139. Particularly, energy companies, who face increasing reputational and liability risk for their operations, have embraced CSR. Bosselman, 1139. In embracing CSR policies, energy companies recognize that companies owe duties to both shareholders and outside stakeholders. Bosselman, 1139. Many energy companies have focused their CSR efforts on sustainability, a term that has taken on many different meanings. Bosselman, 1139. Some companies equate sustainability with sustainable production or the long-term productivity of natural resources. Bosselman, 1139. Other companies view sustainability in a broader sense that encompasses all actions benefiting the environment. Bosselman, 1140. Finally, others argue that energy companies should bear the burden of proving that their uses of energy are not harmful to society. Bosselman, 1140.
Different industries have faced sustainability concerns in different ways. Bosselman, 1140. For example, in the 1980s, the Chemical Manufacturers Association (which includes several major oil companies) established their “Responsible Care” program, a system of voluntary rules and regulations for their members, governing the handling and disposal of chemicals and chemical wastes. Bosselman, 1140; See EPA, “Chemical Manufacturers Association Letter.” As CSR programs have evolved, they have moved from addressing just sustainability issues to addressing other issues, such as human rights, educational opportunities, and workplace issues. Bosselman, 1140. Many Western mining and oil companies, for example, now routinely invest in local infrastructure in the developing world, and have established company policies for ensuring that human rights are respected, especially in the workplace. Bosselman, 1140.
19.2 Oil and Gas Development in the Peruvian Amazon
[LK: intro here] The Amazon River basin in South America is often referred to as the cradle of biodiversity. Bosselman, 1145; See WWF, “About the Amazon.” It contains countless species of plants and animals and is home to many populations of indigenous people. Bosselman, 1145. The basin also has significant quantities of gas and oil, particularly along the eastern slopes of the Andes Mountains. Bosselman, 1145.
Oil companies have moved into the basin in an attempt to extract the valuable oil and gas reserves. Bosselman, 1145. However, their presence in the area has been intrusive to many of the native plant and animal species. Bosselman, 1145. Noisy helicopters carry equipment and work crews into the forests. Bosselman, 1145. They cut down trees to make room for heliports and trails. Bosselman, 1145. They destroy crops and detonate explosives in the middle of the forests. Bosselman, 1145. Food, habitat, and medicines are all destroyed in the process. Bosselman, 1145. Right before drilling actually begins, the company clears two to five hectares (one hectare is about 2.5 acres) to build the drilling platform. Bosselman, 1145. Logging for boards that lie beneath the platform disturbs an additional 15 hectares. Bosselman, 1145. Once drilling commences, water wastes, along with spilled oil and chemicals and wastes from well drilling enter the environment untreated. Bosselman, 1146. Most of these wastes are initially contained in open pits, however, rainwater will enter, creating large lakes of spilled oil. Bosselman, 1146.
In response to pressure from environmental groups and certain South American governments, oil companies have developed codes of conduct for operations in fragile environments like the Amazon. Bosselman, 1146. For example, Occidental, the largest US-based producer of crude oil in Latin America, adopted an Environmental Management Plan (EMP), which forces it to abide by “international standards” and “best practices.” Bosselman, 1146. However, these standards are not public and have not been effective in remedying consequent environmental problems. Bosselman, 1146.
In order to better regulate the environmental effects in the Amazon, additional safeguards are needed. Bosselman, 1146. First, companies must clearly identify the standards being used and the source of these standards. Bosselman, 1146. Second, they must require compliance with these standards, and measure actual environmental performance against these standards. Bosselman, 1146. Third, they must have credible monitoring and review protocols. Bosselman, 1146. Lastly, the finding of external experts and auditors must be accurately recorded and reported to the public. Bosselman, 1146.
19.2.1 Shell Oil Explores Camisea
In 1981, Shell began the exploration of Camisea field, a natural gas field in Eastern Peru located in the remote rainforests of the Urubama Valley in the southeastern Peruvian Amazon. Bosselman, 1147; See Wikipedia, “Camisea Gas Project.” The exploitation zone covered the legally recognized territory of several populations of indigenous peoples and was home to one of the richest areas of biological diversity in the world. Bosselman, 1147. The field was then stated, as it is now, to have enormous potential in terms of oil and gas yields.
When Shell drilled its first exploratory wells in the region, it pledged a policy of openness and public participation. Bosselman, 1148. It maintained an extensive website, which broadcast briefing papers, photos, reports, speeches, etc. Bosselman, 1148. It also pledged a standard of sustainable development to “improve the quality of life while ensuring that renewable resources remain vibrant to benefit future generations and nonrenewable resources are used wisely and efficiently with the benefit of future generations in mind.” Bosselman, 1149. To develop mechanisms to work with the indigenous groups, it hired environmental consultants and NGO groups to advise them at meetings and workshops. Bosselman, 1149. It developed a health passport of required inoculations for all of its workers, in order to minimize effects on indigenous. Bosselman, 1150. Shell also hired native people as guides and field workers. Bosselman, 1150.
With the help of the Smithsonian Institute, Shell undertook a comprehensive environmental impact assessment (EIA) to survey biodiversity and monitor any adverse effects of the projects. Bosselman, 1150. It assumed a public commitment to carry out the project in a sustainable manner, “based on good operating practices, the fulfillment of the highest industry standards, and with a net benefit for the region with the dynamic participation and the cooperation of the surrounding communities to the area of the project.” Bossselman, 1150.
However, two groups continued to oppose Shell’s operations in the Amazon: the Rainforest Action Network (RAN) and the Project Underground. Bosselman, 1150-51. They have focused their concerns on understanding Shell’s EIA and the involvement of various NGO’s in regards to the effect on the indigenous population. [LK: what does this mean??] Shell countered criticism by offering evidence of the support it had from local indigenous communities and the desire of these communities to make social and educational progress. Bosselman, 1151.
19.2.2 The Project Falters and Starts Again
The Camisea project was halted during a lengthy period of conflict between the Peruvian government and a group known as the Shining Path guerillas. Bosselman, 1151. Shell, Mobil and others signed a two-year contract in 1996 to explore Camisea. Bosselman, 1151. By the end of the contract, however, the consortium withdrew from Peru due to guerilla violence and the inability of the parties to come to agree on a long-term contract with a fixed price for the gas. Bosselman, 1151.
The Smithsonian researchers involved with the project were disappointed at this failure to continue the Camisea project. Smithsonian National Zoological Park, “Conservation Science – Camisea Project (Peru).” The Camisea region is rich with a variety of plant and animal species and Shell and Mobil had been in full compliance with Peruvian environmental law. Bosselman, 1151. At the time, Francisco Dallmeier, director of the Smithsonian Institution’s Monitoring and Assessment of Biodiversity program, praised Shell and Mobil for seeking the help of both the Smithsonian and other national and international organizations to ensure the Camisea project would proceed in a manner extremely sensitive to environmental concerns. Bosselman, 1151.