Offshore Environmental, Labor Practices Challenged

U.S. firms outsourcing software development and customer service work to firms overseas are largely doing so without regard to the environmental or labor records of those firms. This is a risky path for U.S. companies to follow, according to Trudy Heller of Executive Education for the Environment.

“I like to use the example of Kathy Lee Gifford’s clothing line,” Heller said. “When the public, and Kathy herself, learned that some of the garments were manufactured oversees using child labor, her business was ruined,” Heller said.

The Kathy Lee Gifford case illustrates a point made by British Marketing Professor Ken Peattie. Peattie said that consumers no longer make purchasing decisions based on the product alone. They consider the entire company.

“It is the company, not just the product, that they are buying,” Heller said. “Thus Kathy Lee’s sales plummet when the public learns about her company’s use of child labor — even though the product has not changed,” Heller said.

According to Heller, the risk to these firms is not just from government authorities but more so from consumers. “Consumers can easily become a ‘stakeholder swarm’ in the Internet age,” Heller said.

Employment Discrimination

Following IBM’s agreement in April to purchase 100 percent of Daksh eServices in India, there was a swarm of online bulletin board attention to the fact that Daksh (following its acquisition by IBM) was openly declaring on its Web site that it would not hire new agents for its call center who were over 27 years old. Such discrimination is not uncommon at South Asian IT outsourcing operations. As of yesterday, Daksh’s Web site was no longer openly advertising age discrimination practices, but it continues to collect age information for all job applicants.

Amazon.com and IBM were reportedly clients of Daksh prior to IBM’s purchase of Daksh. Both firms could have made an effort to put a stop to discrimination at Daksh long ago if they had used their leverage as clients. Likewise, IBM’s and Amazon.com’s own clients could have attempted to prevail upon those two firms to uphold those clients’ basic human resources policies regarding equal opportunity.

The Daksh affair raises questions about the role and effectiveness of human resources and corporate ethics managers industrywide in conducting due diligence of outsourcing practices.

IBM’s and Amazon.com’s openly discriminatory practices in regard to offshore workers are hard to justify from a performance perspective. Older agents are often the best workers. There are IT outsourcing firms in Pakistan and Sri Lanka that are actively seeking to recruit older workers, particularly those with work experience in Western countries.

So far, only one U.S. firm or IT outsourcing brokerage house has declared that it will stop doing business with the following types of offshore firms:

• Firms that practice discrimination in employment hiring and promotion.
• Firms that do not pay their employees promptly or fully (which is also a major problem at Indian firms, including those owned by Westerners or the Japanese).
• Firms that do not ensure environmental responsibility at their own facilities, at their outsourcers, contractors and their parent firms.

That declaration by InternationalStaff.net on June 10 has not been seconded by any other U.S. firm.

Rewarding Pollution

Shifting the discussion to environmental performance, the aforementioned statement of June 10 read: “If we arrange for a U.S. client to have its IT work outsourced, we want to make sure that the firm performing the outsourcing work is not also polluting the environment, or that the IT facilities are not owned by or leased from organizations with horrendous environmental records.” It added, “Otherwise we are rewarding polluters and encouraging additional pollution.”

An outsourcing vendor directly and indirectly responsible for significant amounts of pollution is ICICI Bank (formerly Industrial Credit and Investment Corporation of India). ICICI’s merchant outsourcing services are largely run through its subsidiary ICICI OneSource (also known as I-OneSource).

Since India does not require the reporting of waste generation (before treatment) and accurate chemical-specific reporting of releases to air, water and land (or shifting between those media), it is not possible to compare releases from ICICI-funded industrial operations to releases from other firms. However, with cooperation from ICICI, it would be possible to estimate hazardous waste generation if information on the amount of hazardous raw materials brought onsite were to be compared to the amount of hazardous materials incorporated into products shipped offsite.

ICICI has been serving as a call center industry consolidator, buying CustomerAsset in 2002, FirstRing in 2003, and a 51 percent stake in Pipal Research in 2004. This month, they bought the New York collections company Account Solutions Group (ASG). ICICI has approximately 6,000 seats, including 500 employees in the U.S. now that it has acquired ASG.

ICICI is a major lender to polluting industrial firms in India. Huge environmental benefits would be achieved if ICICI’s loan policies became consistent with those of its U.S. IT outsourcing and collections clients.

Those policies are increasingly emphasizing that before any vendor, contractor or industrial borrower can receive a business opportunity, an environmental management plan should be in place, properly implemented, and verified by independent auditors, with accurate environmental performance data made available to the public on an annual basis. At ICICI, this would include industrial firms that come to it for loans.

Environmental Plans

The two most popular types of independently verified environmental management plans in the U.S. are the International Standards Organization (ISO) 14001 standard and the U.S. chemical industry’s Responsible Care (RC) 14001 standard. RC 14001 includes a greater focus on worker health and public participation than ISO 14001. This reflects the emphasis in the U.S. on worker protection and public participation.

Neither ISO 14001 nor RC 14001 set numerical performance standards. Instead, they provide a means for a firm to systematize the assessment of their environmental impacts and to develop, implement and document systems to control or eliminate those environmental impacts.

Independent third-party certification of environmental, health and safety management plans is gaining popularity because it addresses the perceived credibility gap that many members of the public might associate with corporate environmental reports.

Independent certification is also gaining popularity because a growing number of Western firms have decided that they will not use suppliers that have not implemented independently certified ISO 14001 or RC 14001 environmental management plans. These environmental management plans are being seen as an integral part of a firm’s overall approach to both social responsibility and market competitiveness.

Among the 250 largest companies in the world in 2002, KPMG found that 29 percent published social responsibility reports that were verified by external auditors. This compares to 10 percent that used external auditing in 2001. KPMG said that the use of external auditors highlights the view that internally produced environmental reports are no longer seen as having sufficient accountability among wide segments of the public.

Independent Verification at British Airways

British Airways provides an example of a quick (read: poorly funded) independent review of a major firm’s corporate-wide social and environmental report for 2004. It can be seen here.

The original report can be seen here, with additional details here.

A firm considering contracting with British Airways could read those reports and conclude that while British Airways still faces challenges, it is largely addressing those challenges in a responsible manner and should therefore serve as a safe, low-risk vendor to work with. The progress that British Airways is making in its social and environmental responsibility is coming at a time when that firm is under increasing financial pressures due to rising fuel prices and competition from low-cost no-frills competitors.

The verification process provides an opportunity for exchanges between the auditors and the commissioning firm, as seen in the independent auditors’ criticism of British Airways for keeping them at the head office and not having them visit operational areas. The auditors are critical of delays in British Airways implementing human rights and labor protections, to which British Airways responded: “We plan to thoroughly review the social and environmental performance of our top 20 suppliers over the next year.”

Noise levels near airports constitute the most contentious issue for many airlines, and British Airways has been in close contact with community groups and local government officials around Heathrow and Gatwick airports to seek to come to some agreement about allowable noise levels. In the U.S., the operators of facilities with significant environmental impacts often enter into good-neighbor agreements with local communities. These good-neighbor agreements are seen as an integral part of a firm’s social and environmental responsibilities and might provide for a host of community benefits to offset impacts from a facility.

In considering whether to allow a firm to become an approved vendor, the good-faith implementation of good neighbor agreements can serve as an indicator of a vendor’s overall social and environmental responsibility. Good neighbor or host community agreements may include compensation payments from the firm or firms responsible for large-scale adverse impacts. There may also be commitments to improve environmental practices, especially through the use of the source-reduction hierarchy.

Source Reduction Hierarchy

U.S. companies’ environmental policies commonly encourage source reduction over waste treatment and disposal. In other words, U.S. firms would often rather design products and processes that do not generate waste (especially hazardous waste) than try to pay to treat and dispose of waste after it is generated, or to release some of it as pollution. This emphasis on avoiding waste generation is referred to as the source-reduction hierarchy.

ICICI has been contracted by multilateral and bilateral aid agencies to encourage the source reduction hierarchy among Indian firms. However, ICICI came under criticism by the World Bank after failing to promote the source-reduction hierarchy in a loan program funded by the World Bank wherein ICICI was provided with US$50 million (IBRD Loan 3780-IN) to use to make loans on concessionary terms to encourage source reduction in Indian industries. That ICICI loan was part of the World Bank’s “India — Industrial Pollution Prevention Project” (IPPP).

The World Bank’s June 30, 2003, “Implementation Completion Report” (Report No: 26255) on the IPPP contained the following statement:

“ICICI had a very difficult time distinguishing pollution control investments (i.e., end-of-pipe measures to achieve minimum environmental compliance) that were the primary focus of the predecessor Industrial Pollution Control Project (IPCP) operation, from pollution prevention investments (through waste minimization and recovery, improved production techniques, and other measures “before the pipe”) that were the primary focus of the Industrial Pollution Project (IPPP).”

If an established financial institution cannot distinguish source reduction from end of pipe approaches when they are being funded to do so by aid organizations, then how likely are they to do so in their regular business practices?

Part of the challenge of lending money to encourage source reduction is that the best time to take advantage of source reduction opportunities is at the beginning of a project, before anything has been built, or in ICICI’s case, before a firm has decided to provide funding for a project. However, as evidenced above, ICICI’s approach is like an airline taking delivery on a new jetliner and then trying to figure out how to retrofit it with a more efficient wing or a better engine.

Starting a Dialog

In some ways, ICICI is ahead of other offshore firms in terms of its environmental and labor policies. However, loans to firms with questionable labor practices, with uncontrolled pollution issues, and without independently certified ISO 14001 or RC 14001 environmental management plans could potentially disqualify a firm, any firm, from access to contracts from some Western clients.

In its statement of June 10, where InternationalStaff.net declared that it was going to cease doing business with outsourcing firms that had poor labor and environmental practices, an immediate break with all offshore service providers with environmental and labor problems was not urged.

“Our process is to begin a dialog,” the statement said, “and explain what we and our clients expect, and how we will evaluate the environmental ethics of our contractors.”

Since all industrial conglomerates in developing economies face environmental challenges, InternationalStaff.net’s statement advised offshore firms to take a comprehensive look at their environmental performance, and then develop plans to improve their environmental performance over time. Ongoing pollution should first be eliminated as much as possible at the source, InternationalStaff.net’s statement said, then any releases should be treated and controlled, and cleanups initiated for accumulated pollution discharges from the past.

Calling Kathy Lee Gifford

Kathy Lee, you have a couple telephone calls waiting for you. Someone from Amazon.com is on line one and there are a couple Indian bankers holding for you on line two. And why are all these wasps swarming around outside?