Reputational Risk Under MNCs Environmental Violations

by Sumiah Bagazi


Multinational Companies (MNCs) have negative impacts on human rights, especially the right to a clean environment. MNCs have caused deterioration of the environment and wide range of human rights violations, such as displacement; and threats to life, expression, health, and property rights protected by the human rights declaration. A Host state constitution, law, and international commitments govern the MNCs operations, including human rights.

The responsibility to respect environmental standards is spread among all stakeholders. Host states, home states, and MNCs could be reluctant to implementing human rights. Nonetheless, not only should host and home states enforce human rights on MNCs because of their human rights ratification but also prevent reputational risks. States’ active or passive participation in environmental degradation raises reputational risks that eventually causes financial loses to all parties, host state, home state, and the MNCs itself. This blog will examine reputational risks to MNCs, host state, and home state as a result of MNCs’ environmental and human rights abuses.

flag of UN

The role of states and MNCs is essential to enforce environmental obligations. Under the United Nations’ increasing awareness to address human rights obligations, it issued the Guiding Principles on Business and Human Rights that clarifies standards and practices along with their relationships to human rights and business knowledge within stakeholders. MNCs are accountable for not using measures to eliminate adverse human rights impact independently from the states.  According to the Guiding Principles on Business and Human Rights,  adverse impacts could result from “both actions and omissions” to measures with its “business partners, entities in its value chain, and any other non-State or State entity directly linked to its business operations, products or services.”

Also, host and home states should put in place domestic measures that prevent human rights violations from third parties including MNCs.  Whether it is by putting in place the United Nations’ Guidelines for Multinationals Enterprises of the Organization for Economic Cooperation and Development or by requiring parent company to report global operations. Originally, host state is responsible for protecting against human rights abuse through setting expectations for MNCs and businesses, enforcing laws and regulations, providing effective guidance, and maintaining adequate monitoring of businesses.  However, states with no bargaining power immediately eliminate their ability to sustain the human rights best practice.

Equally important, state-owned enterprises should also put a restriction on the quality of MNCs that are exported by a home state. The role of environmental protection does not rely only on host states but shifts into home states who are responsible for preventing human rights violations on host state jurisdiction.

Such contributions affect states negatively through the risk of reputation, financial, political, and legal risks. A survey that evaluates risks confront board members showed that 73% of more than 230 board members in different legal forms of companies recognized reputational risk as their top concerns, which represents a 19% increase from an initial survey.

Many factors influence the reputation of an entity, some of which are operational losses, managerial decisions, and environmental violations. Reputational risks rank as top priority for board members because its effects spread to the financial markets, shareholders, investors, counterparties, government, and regulators. MNCs that operate projects with adverse effects to human rights and environment, such as mining, often result in reputational risk. Also, MNCs that are registered in the stock market face a great threat from reputational risk due to the direct linkages between reputation and the fall of shares price. Also, other consequences may occur as a result of the reputational impacts, such as loss of revenue and partners, deterioration of entity image and branding, and the increase in market and regulatory scrutiny.

States that host MNCs activities without adequate environmental protection are subject of a negative publicity campaign. A study evaluated the effects of human rights commitment by states and the states’ ability to enforce human rights on third parties.  It proved that there is a positive correlation between the host state’s human rights record and the MNCs’ decision to invest in a particular jurisdiction. In fact, a newly emerging field of MNCs methods of decision-making aims to evaluate the human-rights impact assessment of the host state before choosing to commence the investment. It theorized that MNCs choice of host state with positive human rights records acts as “reputational umbrella.

In conclusion, stakeholders’ commitment to human rights and environmental enforcement allows them to maintain a positive reputation. Such commitment protects these stakeholders from risking their reputation and consequently, causing financial, political, and legal loses.

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