The Dutch Diamond Dynamic: doing business in the context of the new sustainable development goals

June 8, 2016 - nr.99
Summary

Conclusions and recommendations

Conclusions

In September 2015, the UN General Assembly adopted a comprehensive agenda for sustainable development, with related goals on a better environment, climate action and improving well-being and human rights. The new agenda applies to all countries and achieving the SDGs will require close coordination, nationally and internationally.

The complexity of the agenda calls for new forms of cooperation. Its implementation will depend on the participation of a wide range of actors. Besides central and local authorities and international institutions, major efforts will be asked of companies, civil society organisations, knowledge institutes and financial institutions. Together, they form the public domain that is responsible for achieving the SDGs. In other words, governance is no longer the sole prerogative of public authorities, but takes place in interaction between all those involved.

The AIV acknowledges that a number of large Dutch companies are international pioneers in their contribution to sustainable development. Their intrinsic motivation to incorporate sustainability in all parts of their operations reflects a transition that is also taking place in society at large: from a defensive approach to sustainable development as side issue, to awareness that a society based firmly on sustainability is the only way to safeguard prosperity and economic development now and in the future.

However, these pioneering companies still run up against stiff restrictions. None of them can boast a fully sustainable business model. Their good intentions are hampered by the reality of competition and the market. For these companies, too, it is an ongoing challenge to reconcile their internal business interests with sustainable development. The AIV also observes that small and medium enterprises, social entrepreneurs and financial institutions still contribute little to sustainable development outside the Netherlands.

Especially in respect of human rights, companies fail to fulfil their responsibilities in important areas. They may be showing a greater interest in the working conditions and terms of employment of their own employees and, increasingly, of other companies in the supply chain, but that attention seems to be driven mainly by defensive considerations. Fear of reputation damage and liability risks are important incentives. The UN Guidelines may have acquired the status of a ‘regulatory ecosystem for business and human rights’,1 but compliance by companies is still voluntary. The AIV therefore welcomes the steps that have been taken internationally to create a legally binding agreement on human rights and corporate sustainability.

In the AIV’s view, another point that merits attention is the financial sector’s ‘wait-andsee’ attitude regarding the financing of initiatives promoting sustainable development. With the exception of certain pension funds (e.g. ABP) and institutions like the FMO, Triodos Bank and ASN Bank, the sector is still giving little priority to sustainable development. Particularly undesirable is the large-scale tax avoidance by multinational companies. This costs governments worldwide, and especially those in developing countries, billions of dollars every year. The AIV calls on the government to give its full support to the measures recently proposed by the European Commission in this regard.

Now that the international agenda for sustainable development and the SDGs have been laid down, Dutch policy needs to be aligned to the agenda in terms of what the Netherlands is to achieve domestically and through its foreign policy. Devoting attention to the expected contribution of Dutch businesses will encourage them to mirror their corporate sustainability strategies to the sustainable development agenda.

The Dutch government has launched a number of interesting initiatives to support Dutch businesses that are active abroad in making the transition to corporate sustainability. Two prominent instruments are public-private partnerships and voluntary agreements on ICSR in high-risk sectors. Nevertheless, the AIV is of the opinion that the government is not yet tapping the full potential of its economic diplomacy policy. The link between trade and development cooperation and the top sector policy, for example, could be made more robust.

The government’s fourfold role as legislator, partner, grant-provider and market manager makes high demands on coordination – not only within the Ministry of Foreign Affairs but also in its relations with other ministries and actors. Experience shows that the timing and coordination of interventions is more important than their scale. A varied approach proves to have the greatest effect.

With regard to partnerships as instrument, the AIV observes that it is difficult for the government to combine the role of grant-provider (facilitation) and partner. It is important to prevent government’s role as partner from negatively affecting its other roles and responsibilities. In a partnership, other actors may cease to see the government as standing above all the parties involved. The partner role can also negatively affect the government’s motivation to tighten up legislation. The AIV considers that this demands constant vigilance and action.

The role of market manager also needs to be further developed. The AIV notes that current competition policy (legislation) is currently inadequately linked to the tasks of facilitation and, perhaps, endorsement of partnerships. This calls for a wider concept of prosperity (see chapter IV.4) and, as experience of partnerships shows, a different assessment and perhaps also a different definition of ‘market distortion’. A partnership intended to contribute to sustainable development may distort the market in the short term but can also create a new market in the long term and thus prevent a race to the bottom.

In response to the specific questions in the request for advice, the AIV concludes as follows:

  • Lack of a level playing field: This situation, caused by globalisation and the economic emergence of Asia, presents an extra challenge for Dutch companies which find themselves faced with competition from businesses that work under other legal frameworks and have a different perspective on sustainable development. And yet it also presents opportunities. Experiences in relation to the environment have shown that the absence of a level playing field can also work as an incentive to use innovation to acquire a better competitive position. Sooner or later, all countries will have to play the sustainability card. Imposing increasingly strict requirements encourages companies to adapt and innovate so as to remain both sustainable and competitive. The better businesses benefit from this. But it does not change the fact that action must be taken to create a level playing field, which will only be possible if legislation and monitoring of compliance are harmonised internationally.
  • Public-private partnerships: Promising experiences disguise the fact that many partnerships are still a work in progress when it comes to sustainability. A positive aspect of the Dutch approach is that the government supports and initiates a wide range of initiatives. That may have led to fragmentation, but also offers good scope for experimentation. At the moment, programmes’ internal focus is mainly on the efficiency and effectiveness of individual partnerships. What is missing is a regular, systematic (internal) study of possible gaps across the board – a study addressing all the components of the agenda for sustainable development.
  • Competition law: the request for advice assumes that current legislation on competition is a stumbling block for many sustainability initiatives. That is not always the case. The interviews conducted by the AIV show that the restrictive nature of competition law can be seen partly as an ‘emotional factor’. More is possible than businesses are aware of or prepared to admit. It is important that a clear distinction is made between what is and what is not permitted. The AIV expresses its appreciation for the fact that the government has entered into consultations on this issue with the market parties concerned. The AIV would also note, however, that the broad concept of prosperity used is still relatively limited and that more scope could be provided for weighing aspects such as market creation (rather than market distortion) and for a broader understanding of pre-competitive cooperation, international coordination and especially the interests of the chain as a whole.

Recommendations

On the basis of these findings, the AIV advises the Minister for Foreign Trade and Development Cooperation as follows:

To provide regulation where self-regulation is inadequate, nationally and internationally

  • Given the importance of sustainable development for society at large and the fact that companies are served by clear legislation, the AIV advises the Dutch government to (continue to) give priority to its regulatory task in its efforts to achieve the SDGs over its other roles of facilitating, stimulating partnerships and acting as market manager.
  • This regulatory role demands international coordination, starting at EU level. The AIV calls on the government to continue to advocate common frameworks with European partners, UN bodies like the Human Rights Council and international financial institutions, in at least three areas:
    - Making international chains more sustainable and creating a level playing field: as a follow-up to the international conference ‘EU and Global Value Chains’ and the joint meetings of European ministers for development cooperation and trade (on 7 December 2015 and 2 February 2016 respectively, both in Amsterdam), the AIV strongly urges the Dutch government to work towards an EU action plan by, for example, initiating a broad discussion with European partners (companies, trade and industry organisations, and experts on sustainable development and competition law) on the legislative obstacles reported by those in the field, with the aim of making legislation more transparent and creating the conditions for a level playing field. Further harmonisation of competition law at European level is a special point for attention.
    - Respect for human rights: Given the observed limitations of self-regulation in this area, the AIV advises the government to give its unreserved support to the creation of an international legally binding agreement on human rights and corporate sustainability.
    - Combating tax avoidance: The AIV also advises the government to give its full support to implementation of measures recently presented within the EU to curb tax avoidance by multinational companies. A special concern here is further harmonisation of certain elements of competition law.
     

To use the Dutch Diamond and actively involve the relevant actors

  • The AIV advises the government to ensure that, besides companies and knowledge institutions, civil society organisations and financial institutions are also actively involved in formulating and implementing policy. This will help optimise the effectiveness of the Dutch Diamond approach.
  • The AIV urges the government to closely monitor progress on the voluntary agreement on ICSR in the financial sector to ensure that it includes concrete provisions on transparent reporting.
  • The AIV advises that other layers of the public sector also be actively involved in the plans for implementing the agenda van sustainable development. The authorities in large cities have internationally relevant expertise on, for example, urban agglomerations in delta and coastal areas threatened by climate change.

To ensure that diplomacy is more focused on sustainable development

  • Businesses and the wider public should be made more aware of the international agenda for sustainable development and of what contribution the Netherlands is expected to make, in what areas and by whom. The AIV notes that it is worth considering drawing up a vision document that stands above political and other parties and explains how the Netherlands will contribute to achieving the SDGs in the years ahead.
  • Linked to this, the AIV calls for the international agenda for sustainable development to be explicitly taken into account in foreign policy alongside economic interests, and for policy instruments to be aligned with this agenda. The social aspects of sustainable development, especially human rights, should be emphasised.

To take more account of its own role in setting an example

  • Demanding that companies and the wider public make every effort to contribute to sustainable development is only credible if the government itself sets a good example. In the opinion of the AIV, the government still falls short in this regard. It must address major issues, like pressure on the environment (through energy generation, water management, etc.) and the government’s own procurement policy. The AIV recommends that the government take more serious account of the role it plays in setting an example in the area of sustainable development and show initiative by taking coherent action.

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1 According to Professor John Ruggie at the 3rd UN Forum on Business & Human Rights, Geneva, 3 December 2014.
Advice request

Professor Jaap de Hoop Scheffer
Chairman of the Advisory Council
on International Affairs (AIV)
P.O. Box 20061
2500 EB The Hague

Date    31 December 2014
Re       Request for advice on the private sector’s role in achieving sustainable development goals

Dear Professor De Hoop Scheffer,

The government is writing to ask the AIV’s advice on how the private sector can optimise its contribution towards achieving international sustainable development goals.

The question is an important one, because the private sector has become an increasingly significant and influential partner in development cooperation. Of the world’s 100 largest economic entities, 40 are companies – not countries – and for governments, achieving sustainable development goals is difficult without private sector knowledge and expertise. The increasingly significant and influential role played by businesses has correspondingly increased their opportunities to focus on sustainable development goals, and a number of businesses have recognised and shouldered this responsibility. They are motivated not only by a desire to act in the public good, but also by enlightened self-interest; for instance if the secure supply of raw materials is threatened. The public’s demand for more transparent production processes is also encouraging businesses to adopt a more sustainable approach.

Dutch businesses operating internationally are contributing in many ways towards the achievement of sustainable development goals. Moreover, they are expected to exercise due diligence by complying with the OECD Guidelines for Multinational Enterprises, which incorporate the UN Guiding Principles on Business and Human Rights, to prevent poor working conditions, child labour, damage to the environment, corruption and human rights violations in their supply chains as much as possible. Interestingly, an increasing number of businesses are showing a deeper commitment to corporate social responsibility. They are developing innovative business models to ensure they proactively contribute to increasing global sustainability, for instance by reducing poverty and protecting the environment. In light of the above, the government asks the AIV to draw up an advisory report on how companies doing business internationally can optimise their contribution towards achieving sustainable development goals. This principal question can be divided into three sub-questions:

  1. What opportunities and obstacles does the business community face when seeking to increase or optimise its contribution towards achieving sustainable development goals? This could include issues like the lack of a level playing field or insufficient market power in production and marketing chains. What can the Dutch government do to encourage and assist the private sector in this regard?
     
  2. What role do public-private partnerships (PPPs) play in achieving sustainable development goals? Can PPPs sufficiently ensure sustainable development goals are achieved?
     
  3. What obstacles can legislation, and competition law in particular, create for businesses aiming for more sustainable production processes? Please see the explanatory notes (Annexe 1) for greater detail.

The government looks forward to receiving your report.

Yours sincerely,

Lilianne Ploumen
Minister for Foreign Trade and Development Cooperation

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Explanatory notes

The World Summit on Sustainable Development (WSSD), held in Johannesburg in 2002, gave a major boost to the role played by the private sector in achieving sustainable development goals. Public-private partnerships (PPPs) came into the picture as a way of better defining this role. Ten years later, at the UN Conference on Sustainable Development (UNCSD/Rio+20) in Rio de Janeiro, the responsibility of the private sector – along with other players – was even more clearly recognised. It was decided that business needed to shoulder its responsibility of achieving greener growth, with a focus on sustainable development and poverty reduction. PPPs are an important instrument in making this a reality.1

The Rio conference also noted that the private sector requires government support to carry out this task. Government must devise policies and enact legislation that enable business to promote sustainable development, for instance by making it easier to invest in clean energy technologies.

In recent years, increasing attention has been paid in the Netherlands to the role the private sector could play in helping solve societal problems. The EU research and innovation programme Horizon 2020, with its ‘grand challenges’, serves as a good example of what the Netherlands could do. The way the Netherlands looks at societal challenges is shaped mainly by the government’s top sector policy, in which government, the private sector and knowledge institutions work closely. The Advisory Council for Science and Technology Policy (AWT) believes that government must demonstrate even more vision and commitment in charting a course for the other parties involved.2

Public-private partnerships are a specific instrument allowing the private sector to work together with other partners to achieve sustainable development goals. PPPs are cooperative undertakings between government and business for which both parties assume the risk and responsibility, and where both sides provide resources and expertise. In the Netherlands, this form of cooperation has existed since the 1980s.

The general focus of the type of PPP that has existed since the 1980s has been on creating or improving public or social infrastructure. The type of PPP proposed at the World Summit on Sustainable Development in Johannesburg in 2002 was different, with a focus on broader development goals. The Dutch government has played a strong role in encouraging this type of PPP.

The government’s policy of creating synergies between trade and aid was a new stimulus for establishing PPPs, especially for the food security and water priorities. In 2014 the Ministry of Foreign Affairs, together with a number of external parties, created the PPPLab, a project which aims to increase understanding of how PPPs work and the role they play.3 These efforts to increase expertise around PPPs are in keeping with a recommendation made by the Policy and Operations Evaluation Department (IOB) in 2013.4 Two concerns raised in the IOB evaluation are relevant to the question of what contribution the private sector can make to towards achieving sustainable development goals. The first is the need to measure the impact of PPPs on pre-agreed goals, as current information on PPP effectiveness is rather sparse.5 The second is the need for a sustained involvement in PPPs on the part of the Dutch government to protect the public aspect of such partnerships. In the IOB’s view, this involvement must above all be expressed through establishing and maintaining systems (including safety, quality and accessibility standards, etc.).6

However, even when the private sector is encouraged to contribute towards achieving sustainable development goals by improving production processes, legislation can still stand in the way. One example is competition law, intended to prevent cartels, abuse of dominant market position by individual companies, and unwanted market concentration created through mergers and takeovers. Cartels come about when businesses enter into agreements with one another on production levels and prices; preventing such agreements is in the consumer’s interest, as prices are kept lower.

However, the ban on agreements can sometimes conflict with attempts to improve production methods in the interest of corporate social responsibility. Corporate social responsibility means, by definition, setting standards that go beyond those legally required. For businesses, this means it is more attractive for entire sectors – rather than individual companies – to commit to higher standards.

This leads to the question of whether there can be exceptions to competition law for agreements between businesses to make production more sustainable. In competition law, the question is to what extent non-economic interests constitute grounds for such an exception. In recent years, demonstrably more attention has been paid in the Netherlands to the role of non-economic interests when applying this law.7

However, there is still insufficient scope for businesses to enter into agreements on greater sustainability in various areas. These include more transparency on the origin of raw materials, preventing child labour and increasing the sustainability of food production.8

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1 For more information, see: <http://www.un.org/en/sustainablefuture/>.
2 AWT, Waarde Creëren uit Maatschappelijke Uitdagingen [Create Value from Societal Challenges], The Hague, 2013.
3 PPPLab Food & Water, Public-Private Partnerships: a Brief Introduction, The Hague 2014, p. 25.
4 That is, ‘Systematic analysis of PPP performance could provide more insights in the success and failure factors underlying PPP effectiveness.’ IOB, Public-Private Partnerships in Developing Countries: A Systematic Literature Review, The Hague, 2013, p. 13.
5 Idem, p. 45.
6 Idem, p. 39.
7 See Social and Economic Council (SER), Making Sustainable Growth Work, 2010. For more on this issue, see Tom Ottervanger, ‘Socially Responsible Competition: Competition Law in a Changing Society’.
8 For this last topic, see the parliamentary committee meeting on food of 9 December 2014.
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