Firms Face Increased Reputational Risk for Corporate Responsibility Failures

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Executive Summary

 

Jama Mosque adorned with China’s flag and propaganda banners that read “Love the Party, Love the Country” in Kashgar prefecture’s Kargilik county. (Photo provided by an RFA listener)

Recently, Walt Disney Studios and metals and mining corporation Rio Tinto found themselves embroiled in scandals stemming from significant environmental, social, and corporate governance (ESG) failures, highlighting the need for firms to conduct research into potential reputational risks—in addition to due diligence and compliance checks—before engaging in business activities. Disney’s use of shooting locations in the Xinjiang Uyghur Autonomous Region (XUAR) in 2018 for the movie Mulan and Rio Tinto’s demolition of 46,000 year old Aboriginal caves in the Juukan Gorge on May 24, 2020 resulted in significant backlash and reputational damage for the two multinational firms.

Disney

 

Disney’s release of the live-action adaptation of its animated hit Mulan in September 2020 quickly became controversial after one of its shooting locations was identified as XUAR—the western province in the People’s Republic of China (PRC) where approximately 2,000,000 Uyghur and Turkic Muslim ethnic minorities are detained in reeducation camps by the Chinese government and used as slave labor. Disney also thanked eight state entities in the film’s closing credits, including Turpan’s Public Security Bureau, which was named to the Commerce Department’s BIS Entity List in October 2019 for its primary role in administering China’s internment system.

  • Prominent legislators in the United States, such as Senator Josh Hawley, condemned Disney for whitewashing the ongoing atrocities against Uyghurs and other Muslim ethnic minorities in Xinjiang. The Congressional-Executive Commission on China requested information about the studio’s cooperation with PRC officials, noting the company’s choice, “offers tacit legitimacy to those perpetrators of crimes that may warrant the designation of genocide.”

In Disney’s first public response to the controversy, Chief Financial Officer Christine McCarthy on September 11 downplayed the company’s ties to Xinjiang by noting that principal filming occurred in New Zealand and that scenery was filmed across 20 separate locations in China. McCarthy also said that filming in China required government authorization and acknowledging government entities that provided authorization in the film’s credits was standard practice. However, McCarthy also noted that the controversy, “generated a lot of issues” for Disney, although she failed to provide details or explain why Disney chose to film in the region in August 2018, when the media was reporting on China’s policies toward the Uyghurs and the United States first considered sanctioning responsible officials.

Rio Tinto

 

In May 2020, backlash against Rio Tinto led the company to admit that its demolition of Aboriginal caves in Australia was an, “incomprehensible mistake,” especially because it knew of the site’s historical and cultural significance since at least 2014. After noting that the destruction took place during National Reconciliation Week—a state-sponsored program intended to heal relationships between Indigenous and non-Indigenous Australians—pressure from activists investors, politicians, and environmental groups led to the resignations of the company’s CEO, Chief Executive for Iron Ore, and Group Executive for Corporate Relations in September. Rio Tinto’s shareholders expressed serious concerns about executive accountability, highlighting the need for a comprehensive approach to ensure the best timing, messaging, and engagement with stakeholders of major projects.

  • In August 2020, Rio Tinto published an internal report acknowledging that the company failed to meet its own standards to protect cultural heritage and work effectively with Indigenous groups. The company revoked performance-based bonuses for the three executives, and non-executive directors promised to donate 10 percent of their fees to the Clontarf Foundation, which supports Aboriginal education and employment.

Analysis

 

Disney and Rio Tinto are only the latest international conglomerates to face backlash for serious ESG failures. Global consulting giant, McKinsey, faced a public relations uproar after it held its 2018 company retreat in Xinjiang’s capital, Kashgar, roughly four miles from one of the city’s largest internment camps and only one week after the UN denounced China’s mass detentions. Japanese clothing brands Muji and Uniqlo garnered negative coverage for using “Xinjiang Cotton” as a selling point in 2019 and were named by the Australian Strategic Policy Institute as two of 83 global brands that benefit from Xinjiang forced labor. Sportswear firm Adidas in 2019 faced scrutiny for its treatment of non-white employees, and more recently was accused of a “muted response” to the death of George Floyd in May.

FiveBy assesses that firms linked to corporate responsibility failures, such as human rights violations, destruction of indigenous heritage, and racial discrimination—issues about which investors are progressively more concerned—will increasingly struggle to protect their public standing and value. Recent analysis by Bank of America, which estimated that failures to address ESG issues cost companies $534 billion in value between 2014-2019, supports our assessment.

FiveBy also expects companies that fail to address ESG issues to face greater public and regulatory scrutiny. Legislators around the world are under pressure from voters to hold major corporations accountable for ESG breakdowns. The EU is showing increased support for the adoption of a human rights-centered Magnitsky-style sanctions regime, similar to those enacted in the United States, Canada, and the UK. The Australian government is also reexamining its policies after authorizing Rio Tinto in 2013 to demolish the Juukan Gorge under the Aboriginal Heritage Act of 1972.

FiveBy encourages corporate responsibility leads to closely follow the public and regulatory blowback associated with engagements with companies in Xinjiang. On September 14, Customs and Border Patrol issued five withhold release orders on products the administration assesses are produced by slave labor in XUAR, directing officers at all ports to withhold release on goods such as hair products, clothing, and computer parts, and signaling that companies could face considerable scrutiny and possible complications to their business relationships in the region. Firms that continue engaging with companies in Xinjiang are also at risk of violating US and international sanctions. In July 2020, the US government issued an advisory, describing the risks and considerations for US firms with supply-chain exposure to entities engaged in human rights violations in XUAR.

 

FiveBy can provide reputational risk analysis for your organization and monitor your activities for potential vulnerabilities. We offer risk intelligence expertise to help our clients avoid violating OFAC sanctions, conduct due diligence research, and mitigate reputational and regulatory risk. Please contact us for assistance. 

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