The Case Against Self-Regulation in Extractive Industries

The Case Against Self-Regulation in Extractive Industries

Consumers are becoming increasingly aware of international social issues and are demanding more responsible businesses. A model that is often discussed as an example of successful industry regulation is the Kimberley Process Certification Scheme, which has been credited with a strong reduction in conflict diamonds. The Kimberley Process is celebrating its 10th anniversary this year, and it is worth examining its applicability to other extractive industries.

The Process

The Kimberley Process is a unique international regime in its composition and operation. The scheme was negotiated with NGOs, businesses, and governments all on equal footing, using a consensus decision-making model. The scheme is politically binding, rather than legally binding, for governments and is voluntary for diamond companies. It involves a dual track certification process where governments and industry work simultaneously to ensure all diamonds sold on international markets are accurately certified as conflict free. The process entails standards for shipment, records keeping, inspection, and certification issuance.

Has it worked?

There is significant debate over effectiveness. The portion of conflict diamonds on the world market dropped from 4% to 1% in the years immediately after its implementation, though this coincided with a reduction in violence in key diamond exporting countries such as Sierra Leone. Global Witness, one of the leading NGOs that pushed for the treaty in the early 2000s, has recently withdrawn its support citing the continued presence of conflict diamonds on global markets. Yet, while the agreement is not perfect most experts agree that it has made it harder for rebel groups to sell diamonds internationally and even Global Witness continues to maintain that it is an improvement on what existed before.

Can it be extended to other extractive industries?

The Kimberley Process was a fascinating example of self-regulation by multinational companies. Because it was designed with industry input it is a fairly unobtrusive approach that seeks to limit harm to diamond companies’ profitability, while still accomplishing its goal of ending conflict diamonds. As other extractive industries begin to come under pressure for their lack of corporate social responsibility, it is worth considering if self-regulation is a reasonable path forward. It is ideal for industry in that it tends to be minimally invasive and inexpensive. However, it has obvious drawbacks in terms of its effectiveness.

The Kimberley Process was brought about due to a particularly effective NGO campaign and the inherent elasticity of diamonds. With the exception of a few industrial uses, diamonds are primarily valued for their natural beauty and their expression of love. In many ways they are the opposite of staple products and consumers could easily choose to abstain from the diamond market and find replacements in the form of other gems. Diamonds are also marketed directly to consumers who are more susceptible to media reports and societal shifts. Thus, the diamond industry thought there was a genuine threat of a widespread consumer boycott if they did not act quickly to address the problem. The diamond industry, like most industries, was extremely reticent about the prospect of voluntary regulation. It was only when the combination of NGO pressure and threat of a boycott reached a level seen as extremely dangerous for profitability that the industry moved forward on the Kimberley Process.

Other extractives such as oil, cobalt, copper, and iron are intended for consumption by businesses that turn these extractive products into marketable goods. The link to the consumer is thus less direct. Additionally, as climate advocates well know, finding a replacement for something like oil is not an easy task. Thus, while self-regulation could potentially be an effective avenue for extractive industries it appears unlikely that sufficient pressure will mount to force them into a comprehensive self-regulating regime. Those concerned with the social responsibility of extractive industries would do well consider alternative approaches.

About Author

Evan Abrams

Evan was previously a strategy consultant with Anant Corporation, where he helped companies streamline and grow their online operations. He has interned at the United States Senate, the U.S. Department of Commerce, and SRI World Group. He is particularly interested in international monetary and trade policy. Evan also closely follows the private space sector, on which he completed a master’s thesis. He is currently pursuing a Juris Doctor at the Georgetown University Law Center. He holds a master’s degree in international relations from the London School of Economics and a bachelor’s from Georgetown University’s School of Foreign Service.