- Malavika Parthasarathy
I. Why do corporations comply with soft regulation?
Beyond Petroleum (‘BP’), an integral part of the world’s most polluting industry, has despite the nature of its operations, attained a reputation for being environmentally progressive. Currently seen as somewhat of a leader among corporations in terms of tackling climate change, in 2020, BP stated that it would stop oil and gas exploration in new countries, lower its carbon emissions, and boost capital spending on low-carbon energy ten-fold. Serving as the fulcrum around which BP centered its shift in image was the Paris Agreement, a soft law that aimed at limiting carbon emissions. So strong was BP’s perceived support for the Paris Agreement that in early 2021, BP’s CEO and the former Executive Secretary of the UNFCCC co-authored an article about the role of corporations in furthering the Paris Agreement. A natural question that arises in this context is why BP, along with a host of other corporations in industries as varied as food & beverage and apparel, would choose to support soft laws. They are, after all, instruments that only give the appearance of legality but are in fact unenforceable. Yet, despite the non-attachment of legal sanctions, these soft laws are able to regulate the activities of these corporations. What could help explain this phenomenon is an understanding of the role of social norms in determining the adoption of and compliance with non-binding regulations in the context of transnational ‘new governance’ structures. Scholarship on legal pluralism suggests that state law is not the only form of law. Rather, the regulatory space is characterized by ‘regulatory capitalism’, where state regulation, non-state regulation and civil law co-exist in multiple configurations. In contrast to traditional command and control regulation by the state, embodied in scholarship on ‘new institutionalism’, new governance structures are used by the state to harness decentralized, ‘soft’ measures of regulation, with increased reliance on private actors for expertise and orchestration. Transnational new governance structures, which operate in the international context, play out slightly differently from new governance structures, and are created from the bottom-up by societal actors. They are governed by a triad of main players: the firms and industries themselves, civil society organizations, and combinations of actors from these two categories.
Global capitalism and neoliberal free trade rules have led to a change in the role of states. States participate to a slightly more limited extent in these structures, with states and intergovernmental organizations serving mainly as orchestrators. India, with its own unique avatar of capitalism, operates in a system that consists of both formal rules and informal ‘deals’. Over the years, India’s government has gradually ceded control to independent regulators such as the Securities and Exchange Board of India (SEBI) and the Telecom Regulatory Authority of India (TRAI), among others. While large swathes of our economic system continue to be regulated by the government or by independent regulators, there is some evidence of a shift towards self-regulation in certain sectors. In 2020, the Reserve Bank of India (RBI) proposed that a self-regulatory organization be set up to regulate India’s digital payment system. Following this announcement, in 2021, India’s leading technology and internet associations decided to bid to create an industry-regulated body that would supervise the digital payment system. This shift in favour of self-regulation in an increasingly important sector is perhaps a foreboding of what is going to emerge next in India’s regulatory landscape. In this context, it is crucial to understand the role of regulatory norms in governance structures.
Regulatory norms are voluntary and a form of soft regulation, with social norms playing an important role in determining compliance with soft regulation. These norms are produced through the interactions of groups and their individual members. Actors within a social context are able to determine what is appropriate behaviour and what is not based on social norms. Sanctions, both positive and negative, typically determine enforcement of these social norms. Those who comply with social norms gain social approval while those who do not comply attract social disapproval. In the context of corporate soft governance, violations of regulations lead to the attachment of negative sanctions (disapproval), while compliance leads to positive sanctions (approval).
Literature suggests that regulation may take place without recourse to rules, through economic incentives steering business behaviour, moral suasion, shaming, and architecture. Some suggest that informal sanctions such as negative publicity, public criticism, gossip, embarrassment and shame may in fact serve as more of a deterrent than formal sanctions. For example, in the 1990s, concerns began to arise about Nike’s factory practices in countries such as Indonesia and Pakistan, where underage labourers toiled in appalling conditions in sweatshops. The resulting outcry and mass-campaign affected Nike’s reputational capital to the extent that Nike soon adopted a sustained strategy to fight abuses in its supplier factories. Nike is now seen as more transparent than its competitors in terms of its labour practices. This is just one example of how informal sanctions can create massive change. Regulatory schemes can promote strict standards by drawing attention to the reputational benefits of compliance, making reputation an important factor in corporations’ cost-benefit analysis.
Reputation is important to corporations. Studies have shown that corporations that have favorable reputations are allowed to charge higher prices, and that it enhances access to capital markets and generates financial benefits. Corporations that have faced reputational crises find the market value of their shares plummeting (for example, Exxon after the Valdez oil spill). Reputation incentivizes firms to behave in certain predictable ways, and could serve as a form of regulation.
From the perspective of scholars on regulation, the classic deterrence approach points to the indeterminate cost of bad publicity on a firm’s reputation, which serves as a significant deterrence to non-compliance. In the current environment, firms’ reputations are increasingly dependent on branding. The rise of global brands means that firms’ reputations have become increasingly susceptible to attacks. Information about poor business conduct can be easily disseminated with the click of a button- ‘name and shame’ campaigns have targeted corporate giants such as Monsanto, Exxon, Nike, Nestle and Walmart. Corporations, particularly transnational corporations, have been pressured to comply with regulations and act with responsibility for fear of reputational loss. Regulations are ‘extant social contracts’, where firms voluntarily adopt regulations in an environment where they are allowed to create their own norms. When firms perform these social contracts, their reputational capital grows, while when these contracts are breached, the breaches result in reputational harm. This reduces corporate reputational assets. Corporate reputation is both fragile and valuable in an environment where global civil society is alert and responsive to changes in global corporate conduct. The financial benefits of robust reputational capital make it a prized commodity. Yet, it is also sensitive to fluctuations when the performance of social contracts is involved.
II. What role did reputational factors play in BP's support for soft law?
Within this framework, BP presents a classic example of a corporation that has helped grow its reputational capital through its support for a soft law- the Paris Agreement- created by the UNFCCC, an inter-governmental organization. BP has not always expressed its support for regulatory frameworks, and in fact, until only a few decades ago, was an important part of the Global Climate Coalition, a group of corporations that lobbied against climate regulations.
Founded in the late 1980s, the Global Climate Coalition consisted of corporations from industries that derived their profits from fossil fuels. Amidst rising international concern about global warming, environmentalists were calling for regulations that would limit fossil fuel emissions. The GCC coordinated efforts to oppose mandatory limits on carbon emissions. In the mid to late nineties, it ran extensive public relations and advertising campaigns, worth over multiple millions of dollars, pushing back against the Kyoto Protocol. The Kyoto Protocol was a treaty that imposed limits on carbon emissions by each state. This campaign by the GCC received bad publicity. Members of the coalition were called out for being a part of it. Corporations began to steadily leave the GCC, and in 1997, BP finally exited the GCC. Leaving the GCC in fact marked a small reputational victory for BP, as it was able to attract the praise of environmental groups such as Greenpeace. 
BP began to slowly shift its stance on regulation, and started to advocate a ‘measured approach’ that would not be detrimental to economic growth. BP changed its name in 2001 from ‘British Petroleum’ to ‘Beyond Petroleum’, and began to position itself through advertising and rebranding as being at the ‘forefront of climate change mitigation’ and as a ‘green oil company’. It claimed to be distinct from players like ExxonMobil, which continued to both deny climate change and oppose any regulation. BP’s branding exercise was largely successful, though behind the scenes it continued to increase oil production and exploration to address the needs of markets such as Russia, Angola, China and Egypt. 
BP suffered a devastating reputational blow in April 2010, when an explosion at the Deepwater-Horizon oil rig released millions of gallons of crude oil into the Gulf of Mexico, in ‘one of the worst environmental disasters in world history’. Eleven workers at the rig lost their lives, and millions of animals, fish and birds were killed. To this day, the fragile marine ecosystem in the Gulf of Mexico continues to suffer. Nearly every major oil company had had its own environmental disaster. Yet, the rest of the oil industry tried to single out BP, painting it as an outlier in order to resist regulation. Rather than pushing against regulation, BP did something rather surprising. It started to embrace regulation.
This embrace of regulation must be contextualized. BP underwent a major overhaul in the aftermath of the Deepwater Horizon Oil Spill, retooling its facilities and ousting its top executives. It sold assets worth several billions of dollars, and was taken over by a new CEO. BP also cooperated with the Obama administration in its investigation. Despite pleas to the contrary by other oil companies, regulators emphasized that it was not a firm-specific issue and that industry-wide reforms must be put into place.
It was BP that led the oil industry to form the Oil and Gas Climate initiative in 2012. The members of the OGCI, including BP, Chevron, ExxonMobil, Shell and Total, aim ‘to accelerate the industry response to climate change’, and ‘explicitly support the Paris Agreement and its aims’. The Paris Agreement, unlike the Kyoto Protocol, is a soft law. While the UNFCCC claims that the Paris Agreement is a ‘legally binding’ international treaty, the Agreement creates a framework where countries are politically encouraged to set certain climate goals, rather being legally binding. The national climate goals have political, rather than legal force. The OGCI has released several position papers that underline its commitment to the goals of the Paris Agreement, and its website highlights its pledge to helping nations achieve their obligations under the Agreement, though it is markedly short of details about the specifics. BP’s website has a prominently displayed tab called ‘Reimagining Energy’, dedicated to showcasing its commitment to renewable sources of energy, reducing emissions and sustainability. The website showcases BP’s support for the Paris Agreement, featuring over a hundred news articles, speeches and press releases on the Paris Agreement alone. Far from the days of the now-defunct GCC, energy companies led by BP have begun to strongly embrace, or at least give the outward appearance of embracing, soft regulation.
This is an interesting outcome, for BP and the rest of the oil industry’s support for soft regulation has perhaps yielded more benefits for it than its resistance towards regulation. BP has managed to build its reputational capital through its support for the Paris Agreement. In fact, this has even led to tangible outcomes such as a marked increase in share prices. BP is engaging in a type of self-regulation. Incentives such as improved reputational capital, and sanctions such as naming and shaming are factors that result in desirable regulatory outcomes even without the intervention of state regulators.
New governance, as well as transnational new governance structures are able to regulate behavior despite the absence of legal sanctions, merely through the operation of social norms. This withdrawal of state actors in certain areas, and the privatization of the legal regime do not necessarily have a negative impact on the attainment of regulatory goals. Rather, legal sanctions are substituted with non-legal sanctions and incentives that are able to direct corporate behavior. BP’s shift in stance from being against hard regulation to embracing soft regulation was a remarkable reputational move. While oil companies attempted to paint BP as an outlier in the aftermath of the Deepwater Horizon disaster in order to resist regulation, they are now members of the BP-led OGCI, and have been emulating BP’s model. The oligopolistic nature of the oil industry also strengthens the role of social networks. Oil companies tend to emulate one another’s moves. Currently, they all proclaim support for the Paris Agreement. If any of these corporations were to rescind their commitment to the Paris Agreement, it could possibly lead to the attachment of non-legal sanctions, such as having a negative impact on reputational capital.
BP’s strategy tells us a lot about the reputational value of embracing soft regulation. BP stops short of making a commitment to hard regulation, but is still able to communicate that it wants to do better. It is able to skillfully highlight its advocacy for soft regulation to signal its belief in certain values. The rest of the oil industry was forced to make commitments similar to BPs, until the industry-wide standard itself shifted to one embracing soft regulation. Network effects enhanced its value, leading to a strategic shift in the industry itself. BP is seen as a leader in this area because it availed itself of a distinct first-mover advantage, and has changed the ‘currency’ for doing business in the oil industry.
In the context of international environmental law, several soft law instruments call for the strengthening of world cooperation by referring to the atmosphere as being a part of the ‘common heritage of mankind’. This idea finds an echo in BP’s objectives, mission statements and press releases. BP signals its deep commitment to international environmental law not just through the overt invocation of the Paris Agreement, but by mirroring the language of the principles embodied in soft law on the environment.
BP is not a strong player in the Indian fuel market, despite a recent collaboration with Reliance (Jio-BP). The Oil and Natural Gas Corporation (ONGC) and the Indian Oil Corporation are dominant players in the Indian fuel market. The Indian Oil Corporation, a state-run enterprise, has made a pledge towards sustainability. It started publishing sustainability reports from 2007-2008. The 2016-2017 Report invoked the Paris Agreement (India ratified the agreement in 2016), pledging to reduce its carbon and water footprint by 18 and 20 percent respectively by the year 2020. ONGC, also a state-run enterprise, began publishing its sustainability reports in 2009-2010, with the 2017-2018 report invoking the Paris Agreement. According to the Report, the management of the enterprise is making sure that the organization ‘stays current with global climate change negotiations and India’s domestic commitments’.
While this is by no means an exhaustive survey of all the corporations in the Indian oil industry, reports published by these enterprises strongly reflect the values of the Paris Agreement, and a pledge to further its aims. What remains to be studied are the factors that motivated the invocation of the Paris Agreement by these corporations, and whether the preservation of reputational capital motivated this invocation.
Both corporations and states use soft law as signaling mechanisms and to drive beliefs about their future behavior which in turn promotes cooperation. In the context of BP, as it experienced improved reputation through its commitment to the Paris Agreement, other oil companies followed suit. The soft-law standard became exponentially more valuable as more companies adopted it. This widespread adoption eventually caused standardization of practices. The possible reputational impact of non-compliance has a deterrent effect. Departure from these standards would then come with significant reputational and financial costs, incentivizing adherence and penalizing non-compliance.
The BP case is important because it draws attention to the role of social norms, which are enforced by the community rather than the state, non-legal sanctions, and non-economic incentives in influencing regulatory outcomes. The increased dominance of transnational new governance regimes does not necessarily lead to poor regulatory outcomes. ‘Soft’ forms of regulatory governance can be just as effective as traditional command and control regulation in ensuring the achievement of desirable regulatory outcomes. As evidenced by the case study of BP, reputation plays an important role in determining outcomes.
This piece does not call for the withdrawal of the state from regulatory frameworks. Rather, it stresses that in spaces where state regulation is difficult- a problem that is especially exacerbated in the transnational context- soft law structures may serve as substitutes or complements.
Two words of caution. Some states, with good cause, are skeptical about the power of soft regulation to ensure compliance in the context of business and human rights. Within the business and human rights framework, corporate responsibilities are expressed in the form of soft law. Concerns about the ability of soft regulation to ensure compliance persist. What complicates this issue further is that in the context of global supply chains, manufacturing generally takes place in developing countries, which may not have robust systems to ensure the health and safety of their workers. One stark example is that of the Rana Plaza disaster that took place at the outskirts of Dhaka, Bangladesh. It took a disaster of this magnitude for leading brands to form the Bangladesh Accord, a legally binding agreement between brands and trade unions for a safe textile industry in Bangladesh. A soft law approach in this situation may not have been appropriate or proportional to the sheer scale of the disaster at Rana Plaza. Treading more carefully while designing a regulatory framework in developing countries where citizens are more vulnerable to rights abuses by global corporations is essential. Non-compliance in such cases can have fatal consequences. The existence of a robust civil society to bring attention to these violations, and the engaged involvement of the public are indispensable to ensuring that errant corporations suffer from a blow to reputational capital. Regulation through reputation can take place only when corporations value reputational capital and stakeholders possess the knowledge, willingness and ability to impact reputational capital.
The second clarificatory note is that regulation exists along a continuum. Hardness and softness are a question of degree, with soft regulation taking multiple forms. This article has not delved into these myriad manifestations, but a closer examination of the degrees of softness must be made for a more nuanced understanding of the power of soft regulation to induce compliance through reputational sanctions.
While it is true that social norms, non-economic incentives and non-legal sanctions may not always ensure effective compliance, recognizing these factors as possible complements to legal sanctions could ensure better regulatory design and governance in certain contexts. In an environment where India is slowly moving towards self-regulation, an understanding of these factors and the circumstances in which they operate could be crucial to the design of the country’s governance landscape.
Malavika Parthasarathy is an Associate Editor, Supreme Court Observer. She is interested in constitutional law, laws relating to gender & sexuality, and the business and human rights framework. She would like to thank Professors Lisa Bernstein and Tom Ginsburg from the University of Chicago Law School for their insightful comments, constant encouragement and for being unwavering sources of strength. She is also indebted to the Legal Scholarship Workshop at the Law School for pushing her at each session to be a better writer, scholar and critic.
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 ibid 505.
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 ibid 67.
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