Alliance Notes 4/14/20: Fergus McCormick and Andrew Howell Talk Covid-19, SASB Looks to Update its Tailings Standard

Tuesday, April 14, 2020

 

This Week at the Alliance

 

Announcements

 
  • On Tuesday, April 14 at 11am EDT, the ESG Initiative Working Group call will feature Mike Lubrano, Principal of Lubrano Advisory Services, LLC. Mike has an extensive background assessing, advising and engaging companies on corporate governance issues at International Finance Corporation (IFC), Cartica Management and now as Education Programme Advisor of the International Corporate Governance Network. He will discuss ESG advocacy and implementation, including  investment decision-making, types of ESG investors, common ways of incorporating ESG into the investment process, ESG strategies and ways of meeting investment objectives.

          Covid Chat: Fergus McCormick and Andrew Howell

           

          A worker sanitizes the public offices of the City Hall in Cuauhtemoc, Mexico City. © EneasMx under a Creative Commons Attribution-Share Alike 4.0 license.

          The pandemic remains the dominant and inescapable topic of the day. The IMF–World Bank Spring Meetings, taking place in a reduced virtual format this week, will be devoted to it, and we expect a major focus on the impact that Covid-19 is having on the developing world. Alliance Research Directors Fergus McCormick and Andrew Howell had their own virtual sit-down for a chat about the pandemic, its effect on emerging market economies and the prospective impact on sustainable policies.

          Andrew: So, Fergus. Needless to say, the impact of Covid-19 is looking increasingly challenging for much of the world. But at the same time there is a search for silver linings. Considering the epidemic itself—aside from the fact that it emerged in China, Covid-19 has so far primarily been a developed-world pandemic, at least from a numbers perspective: Most developing countries have reported relatively low infection rates. On the other hand, the economic fallout from the pandemic appears dire. How worried should we be for EM?

          Fergus: Andrew, when assessing the impact of the crisis on emerging markets, I think in terms of three steps. First, there is the severity and duration of the virus, the efforts to reduce infection rates and keep them low, the need to treat those infected, and the rush to create a vaccine. Second, there is the shock to the economy and the financial market sell-off. Finally, there is the policy response, the restructuring and rebuilding of communities and economies in the coming years and the political ramifications of the crisis. In all three areas there are significant unknowns, the most important of which is how long the virus will last.

          Starting with the pandemic, it is encouraging that some countries appear to be successful in containing the virus. The growth in virus-related deaths is starting to slow in developed economies as well as in some emerging markets. However, once the infection rate is brought down, there is great uncertainty over how to maintain a low infection rate. I suspect the attempt to keep infection rates low could go on for six to 18 more months.

          However, many emerging markets do not have the capacity to implement social distancing. How does one remain at home if finding food and medicine depends on human contact? In poor, densely populated urban and rural areas, the virus is spreading rapidly. Moreover, few emerging markets have adequate infrastructure to treat those infected. Many who die will be undocumented; many who survive will be plunged into poverty.

          On this point, the United Nations University World Institute for Development Economics Research (UNU-WIDER), the International Labour Organization (ILO) and International Food Policy Research Institute (IFPRI) have estimated the effect of the virus on poverty rates. The IFPRI estimates that a global GDP slowdown of one percentage point leads to a rise in poverty of 14 to 22 million people (based on daily income of USD$1.90.) The UNU-WIDER survey suggests the virus could drive half a billion people into poverty. Whatever the magnitude, poverty is likely to increase for the first time since 1990, thereby delaying the UN Sustainable Development Goal of ending poverty by 2030. Greater poverty will strain healthcare budgets and could lead to episodes of violence. This could have adverse political implications.

          Andrew: Given the sensitivity of these poverty numbers to an economic slowdown, where are we in our understanding of the economic hit to the developing world from the pandemic shock? Do we have a sense of how bad it might get? And are you seeing much divergence in economic performance in the wake of this crisis—a bifurcation of commodity exporters and importers, for example, or of open versus closed economies?

          Fergus: This is a very challenging situation for emerging markets. The flip side of slowing the growth in virus-related deaths is allowing economic activity to collapse. There has been a record decline in consumer demand for many services; this is because most services require human interaction. There is also a slowdown in the production of goods; this is because workers are unable to go to work, and supply chains have been disrupted. There are also knock-on effects to financial markets, sharp declines in asset prices and liquidity flows and a sharp rise in unemployment. These factors are constraining people’s incomes.

          Determining the extent of the downturn is exceedingly difficult since the crisis is moving at such a fast pace. However, countries that have locked down account for more than one-half of global output. At least for the second quarter of the year, output will decline sharply. Kristalina Georgieva, IMF Managing Director, said in her Curtain Raiser speech opening the IMF–World Bank Spring Meetings that global growth will turn sharply negative this year in the worst economic fallout since the Great Depression. For many emerging markets, the multiple shocks they are weathering could amount to the biggest crisis since independence.

          A return to the level of productive activity before the pandemic will depend on several factors. Of course the most important is whether a vaccine is developed, or whether the virus simply burns itself out. If a vaccine is not discovered, and countries decide to relax the lockdowns, the resumption in activity will depend on the deadliness of the virus. It will also depend on how successful countries are in reducing contagion, executing an effective policy response to the crisis and limiting the damage to the economic structure of their economies.

          Compounding the picture is that many emerging markets had weak balance sheets prior to the pandemic. Many had heavy debt burdens of bonds denominated in foreign currency and high fiscal or current account deficits. Many also failed to do the heavy lifting of reforming their healthcare systems, social security systems or infrastructure. They are now faced with a perfect storm of pressures: fighting the virus with inadequate healthcare systems; dealing with demand and supply shocks; tighter financial conditions; and record high capital outflows. Institute of International Finance (IIF) data shows that in March alone, emerging markets suffered a sudden stop of portfolio capital outflows of a record $83.3 billion from stocks and bonds. Commodity exporters are further suffering from the collapse in oil and other commodity prices, and tourism revenue has dried up.

          The sudden severity of this crisis puts the onus on the IMF and other  multilateral and bilateral lenders to provide immediate financial support in the trillions of dollars. The good news is that this support is materializing, and the initial financial panic has been halted. This is complemented by an unprecedented fiscal and monetary policy response. An important question is how much fiscal space each country has to confront the many aspects of the crisis. Given the amount of leverage on balance sheets, existing debt may have become unsustainable. Some countries will be granted debt relief, while widespread debt restructuring is very likely to occur eventually.

          The IMF Catastrophe Containment and Relief Trust will provide immediate debt relief to low-income countries affected by the crisis, thereby creating space for spending on urgent health needs rather than debt repayments. The IMF and World Bank have proposed that official bilateral creditors suspend debt service for International Development Association (IDA) countries that request forbearance. Official bilateral lenders are independently addressing certain countries experiencing debt-servicing difficulties. However, the longer the shutdowns continue, the more countries that will be in need of debt relief. Private creditors may be unwilling to buy these countries’ bonds. The silver lining on debt sustainability is that the interest rate is likely to remain low for a long time.

          Andrew: Now on the topic of what this means for sustainability, ESG and the transparency issues that we study here at the Alliance. A survey of our members revealed concerns about the near term but a fairly upbeat assessment on the longer-term impact of the pandemic on how investors, governments and companies think about sustainability. Two weeks ago in this newsletter, you wrote that you feel this crisis is likely to have a mixed effect on sustainability in EM over the medium-to-long-term. Now with the situation continuing to evolve, are you feeling more confident—or perhaps more worried—about the ability of governments and companies to continue to pursue progress in sustainability and transparency?

          Fergus: I am worried that this crisis has eclipsed most countries’ ability to prepare for climate shocks and address long-term environmental degradation. In many emerging markets there will not be fiscal space for sustainability measures. Fiscal expansion in emerging and developed markets alike will be aimed at addressing healthcare needs, providing food assistance and social protection, stimulating aggregate demand and limiting the damage to the economic structure. If countries bake sustainable programs into this stimulus, the results could be very positive. However, given the extent of the shocks, the best hope for emerging markets is that the IMF includes sustainable policy conditionality in their loan agreements. In return for official loans, the agreements could include such components as renewable energy as part of an infrastructure build-out.

          Over time, greater social equity, fiscal transparency and accountability surrounding the financial support programs could become more important as emerging markets’ dependence on multilateral institutions grows. Another consequence of the virus may be a shift in attention away from the narrow concept of ESG investing and toward the issues themselves:reducing poverty and inequality, increasing transparency and accountability, building effective healthcare systems and bolstering resilience to climate change.

          SASB Looks to Update its Tailings Standard

          Embalse Los Leones Tailing Dam, Chile. © WeHaKa under a Creative Commons Attribution-Share Alike 4.0 license.

          Members of the Extractive Industries Working Group held a call with the Sustainability Accounting Standards Board (SASB)’s Ekaterina Hardin last week to discuss the organization’s update of its standard for management of tailings dams—part of its Metals and Mining and Coal Industries Standards. SASB has undertaken the update in response to industry and investor initiatives that arose  following recent, high-profile tailings disasters, including the failure of Brazil’s Samarco dam in 2015 and Brumadinho dam last year . These programs include the Investor Mining and Tailings Safety Initiative by the Church of England Pensions Board and the Council of Ethics of the Swedish AP Funds and the Global Tailings Review (GTR) by the International Council on Mining and Metals (ICMM), the United Nations Environment Programme (UNEP) and Principles for Responsible Investment (PRI). The aim of the GTR is to develop a new global tailings standard, expected to be released later this year.  

          In last week’s discussion, members of our working group shared a number of perspectives with SASB. The call participants noted the following problems with current disclosure practices on tailings: 

          1. a lack of disclosure by many mining groups of detail on the full range of their tailings assets
          2. disclosure that is overly technical and inaccessible to investors
          3. a lack of standardized metrics which makes comparability difficult and
          4. lack of third-party verification.

          Some participants voiced the desire for a simple scoring system that would allow for risk assessment by non-specialists as well as easy comparability among producers. They also  discussed the need for independent verification given that past tailings disasters were not necessarily associated with poor disclosure. The Initiative for Responsible Mining Assurance (IRMA) was cited as an organization that offers  independent, third-party verification and certification with respect to a comprehensive standard. 

          We are eager to see the final version of the ICMM/UNEP/PRI Global Tailings Standard as well as changes to SASB’s standard, both of which are expected later this year. -Andrew Howell

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