This Week at the Alliance
|With this issue we bid farewell to our research associate Asprey Liu, who among many valuable contributions to the Alliance has served as editor of this newsletter. Her energy, passion and skillful editorial pen will be greatly missed, and we wish her success as she embarks upon a graduate program at Columbia University.|
Introducing: Debt, Sustainability and Governance Forum
Source: Paris Club
Thursday, June 4 at 11am EDT/ 5pm CET—The Alliance is pleased to commence a new Speakers Series: the Debt, Sustainability and Governance Forum. The speaker will be Schwan Badirou-Gafari, Secretary-General of the Paris Club, moderated by Fergus McCormick.
The Forum aims to engage officials from international financial institutions and emerging market governments, independent policy experts and institutional investors to discuss the G20 debt service suspension initiative and other aspects of the debt crisis in emerging markets. We intend to explore topics such as: the strengths and weaknesses of the heavily indebted poor countries (HIPC) initiative; how to address investors’ interest in reaching a sustainable economic outcome to the crisis; and how international financial institutions, governments and investors can collaborate to find a systemic solution to crisis conditions.
Please note that the call is exclusive to emerging markets investors professionals.
Monthly Working Group Calls
We have a new round of monthly Working Group calls coming up this fortnight:
Launching Soon: Technology, Media, and Telecommunications (TMT) Program
The Alliance is seeking institutional investors to participate in a new Program examining issues in the Technology, Media and Telecommunications (TMT) sector.
This sector has been one the fastest growing among emerging market industries in recent years, bringing with it a range of sustainability issues. In its Technology & Communications Sector Standard, the Sustainable Accounting Standards Board (SASB) cites a number of relevant ESG focus areas, all of which are key issues for EM:
One of the major environmental impact areas associated with TMT is the waste generated by telecommunications devices and equipment. Research Director William Woo provides a snapshot of the issue below. If you are an emerging markets finance professional interested in participating in a Working Group on this topic, reach out to him here.
Waste Management in the TMT Supply Chain
Source: Platform for Accelerating the Circular Economy (PACE).
Supply chains in the TMT industries have come under a bright spotlight in recent years with the progression of the global effort to contain the environmental accumulation of waste. Research by the UN and World Economic Forum (WEF) shows that electronics are the source of the most rapidly growing waste stream—increasing annually by 50 million tonnes, or $62.5 billion worth globally—of which only 20% is appropriately repaired, recycled or reused. Collection rates for electronic devices are low around the world, but emerging markets tend to bear the burden: In 2018 China, previously the world’s largest buyer of recyclable waste, enacted a ban on the import of virtually all waste streams to process its existing backlog.
China’s ban is one among many legislative efforts to motivate sustainable design and reuse practices in the TMT sector. The Basel Ban Amendment, a 1995 agreement prohibiting the OECD members, EU states and Liechtenstein from exporting electronic and other hazardous waste, became international law in December 2019 following its ratification by a total of 98 states, including key import countries such as Indonesia (but notably excluding the US, South Korea, Brazil and others). In March 2020, the European Commission (EC) issued a Circular Economy Action Plan that includes policies specifically targeting the TMT industries. However, in some cases these measures have only increased illegal transfers and diversions of e-waste shipments, shifting the problem to less monitored regions such as Vietnam and Nigeria.
The Challenge and Opportunity
The policies and legislative measures outlined in the Basel Ban and EC initiative are early iterations of the growing compliance challenges that TMT companies face. As the WEF and Platform for Accelerating the Circular Economy (PACE) argue, the TMT sector would benefit from a circular economy approach: reusing as much of the original inputs of discarded products as possible in the production of new products.
This strategy would require electronics manufacturers to play a key role in promoting responsible design (e.g. no single-use devices) and management of waste (e.g. redemption fees) in the TMT industries, of which proper, legal recycling would be only one component. Communications carriers and electronics retailers downstream would also have a role to play in this circular strategy.
Investors have the opportunity to support innovation and guide the evolution of the TMT sector towards environmentally efficient practices and sustainable value. For more information on how to get involved, please reach out to William Woo. – William Woo
IBP's Open Budget Survey 2019: Key Takeaways
The International Budget Partnership (IBP) is an independent nonprofit organization working to improve transparency and accountability in government budgeting around the world. Its major publication is the Open Budget Survey (OBS), a biannual analytical survey that measures and ranks the budget transparency of country governments around the world. The 2019 OBS report has recently become available.
The OBS 2019 ranked budget transparency on 117 countries, adding two more countries (the Gambia and Jamaica) to the sample. Here are five main results that stood out from this round:
OBS 2019 continues a trend of sustained but modest improvement in budget transparency since the inception of the OBS in 2006. The 2019 survey saw an increase in the average OBS score and a decrease in dispersion around that higher 2019 average relative to 2017, signaling a modest overall improvement in budget transparency. This restores the upward trend in budget transparency scores that have largely maintained since the survey began in 2006, except for a brief reversal in 2017.
Source: IBP, EM Investors Alliance.
Global budget transparency is insufficient as most countries fall short. While the restoration of the trend towards budget transparency is encouraging, the remaining inadequacies in most countries’ budget transparency scores still present a formidable challenge. The IBP’s research has determined a budget transparency score of 61 as the minimum threshold indicating that a country fosters informed public debate on budgets. Only 31 out of 117 countries met or passed this threshold in 2019 (see Chart 1)..
Stronger oversight—the purview of legislatures and supreme audit institutions (SAIs)—is needed to ensure budgets are implemented as planned. Of the 117 countries surveyed, only 34 demonstrated adequate budget oversight from the legislature whereas 71 were found to have adequate budget oversight from SAIs. A mere 30 countries have adequate oversight from both legislatures and SAI’s.
Source: IBP, EM Investors Alliance.
Rapid progress is possible when policymakers and other stakeholders commit to enacting the open budget agenda. In the past couple of years, several countries have made important strides in improving budget transparency, albeit from low initial score levels. The countries that have shown the most improvement are Lesotho, Botswana, Eswatini, Zimbabwe, Vietnam, Zambia, Myanmar, Cameroon, Rwanda and Saudi Arabia (see Chart 2).
The IBP lays out the following four recommendations for accelerating budget transparency: 1) Provide sufficient levels of budget transparency 2) Increase public participation in the budget 3) Strengthen monitoring and oversight of budget execution and 4) Sustain improvements on open budgeting.
Source: IBP, IMF, EM Investors Alliance.
Institutions matter: Budget transparency is associated with stronger economic development. Why should countries strive for greater budget transparency? One reason is the potential benefit to economic development, as captured by GDP per capita data. There is a strong correlation between rising GDP per capita and higher budget transparency scores (see Chart 3). The main outliers appear to be Qatar and Saudi Arabia, which have high GDP per capita and low budget transparency scores. (These countries, which catapulted into wealth through rich natural resource endowments relative to small populations, are exceptions to the usual development process that requires institution-building and productivity enhancement.) – Daniel Volberg
Feedback on TPI's Carbon Assessment for Mining
Last week, several members of the Alliance Extractive Industries Working Group convened to discuss the recent paper from the Transition Pathway Initiative (TPI): “Carbon Performance Assessment in the Diversified Mining Sector.” We summarized our initial take on the study in a previous issue of the newsletter.
TPI, the asset owner–led program assessing companies’ preparedness for transition to a low-carbon economy, produced the study in conjunction with the Grantham Research Institute at the London School of Economics. As TPI has done with other industries, the study evaluates the emissions profile of the world's ten largest diversified miners by market capitalization (according to its sectoral decarbonization approach) and seeks to identify which miners are on a path consistent with the trajectory entailed by the Paris climate agreement.
Participants of our discussion expressed the following views on the report:
1. TPI has done a helpful and relevant analysis. The group welcomed TPI’s comprehensive and high-level assessment of carbon emissions in the diversified mining sector. The difficulties of measuring Scope 3 emissions and the lack of comparable, company-level data were noted. TPI’s approach was received as a meaningful step towards producing a clearer view of the sector’s impact. The use of copper-equivalent output to arrive at unit-based emissions, while subject to distortion and volatility, was generally accepted as the right method.
2. Questions remain over company selection. The choice of market capitalization as the selection factor for the 10 companies included in the study prompted questions. Some argued for the preferability of other market-based measures such as enterprise value. Other potential screening measures were suggested, including revenues, assets, emissions and copper-equivalent output—or a possible combination of these. Given the diverse activity of these miners, it was also suggested that a broader universe (perhaps 20 companies) might have resulted in a different and more salient perspective.
3. The report says more about commodities than companies. Some in the group commented that the paper could be more accurately described as a study on the carbon footprint of commodities rather than an analysis of carbon performance by firms —an approach that overlooks how miners themselves are managing their emissions. While the authors were clearly aware of this, noting that company carbon performance was a direct result of production mix, the presentation of the results may create the misleading impression that a copper producer is “outperforming” an iron ore producer, thereby downplaying the ability of all companies to influence their own carbon footprint. Scope 1 and 2 emissions could be given more emphasis, as well as a greater effort to benchmark companies along similar commodity lines—though this is no easy task given the diversity of output and limited Scope 3 disclosures.
4. Is there an incentive to use “technical maneuvers” to decarbonize? One message from the report seems to be that poorly-scoring companies can improve their position by divesting higher-emissions segments such as iron ore or thermal coal. But members of our group expressed concern that an unintended consequence of such action could be the transfer of assets to off-balance-sheet joint ventures or opaque third parties with weaker standards and disclosure. Surely such assets are better housed within responsibly run mining groups who provide full disclosure and are incentivized to manage these assets more efficiently? This is particularly important for commodities that are less subject to substitution and therefore likely to continue operations for many years.
5. The role for innovation, efficiency and recycling should be more prominent. According to some in the group, the paper put inadequate emphasis on the role that efficiency and innovation can play in reducing emissions, notably in steel production, where “green steel” technologies such as hydrogen-based direct reduction and molten oxide electrolysis are emerging. Moreover, there was no discussion in the paper of the role that recycling can play in reducing the carbon footprint of a finished commodity. Surely a highly recyclable metal should be treated more generously from a carbon accounting perspective compared with one that is used only once.
6. Iron ore versus met coal: How should we do Scope 3 carbon accounting for steel? On a more technical note, not all in the group understood the logic of assigning 100% of the Scope 3 emissions from steel production to the iron ore input, and none to the metallurgical coal. It was not clear why “sharing” of the carbon among these two commodities was not more rational.
7. Is it time to widen the scope beyond carbon? While some members supported the TPI’s narrow focus on greenhouse gas (GHG) emissions, others argued for a more holistic analysis that would include consideration for the broader impact of mines on a range of sustainability issues such as water supply and biodiversity.
8. Lack of disclosure from EM miners is disappointing. Finally, we noted the lack of details for some of the emerging market companies in study’s universe, particularly Norilsk.
Overall, the group agreed that TPI’s report represents a step forward in the effort to develop an analytical framework to understand better and assess the full emissions profile and outlook of mining. – Andrew Howell
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