Alliance Notes: Community consent brief / Back to school / Tailings / Accrual accounting

Monday, September 14, 2020

 

Alliance Events, 9/14/20

 

New Research

Last week’s resignation of Rio Tinto’s CEO following the destruction of indigenous ruins at Juukan Gorge serves as a stark reminder of the importance of getting community relations right in the extractive industries. We have published an Issue Brief on Community Consent that takes a closer look at the range of community-related issues that mining companies need to address and investors should be aware of. 

In the note, we summarize key insights from experts and look at specific disclosures on community consent from EM corporates including Anglogold Ashanti, Antofagasta, Grupo Mexico, Norilsk and Petrobras. We also list questions investors should be asking companies and survey best practices by companies on community consent. These include:

  • Establish a vision for community engagement. 
  • Make public human rights, indigenous rights, and gender commitments. 
  • Ask questions and engage communities on the issues that matter to them most. 
  • Be responsive to local grievances.
  • Adopt policies that promote local employment and development. 
  • Commit to FPIC, with detailed, public implementation guidelines. 
  • Take a data-oriented and transparent approach to monitoring and evaluation. 
  • Embrace new approaches. 

This is the first in a series of briefs looking into sustainability issues in the corporate sector relevant to emerging markets investors. 

Announcements and Upcoming Events

 

Agriculture 

On Friday, September 18 at 10am EDT, our Agriculture Program will host a webinar on Deforestation Risk in the Brazilian Cattle Supply Chain.  Our guests Barbara Kuepper,  Matt Piotrowski, and Tim Steinweg of Chain Reaction Research will present on their recently published report, Brazilian Beef Supply Chain Under Pressure Amid Worsening ESG Impacts.  One of the major issues outlined in this report is the little progress made by the meatpackers in monitoring their indirect suppliers,  thus allowing cattle laundered from deforested areas to enter their supply chains.  To address this problem, the National Wildlife Federation, in conjunction with the University of Wisconsin, has developed a new cloud-based traceability tool (VISIPEC) which brings enhanced visibility to the meatpackers multi-tier supply chain. Simon Hall, Senior Manager at the NWF will also join us for an overview of this tool and its state of implementation by the Brazilian meatpackers. If you would like to attend the call, please register in advance here.  Please note that the call is exclusive to emerging markets investment professionals.

 

Telecom, Media & Tech

On September 17 at 10am EDT, the Alliance’s TMT program welcomes Vanessa Forti of the United Nations University as the first speaker to kick off the Telecom, Media & Tech working group. Vanessa will give us a solid overview of the global electronics waste issue and an update on the latest policy developments in her presentation Global Monitoring of E-Waste. If you would like to attend the call, please register in advance. Please reach out with any questions.

 

Extractive Industries

On Thursday, Sep 17 at 11am EDT, the Extractive Industries working group will host a forum on engagement and advocacy in the extractive sectors. The purpose is to share feedback and ideas, both on specific engagements that members are working on as well as more generally with the engagement process. Reach out to us if you are an investor who is interested in participating.

 

Carbon Transition in Emerging Markets

The Alliance is launching a new program focused on the impact of the carbon transition on emerging markets. We are kicking off this effort with an opening discussion about the scope and goals of the program on Wednesday, Sep 23 at 10am EDT. If you are interested in this topic and are open to being part of the steering committee for this new initiative, let us know.

Recaps of Recent Events

 

Back to School “Maybe?”

On 9 September the Alliance marked the end of summer with our first annual Back-to-School Virtual Drinks.  A group of new and old Alliance supporters gathered on Zoom with Alliance directors to test their knowledge of the Alliance with a quiz on Alliance accomplishments.  Who knew that the Alliance put on 77 events last year?! The highlight of the evening was the comedy stylings of Dhaya Lakshminarayanan. Zoom comedy can come off without a hitch and the laughs were aplenty.  One asset manager commented, “Thank you for inviting me for this event, it was both funny and educational, a rare and perfect combination.” 

You can check out comedian Dhaya Lakshminarayanan at her website, twitter, or on Facebook at /dhayalive.

 

If you want to hear more about what the directors highlighted in each of their Programs & Initiatives, please contact Claire to schedule some time to catch up on what the Alliance is working on for the rest of the year and beyond. See you at the 2021 Back-to-School event and maybe even in person! 

 

Covid19: the Latest Reason to Adopt, Accrual Accounting Adoption

On September 1 the Debt and Fiscal Governance working group hosted Ian Carruthers, Chair of the International Public Sector Accounting Standards Board (IPSASB), to discuss the many reasons countries should adopt accrual accounting standards, the most recent being the repercussions of the Covid crisis. IPSASB is the only global standard-setting organization focused on public sector financial reporting. Composed of independent public sector finance experts, the IPSASB sets out to improve the recognition, measurement, and presentation of key components of all nations’ financial disclosures (i.e., debt, revenues, costs). When governments adopt accounting standards they not only standardize their fiscal presentation, but build in incentives to plan for their future without relying on corrupt practices or changing methodologies. Investors are encouraged by these reform efforts because standardized statements are critical to a higher confidence in valuation. One such standard has been IPSASB’s push toward accrual accounting which, as of 2018 only 25% of countries had adopted. IFAC predicts this number will grow to 65% by 2023. However, this target could be sooner met if investors were more clear and direct on why these reforms are important to them and can result in increased investment. Accrual accounting integrates the very valuable prerogative of a country’s grasp of its financial position, by building on the changes recommended by IPSAS, a finance minister is forced to extend his timeline and plan ahead. There is no wonder it remains the most vaunted transparency reform.  See the IPSASB online materials relating to this issue.

 

ESG investing in Latin America panel, with LarrainVial

On Sep 4, the Alliance hosted a panel discussion on ESG investing in Latin America, part of the 14th Annual Conference of LarrainVial, the Chilean financial group. An illustrious panel including Marcello Estevão (World Bank), Marshall Stocker (Eaton Vance), Ric Marshall (MSCI), and the Alliance’s Ashok Parameswaran and Nadine Cavusoglu discussed a wide range of topics. These included: 1) the impact of the covid pandemic on Latam economies and the ESG agenda; 2) the nature of the expected recovery and how “green” it might be; 3) the “paradox” of green bonds; 4) issues with ESG data and accounting standards; and 5) the importance of the rule of law in emerging markets.  On the positive side, ESG fund investments and investor awareness of ESG data have increased, but panelists shared a mixed view on whether the countries of the region will be able to provide environmentally and socially sustainable opportunities. Among other risks, Marshall Stocker invoked concerns about “isometric mimicry” -- the tendency of governments to attempt to replicate behavior and institutions in other countries with very different situations. The Alliance thanks LarrainVial for our ongoing collaboration. 

 

Extractive Industries: Discussion on recent tailings

On Sep 10, our extractive industries working group assembled on Zoom for an open forum on the newly released Global Industry Standard on Tailings Management. As a reminder, tailings are mining waste held in place by dams that have been linked with a number of high profile disasters in recent years, notably the failure of Vale’s Brumadinho tailings dam in Brazil in early 2019. The new standard was produced by a high profile Global Tailings Review, co-convened by ICMM, PRI and the UNEP.  Our discussion kicked off with a presentation from Jan Morrill of Earthworks, a group that has expressed concerns that the final version of the Standard, despite high aspirations, has turned out to be overly cautious and limited in scope (see their own “Safety First” standard as well as their scorecard comparing the new standard to their own). Jan noted that the Standard was weakened from the draft version released last year and now falls considerably short of what Earthworks sees as desirable. Shortcomings include the absence of a ban on upstream dams or aqueous tailings, no recommendation for filtered tailings, no required minimum distance between dams, weak requirements on liability insurance, and no requirement for obtaining community consent/FPIC. 

In our discussion, participants expressed a positive view that a global standard has been introduced, while echoing some of the concerns mentioned by Jan. In addition to the points above, one area of concern was over ensuring implementation of the Standard, especially among smaller mining companies who are not ICMM members and may have limited resources to address legacy issues. Here, clearly investors have a role to play in pushing for adoption of the Standard alongside clearer and more consistent disclosures of tailings risk.  

 

ESG Initiative 8/26 -  Mike Sell Discusses ESG Integration

On August 26 the ESG initiative hosted Mike Sell, Head of Asian Investments at Alquity Investment Management to discuss the way his firm integrates ESG into their investment process. We were eager to listen to Mike’s approach, as his fund, currently rated A+ by UNPRI, is considered the gold standard for incorporating ESG. Alquity delivers on this philosophy at every turn, but prides itself with its due diligence. Researchers assigned to cover credits take on the dual role of financial analyst and sustainability investigator.  While perusing fiscal projections and reviewing published accounts, they are engaging with upper management and ensuring sustainable best practices. 

Mike explained how incorporating ESG is an integral part of how he selects 25-50 portfolio candidates from a universe of 25,000 listed EM companies. Alquity takes into account industry-specific concerns as well as company best practice to help portfolio managers rank investment options. The investment team is able to then assign additional risk premium given the weaknesses and in some cases even eliminating a prospect due to practices being too deficient.

In addition to promoting sustainability through investing, Alquity has a policy of donating 10% of yearly revenues to microfinance and empowerment projects. One of the latest examples of such donations being an Indian start-up called ‘Phool’, which commissions employment to rural women and serves the purpose of reducing environmental degradation. In the last 10 years, the company has donated $2mn which evidences the real impact created on people’s lives. We thank Mike for sharing his insights on possibly the most robust practices for integrating ESG into the investment process and look forward to having him again to continue to push the frontiers of ESG investing.

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