Alliance Notes : Debt Relief - Crisis = Opportunity, Chile and the Path to Decarbonization, Public Policy Modelling and Stranded Assets, Explosion in the Juukan Gorge: Rio Tinto and FPIC, Curbing the Spread of AMR Resistance

Wednesday, July 1, 2020


                          This Week at the Alliance



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:

  • Environmental Footprint of Operations
  • Data Privacy and Security
  • Product End-of-Life Management
  • Managing Systemic Risks from Technology
  • Disruptions
  • Competitive Behavior

If you are an emerging markets finance professional interested in participating in a Working Group on this topic, please reach out to William Woo.

Alliance Opinion: Debt Relief: Crisis = Opportunity

The COVID-19 health crisis is wreaking financial havoc on emerging markets, as countries spend more on healthcare while their economies contract, currencies depreciate and debt dynamics worsen. If past is precedence, we should expect the financial shock to EM countries to grow increasingly complicated as it matures. It will metastasize, exacerbate pre-crisis vulnerabilities and make interventions more difficult to execute.

In developed economies, the response to the COVID-induced economic downturn has been swift. Emergency countermeasures have been rapidly deployed. Interest rates have been slashed, fiscal policies expanded and unprecedented quantitative easing enacted. For emerging economies, these liquidity operations have reverberated beyond the borders of advanced economies, dampening the uncontrolled nature of the financial wildfires. 

In response to the challenges facing emerging economies, the G20 has also called for action to redirect EM sovereign debt service payments to pandemic response.  The IMF and the Paris Club have granted low income countries breathing space, and China has agreed to temporarily relieve the debt burden owed to it by a subset of emerging market governments. But these are Band-Aid solutions. While these efforts have eased financial pressures, the provision of short term liquidity is unlikely to offset the unfavorable debt dynamics of countries that entered this crisis with high debt burdens. The pandemic has created double digit fiscal deficits in many emerging countries which must be covered either by new borrowing -- prolonging the unsustainable debt reckoning, or from opaque bilateral sources -- heightening governance and accountability concerns.  In short, this is not just any EM debt crisis:  this is the first ESG debt crisis.

At the same time, initiatives for the private sector to participate in the G20’s call to action are at an impasse. Bond markets are a blunt instrument for an effort as precise as temporary debt service relief. Even the smallest alteration in the financial terms of bond contracts can trigger ratings downgrades and defaults. Blanket approaches which prod governments to default when they do not need to distort market behavior and inflict long-lasting damage to issuers’ hard-earned access to capital markets. Recognizing the potential damage, many governments have been reluctant to ask for debt relief. At this stage, all parties seem to have unofficially acknowledged that commencing a blanket, multi-dimensional debt exchange process for the purpose of deferring a few months’ cash flows is simply too expensive, too destabilizing, and in some cases, too little to be worth the effort.

 In our view, current efforts to contain the advancing wildfires in emerging markets with short term mitigation strategies will disappoint. If we are going to avoid another cycle of lend-and-forgive, we need long-term planning, more flexible crisis-fighting tools, and a new unified consensus on advancing sustainability. The debt crisis triggered by the COVID-19 pandemic is likely to be unprecedented and it will exact a heavy toll on emerging economies. Some sovereign defaults are inevitable. Despite this, we believe that the fallout can be lessened by a shared commitment to transparency and accountability and a renewed effort to advance sustainable development goals. 

We recognize that our call for EM governments to prioritize sustainable development goals in the midst of a growing debt crisis may seem impractical. But it is our enduring belief that crises are an opportunity to revisit priorities which have not been getting enough attention. If we will inevitably rebuild the financial architecture for emerging markets, let’s rebuild it for the better -- beginning with new financing structures to align concessional financing with the needs of the poorest countries, and a focus on sustainability that forces reforms to attract capital at reasonable rates.

Let’s set down policies to improve debt oversight, fiscal transparency, and environmental sustainability which will restore confidence and set the groundwork for private-public initiatives to attract new investors. Let’s expand the investor base to include more asset owners with the capacity and mandate to provide financing for SDGs and impact related causes. Let’s harness the enthusiasm for sustainable finance and the public commitments to responsible investing, including asking investment banks to work on new financing structures with reduced fees. Let’s bridge the gap between the general risk appetite of ESG investors and the current level of emerging markets risk. We can intermediate this disconnect by exploring all options. These can include blended finance funds which could include private, public and philanthropic capital, partial guarantees, market-oriented debt swaps and asset purchase programs.

As an advocacy and social impact organization, our commitment to improving governance, transparency and affecting change in the countries in which we invest is foundational.  We believe that investors can determine if this crisis advances SDGs because investment decisions are the most powerful form of pressure. Let’s work together to ensure that this opportunity to provide for a more resilient and sustainable future is not squandered.  --Abby McKenna

Utilities: Chile and the Path to Decarbonization

Chile’s Decarbonization cost curve 

Source: Chile Ministry of the Environment

On June 11, the Alliance teamed up with the Chilean financial group LarrainVial to offer a webinar for investors on the carbon transition underway in Chile’s utilities sector. The webinar looked at this complex issue from a number of perspectives, starting with a global one. Perrine Toledano, who runs the extractives programs at the Columbia Center on Sustainable Investment (CCSI) presented the findings from her recent report on the decarbonization efforts of the global utility sector (see her presentation). The report looked at ten large global utility groups within the context of their four-pillar sustainability framework (product / production process / value chain responsibility  / corporate citizenship), with mixed findings. More than half of the companies assessed were not on target to meet the Paris agreement goals, and, as Perrine put it, “They don’t even claim to be carbon neutral by 2050 and 80% of them still have coal in their portfolio by 2030!” Perrine’s conclusion is that much work remains to be done in the sector. Certainly, this conclusion would apply even more emphatically to utilities in the emerging markets. 

Following Perrine’s presentation, some insights into Chile’s national climate policy were provided by Alfonso Galarce, Head of Climate Finance of the Chilean Ministry of the Environment. Alfonso played a central role in negotiating the recent update to Chile’s National Determined Contributions or NDC coming out of the Paris Agreement — with Chile being the first country in the region to do so (see his presentation). Alfonso discussed the various initiatives underway to develop Chile’s climate strategy in the near and longer term. 

Overall, the country faces significant risks from the impact of climate change, but also has advantages when it comes to mitigation in the form of some of the world’s best wind and solar potential. In its recent NDC update, the country has significantly upgraded its climate goals as well as made them more concrete: a carbon budget of 1100 million tons of CO2 equivalent (MTCOEQ) from 2020 to 2030; peak emissions by 2025, and 2030 emissions of 95 MTCOEQ. 

Finally, Alex Varschavsky, Utilities Analyst and Co-Head of research at LarrainVial, spoke about his recent report Chilean utilities, the outlook for the sector and especially his perspective on their carbon transition (his presentation). Although the Chilean utility sector has been a difficult area in recent years as returns have fallen amid a collapse in electricity tariffs, Alex argues for a more upbeat outlook.  He owes his optimism in part to the rapid improvement in the economics of renewables, which should ease the sector’s transition, which can be financed for a time by the industry’s legacy contracts that will continue to support cash flows. As elsewhere in the world, the economics of coal-generated power have deteriorated, and Alex believed that units could be completely shut down by 2033 if the required transmission investments are made. This bodes well for progress towards Chile’s climate goals. --Andrew Howell

OpenOil’s Johnny West on Public Policy Modelling and Stranded Assets


Source: OpenOil

Earlier this month the Extractive Industries Working Group welcomed Johnny West of OpenOil, a consultancy in Berlin that performs “public policy financial modeling”, a type of financial analysis that plays an important behind-the-scenes role in guiding government policy choices and approaches to the negotiation of major resource deals.

As West explained in his presentation on this work, modelling needs to play a more important role in guiding policy choices, especially in developing countries. Better modelling can help governments in a variety of ways:

  1. to better understand how much they stand to gain or lose under different tax agreement assumptions
  2. to see the impact of commodity price assumptions on currency
  3. to understand the impact of changing energy demand dynamics on national oil development projects;
  4. to judge the impact of tax holidays; and
  5. in tax gap analysis.

West went on to cite a rich range of examples where his models have helped illuminate and guide policies, from Guyana to Senegal to Myanmar. At the same time, he was not shy in admitting that there are many cases in which models can fall short -- such as in fully capturing the economics of natural resource deals. In one example -- the Essakane gold mine in Burkina Faso, 90% owned by IAMGOLD -- West noted that there are 14 different government revenue streams associated with the asset, and that half of revenues could not be modelled because of missing sub-contract and cost data. 

Following this rapid tour through the various aspects of public policy modelling, West turned to a topic that has became a major theme in his analytical work of late: the risk of stranded assets in frontier economies. This risk has grown as the near-term impact of the Covid-19 pandemic combines with the longer-term impact of the energy transition to change the commodity price outlook. His presentation on this topic is well worth a read, highlighting just how much the world has changed when it comes to the viability of large resource projects. 

West argued that both governments and investors may be underestimating how much more difficult it may be to get some projects off the ground, and his #1 casualty here is Lebanon. Although the country may be sitting on a natural gas resource base estimated at 25 trillion cubic feet, it is unclear that any export market exists for that amount, particularly given very tricky politics in the Eastern Mediterranean. Senegal is another country where a number of discoveries including in Sangomar (developed by Cairn Energy), Tortue, and Yakaar are looking much less attractive than they once did.  --Andrew Howell

Explosion in the Juukan Gorge: Rio Tinto and FPIC

In last month’s Extractive Industries Working Group Call, Oxfam’s Emily Greenspan shared a range of incidents  caused by mining companies failing to engage sufficiently with their local communities. A vivid new example of this failure was provided a few days after her presentation when, on May 24, Australian mining giant Rio Tinto destroyed a 46,000 year old heritage site in Australia’s Juukan Gorge, resulting in widespread condemnation from civil society and spurring a federal parliamentary inquiry. 

As with other examples that Emily cited (including Pan American Silver's Escobal mine in Guatemala), Rio does not appear to have acted in violation of the law: The company had negotiated use of this land with the aboriginal Puutu Kunti Kurrama and Pinikura (PKKP) peoples in 2011, and subsequently obtained authorization from the state government of Western Australia in 2013.

However, soon after the incident, representatives of the PKKP revealed that in the years since  authorization was given, several new ancient artefacts have been discovered. This renewed the group’s desire to preserve the site, which dates to the last Ice Age and has yielded thousands of findings linked to the aboriginal PKKP peoples. Some Austrailians expressed outrage with Rio’s actions, and protests have erupted calling for a deeper consideration of indigenous land rights. Otherindigenous organizations announced that their previously harmonious relationship with Rio Tinto has been damaged. In addition to the parliamentary inquiry, Rio’s Board has launched an investigation into their processes of managing heritage sites. 

On 31 May, the company issued the following statement:  “We are sorry for the distress we have caused…At Juukan, in partnership with the PKKP, we followed a heritage approval process for more than 10 years.” Two weeks later it issued a second, similar statement, “We are very sorry for the distress we have caused the PKKP...Rio Tinto has a long history of working in partnership and creating shared value with Aboriginal and Torres Strait Islander communities.” 

While the company has argued that the incident was the result of a  “misunderstanding,” it appears that community consultation recommendations from the Alliance’s policy partners, such as Oxfam and the Responsible Mining Foundation (RMF), were not followed. These recommendations acknowledge that mining projects can be invasive and hazardous and often take place in remote and fragile areas putting them at odds with local communities, who deserve to have a voice in their development. The UN Declaration on the Rights of Indigenous Peoples (UNDRIP) recognizes Free, Prior, and Informed Consent (FPIC) as a process meant to protect indigenous populations. FPIC is a process of community consultation and discussion which provides thorough, accurate information on proposed projects to local communities. According to Oxfam, this process should allow enough time for feedback to be incorporated -- and should be iterative, anticipating that circumstances at the initial time of negotiation may change in the years leading up to the actual start of the project. In Rio Tinto’s case, the FPIC process lapsed, and the feedback loop appears to have failed. 

With respect to Heritage Sites, the RMF notes in a recent article that “The recent cases have highlighted weaknesses in heritage legislation, that allow companies to destroy cultural sites, and prevent indigenous groups from renegotiating their consent to the destruction, once government approval has been granted and even if new information proves the sites are highly significance.” According to them, only 10 of the 38 companies in the Responsible Mining Index have publicly committed to avoiding operations in World Heritage Sites (WHS). The World Wildlife Fund has estimated that globally almost one-third of all natural WHS were under threat of oil, gas and mining exploration, and UNESCO has warned about the impacts of extractive activities on these sites. 

In response to these developments, the Alliance recommends that investors raise the following points with mining companies:1) Ensure a commitment to a thorough, iterative and ongoing FPIC process; and 2) Forego activities in all World Heritage Sites.  --Andrew Howell & Asha Meagher

Curbing the Spread of AMR Resistance



Antimicrobial consumption for food animal production by country, in 2013 (light red) and projected for 2030 (dark red). Van Boeckel et al (2017), Supplementary Material for Reducing antimicrobial use in food animals. Available online at download.

On June 12, Lena Brook, Director of Food Campaigns at the National Resources Defense Council (NRDC); Sonia Alexandrenne, Head of Research and Engagement, and Lorraine Hau, ESG Analyst at FAIRR; and Suzi Shingler, Campaign Manager at the Alliance to Save Our Antibiotics joined our Agriculture Working Group call to present on the excessive use of antibiotics in factory farming and its role in the growing threat of antibiotic resistance in the world.

Antimicrobial resistance (AMR) is one of the greatest challenges of this generation, as the overuse of antibiotics has increased the spread of antibiotic-resistant bacteria. When we think of AMR resulting from antibiotic usage, we tend to instantly think of extensive usage in the treatment of humans.  However, the issue of antibiotic usage is far more prevalent in the livestock industry.  In the United States and European Union, farm animals account for about  65% of overall antibiotic use, and in the global livestock industry, antibiotic usage jumps to 75%.  The mass use of antibiotics in animals results in the killing of non-resistant bacteria by the antibiotic, leaving only the resistant bacteria to multiply.  

The increasing amounts of non-resistant bacteria can easily spread from livestock to humans, directly or through consumption of meat and through animal waste via waterways, soil, or fertilizer and contaminated vegetables and fruits that come in contact with it. Globally, there have been at least 700,000 deaths tied to antibiotic resistance per year.  Every year in the United States about 2.8 million people contract an antibiotics resistant infection and 162,000 of them die. These infections cost the United States about $55 billion, and worldwide the UN has compared the economic effects of antibiotic resistance to the economic downturn associated with the 2008/2009 recession.

As EM countries have adopted more intensive factory farming models, usage of antibiotics in these countries has increased, and antibiotic usage is expected to double by 2030.  China is the largest consumer of veterinary antimicrobials, both in relative and in absolute terms, and China, the U.S., Brazil, and India collectively represent nearly 75% of total antibiotic consumption worldwide.  

China and Brazil have both launched plans to curtail the use of medically important antimicrobials.  However, there is very little transparency and publicly available data about the progress and implementation of such policies.  One of the risk factors scored for FAIRR’s Protein Producer Index is policy and disclosure on antibiotics.  Out of the sixty companies ranked, only one, Bakkafrost, is categorized as best practice. Forty-six companies are high risk, five are medium risk, and eight are low risk.

NRDC and The Alliance to Save Our Antibiotics have successfully instigated change through transparency and education campaigns targeting different parts of the food chain, starting with the chicken industry.  The NRDC targeted the major fast food chains to catalyze change in the chicken industry. In 2010, none of the major chicken producers had a commitment to reducing antibiotic usage, by 2019 73% of producers did not use any medically important antibiotics in their production. One of the important ways that they were able to accomplish this is by assigning grades to twenty-five largest fast food chains in the United States which they track and publish in their Chain Reaction report. In 2015 only five out of the twenty-five identified major companies had a passing grade, and in 2019 that number rose to seventeen. They have now started a similar restaurant campaign targeting the beef industry.  

Likewise in the UK, The Alliance to Save Our Antibiotics has had success targeting the supermarkets through a similar approach, publishing a report in 2017 that increased public awareness which led to improved policies and disclosures, as highlighted in their 2019 report.

A law banning the use of medically important antibiotics in livestock production is expected to take effect in the European Union in 2022.  This is a major step towards curbing the spread of antibiotic resistance.  However, many countries (including the United States) still lack the regulatory framework and enforcement to curb usage.  Therefore, in order to bring systemic change, civil society, consumers and investors need to keep the pressure on the various actors of the food chain.  -Nadine Cavusoglu

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