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Benefits and Pensions MonitorFighting For Transparency In Emerging MarketsAdvocating For Transparency Institutional investors have played an important role in the EITI by helping to bring corporate and government parties to the table. In 2003, 38 institutions signed the Investorsʼ Statement on Transparency in the Extractives Sector to signal unambiguously their support for the EITI and the creation of more transparent markets. The group has since grown to more than 60 investors who collectively control US$8.6 trillion. The process was led by F&C Asset Management, a UK-based investor with US$194 billion under management, as of June 30, 2006. Signatories include Bâtirente, Cal-PERS, the Canadian Labour Congress, Dresdner RCM Global Investors, Ethical Funds, Fidelity Investments, the Hospitals of Ontario Pension Plan, Merrill Lynch Investment Managers, the Ontario Teachersʼ Pension Plan, PGGM, Schroders Investment Management, SSgA Limited, and the York University Pension Fund. The statement sends a clear message to host countries that capital markets value strong, transparent fiscal practices and support better governance. However, while its aim is to reduce investment risk and improve investment prospects, it remains up to extractive companies to decide on investment in individual projects and countries. The statement encourages positive change at the country level, but is not a call for divestment from companies or countries. Rather, investors have an opportunity to assist the companies they own by signaling to host countries that their cost of capital may come down if they invest in better governance. Threats To Transparency The success of EITI depends entirely on the degree of uptake by governments and extractive companies. While the growth of broad-based support for the initiative is impressive, key holdouts remain and their lack of participation could hinder the EITIʼs effectiveness. To date, only a handful of host countries have achieved real progress in operationalizing the EITI principles. The strategy requires that individual host governments remove confidentiality requirements from contracts with extractive companies, permit or compel disclosure by companies, and disclose government receipts. Several key oil and mineral-rich nations, such as Angola and Indonesia, appear reluctant to embrace transparency. Other countries, such as Ghana and Bolivia, have stalled after initial pledges of support. Yet, progress is more likely if host governments appreciate that companies and their investors will view them as more attractive investment locations if they embrace more robust governance practices and, conversely, that poor governance makes them riskier investment propositions and keeps their cost of capital unnecessarily high. Likewise, while all the major oil companies and the leading mining companies have joined the EITI, some smaller players have not. In particular, resource companies headquartered in emerging markets – with the notable exception of Petrobras and Lukoil – have been less eager to promote EITI, perhaps because they see commercial opportunities in markets that lack transparency. Also of concern is the commercial threat posed by nationally-owned companies, especially from emerging markets, whose rapidly-growing appetite for oil and minerals may interfere with their desire to maintain high standards of governance. The EITI can only succeed if all companies play by the same rules and if host governments have the ability and will to resist the temptation to backslide. Where Does Canada Stand? While the EITI has enjoyed the unanimous backing of all G8 members, Canada has not been a particularly engaged supporter. One reason is that, as a major extractive nation itself, it is unwilling to submit to the EITI regime and would not expect standards of others that it did not expect of itself. This contrasts with the U.S., UK, and Norway, which, although major oil and mineral producers, do not intend to adopt EITI domestically. They consider it unnecessary due to their more effective and transparent fiscal management systems. Another reason is that Canada supports other anticorruption initiatives such as the UN Global Compact, the UN Convention Against Corruption, and the OECD Convention. Our view is that strong government-togovernment action – integrated with aid, debt relief, and trade policy – is essential to the success of the EITI. It is also indispensable to securing companiesʼ support for EITI at the individual country level. Indeed, the unique strength of the EITI is its multi-stakeholder nature; the fact that governments, companies, civil society, multilateral institutions, and investors all coalesce to make it a success. The list of host country candidates is long, and the need for diplomatic firepower acute so active support from all G8 members, Canada included, would certainly be valuable. Interestingly, leading Canadian companies, including Barrick Gold and Talisman Energy, have publicly backed the EITI. These companies and their foreign peers would benefit from strong support from the Canadian government. Likewise, a clear signal from their shareholders that the capital markets value and reward good governance through a lower cost of capital, is a powerful tool to encourage wider adoption by the host countries most in need of higher standards. Canadian institutional investors have a valuable opportunity to lend their support to the EITI and thereby work to bring stability to developing nations, expand investment opportunities in the oil and mining sectors, and improve investment returns for their funds.
Additional investor involvement and support is one of the key elements for encouraging participation in EITI, by resource-rich developing nations, by G8 countries, and by publicly traded extractive companies. Unfortunately, the EITI is far from that so-called ʻmagic bulletʼ that will ensure transparency and wipe out corruption. Nevertheless, it is one of the first successful multi-lateral initiatives joining together the key actors from our global markets against corruption – and backing it up with concrete action. By uniting in favour of transparency, we can encourage better management of public revenues, help to fight corruption, and build stronger, healthier developing nations and more profitable markets for the companies in which we invest.
Karina Litvack is the head of the governance and socially responsible investment team at F&C Asset Management and is the investor community representative on the EITI International Advisory Group. Elizabeth McGeveran is vice-president for governance and socially responsible investment at F&C Asset Management and responsible for North American investors participating in the EITI. < previous |
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