"Reducing corruption levels the playing field for companies"

Corruption distorts competition. For this reason a growing group of businesses and policy makers are joining a movement to fight corruption. This Extractive Industries Transparency Initiative (EITI) is also supported by Allianz. David Diamond at Allianz Global Investors represents over 80 institutional investors on the EITI board. In an interview, he explains how the initiative strives to fight corruption.

 

Mr. Diamond, the G20, the G8, the UN and the World Bank are all supporting the Extractive Industries Transparency Initiative (EITI). It seems to be pretty high up the agenda ...
 

David Diamond: For a good reason. Some of the countries that are richest in natural resources also lag behind in terms of their economic development. Many governments tend to privilege the simple export of their resources over the building a strong and diversified economy. Corruption and mismanagement are often widespread, with political and commercial elites grabbing most of revenues. As a result, the vast majority of the 3.5 billion people living in resource-rich countries benefit very little from that wealth. It’s a major paradox in today’s globalized economy, and this is what EITI wants to change.
 

The interests that hoard wealth seem pretty entrenched. How does EITI propose to change that?
 

By defining a simple global standard, EITI aims at promoting transparency of both exporting countries and the extractive industries – everything from gold mining to oil production. Participating governments – now 39 countries - must publish the revenues generated and companies operating in these countries must publish what they pay. The figures are reconciled by an auditor and the process is overseen nationally and internationally through a multi-stakeholder process. So you can see how much money flows and where it’s flowing to. Over times, you should get better governance through increased accountability on all sides. Ultimately this boosts benefits for all stakeholders, including companies and their shareholders, investors like us. 

David Diamond: "Reducing corruption levels the playing field for companies"
David Diamond: "Reducing corruption levels the playing field for companies"
Oil pumps in Siberia. According to David Diamond, “companies will have to think twice about the business risk when dealing with poorly governed regimes since there’s a big reputational risk if a company is accused of supporting corrupt behavior”.

Oil pumps in Siberia. According to David Diamond, “Companies will have to think twice about the business risk when dealing with poorly governed regimes since there’s a big reputational risk if a company is accused of supporting corrupt behavior.”

Why would that be a key point for institutional investors?
 

The demand for non-renewable natural resources should increase significantly over the coming decades. World population is growing, energy use is increasing globally, and in the years to come the emerging economies’ share of global GDP could as much as double. The energy, oil and gas, but also the metals and mining industries are an important part of large institutional investors’ portfolios, contributing significantly to the risk/return profile of investments. Transparency on payments and revenues can help contribute to a lower risk profile over the long term for both the sovereign countries and companies operating there.
 

With all that growth potential, what’s the problem?
 

The issue is that the extractives sectors are capital-intensive and long-term. They rely on a secure and stable business and operating environment. Therefore, it’s in the interest of business to reduce the risk of potential political, economic and social instability resulting from poor governance, notably corruption. EITI can help reduce these risks with clear benefits to both companies and investors, by helping to better secure long-term returns.
 

Why would that be a benefit for companies?
 

Reducing corruption levels the playing field, as all companies making material payments in an EITI country must report. This includes both state-owned companies and Chinese companies operating in EITI countries. The latter are increasingly competing with the traditional, internationally operating companies in order to secure access to resources for their rapidly developing home market. Companies will have to think twice about the business risk when dealing with poorly governed regimes since there’s a big reputational risk if a company is accused of supporting corrupt behavior. It would impair their local and global license to operate and make them vulnerable to local conflict and insecurity. That could even compromise their long-term commercial prospects in those markets. Transparency on payments can results in less corruption in the bidding process and ultimately better access to these resources.
 

Have you already seen a shift in mindset?
 

Yes, indeed. EITI was set up in 2002. Of the 39 countries now implementing EITI, 23 countries have met EITI’s requirements and thus achieved compliance. Another 16 are in the multi-year process often necessary in order to achieve compliance. On the industry side, nearly 80 of the world’s largest oil, gas, and mining companies have chosen to support the initiative.
 

Do financial markets recognize the value of the EITI label?
 

They’re beginning to. The S&P Sovereign Government Rating Methodology and Assumptions, for instance, includes a “political score”. This considers the “transparency and accountability of institutions, data, and processes” that also accounts for the perceived level of corruption of the country itself. And Fitch Ratings upgraded Azerbaijan’s rating based on it “being the first country to be fully compliant with the International Extractive Industries Transparency Initiative”. To us that means that a commitment to EITI contributes to a country’s improved sovereign credit rating over the long-term. As sovereign ratings rise, investors are already encountering the emerging market debt of EITI countries in their fixed income portfolios. For companies operating in participating countries, EITI can also enhance the prospect for investment returns.
 

You are co-head of  environmental, social and governance (ESG) activities at Allianz Global Investors (AllianzGI). Apart from the EITI Board mandate, what other activities is AllianzGI committed to?
 

AllianzGI participates in several ESG initiatives worldwide. The most all-encompassing is our commitment to the UN’s Principles of Responsible Investments (UN PRI), which we signed for the first time in 2007. These commit our organization to integrating ESG factors across the full investment value chain. For example, we engage with public policy makers for better integration of ESG issues in regulatory developments, such as more transparent financial markets. If all listed companies were covered by a common ESG reporting framework, this could play an influential role for long-term investment success. Our commitments to EITI and the PRI’s Sustainable Stock Exchanges initiative are part of that.
 

That’s ESG engagement with regulators. How about the companies you work with?
 

For engagement with companies, we are increasingly seeking in some cases to go beyond purely research-oriented dialogues. In order to mitigate risks, we are actively encouraging companies to improve their ESG performance and thus assure their long-term business prospects. Here, for example, we are active participants in investor working groups dedicated to sustainable palm oil and improving working conditions in Bangladesh after the numerous clothing factory disasters there. Our engagement activities build upon robust and rigorous ESG research provided by our in-house ESG team co-headed by both my colleague Bozena Jankowska, on the research side, and me on the engagement and governance side.

As with all content published on this site, these statements are subject to our Forward Looking Statement disclaimer:

 

Stefanie Waldeck
Allianz Global Investors
Phone +49.69.263-14670
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Nicolai Tewes
Allianz SE
Phone +49.89.3800-4511
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