Corporate Governance and Disclosure
Why should investors care about corporate governance in emerging markets?
What can investors do to promote stronger corporate governance?
Emerging markets companies differ from those in developed countries because of the context in which they operate. Instability in government institutions and less strict regulations mean that EM companies are often less democratic and transparent in their ownership and management. Differing norms and lack of oversight can present new risks and challenges for investors seeking maximal returns and efficient use of their resources.
Investor Guide To Climate Institutions
Climate change has emerged as one of the most critical risks facing investors. Although historically many investors in emerging markets (EM) have not focused on this issue, climate risk is arguably more important in EM, where the transition to a low carbon economy consistent with the goals of the Paris Agreement is likely to present major challenges. Likewise, as we discussed in a recent report, many EMs are both highly exposed to physical climate risks and, in many cases, less prepared for these effects.
Investors looking to assess climate risk have the benefit of a wide range of global institutions that have emerged in recent decades to assist governments, companies, investors and citizens in grappling with issues around climate change.
Physical Climate Risk in EM
We address physical climate change risk from the perspective of emerging markets investors. Climate change affects many countries. However emerging markets are both more vulnerable to climate-related hazards and less prepared to cope with their effects. The risks associated with climate change do not appear to be reflected in valuations of most financial markets.
Climate risk indices suggest that Nigeria, Pakistan, India and Philippines are particularly vulnerable to physical climate risk, among the major EM and frontier markets. Poland, Chile, Brazil and Russia appear relatively less vulnerable.
This brief is the first in our Carbon Transition Initiative, a series of 12 webinars on the impact of climate change and carbon transition on emerging markets. It accompanies our webinar on the topic in January 2021.
Energy and Metals & Mining Transparency
Why should investors care about transparency in the energy and metals & mining industries?
Many resource-rich countries suffer from corruption, conflict, and under-development. Increased disclosure of information on payments made between natural resource companies and host governments can reduce risk premiums on financial assets, improve sovereign and corporate governance, reduce corruption, and help alleviate poverty by improving public service delivery. The Cardin-Lugar Energy Security Through Transparency (ESTT) provision of the Dodd-Frank Wall Street Reform Act requires SEC-registered companies to annually disclose this information on a country- and project-level basis.
Why Should Investors Care About Fiscal Transparency?
Despite improved standards on fiscal openness, poor government fiscal transparency- particularly in emerging markets- makes governments increasingly prone to fiscal risk. Conversely, empirical evidence has demonstrated a positive correlation between the degree of fiscal transparency and market perceptions of fiscal solvency. The positive outcomes associated with fiscal openness include: improved government fiscal sustainability, greater macroeconomic stability, more informed policy-making, better public service delivery, decreased corruption, reduced poverty, and increased government legitimacy. From an investment perspective, the degree of fiscal transparency that exists in a country’s budget is a strong predictor of that country’s fiscal credibility and performance.
Major tailings accidents in recent years such as at Samarco and Brumadinho in Brazil have awoken investors to risks posed by the long-term storage of mining waste. With an estimated 3500 tailings storage facilities (TSFs) worldwide, and more being built every year, accidents are likely to continue. We provide a primer on tailings risk in emerging markets and assess the new Global Tailings Portal dataset as well as the Responsible Mining Index to identify which countries and companies have the greatest exposure to tailings risk. Chile, Russia, South Africa, Peru, Brazil and Poland are the most exposed EM countries. Top exposed stocks are Vale, Anglogold Ashanti, Evraz, Severstal, Sibanye-Stillwater, Phosagro, Antofagasta and KGHM. We suggest ways investors can assess tailings risk in their portfolios and questions to ask management when engaging on this issue.
Fiscal Governance Briefs
Fiscal Governance Briefs take stock of a country’s fiscal transparency and public financial management. We begin at the central government level, then proceed to other parts of the public sector, including natural resource state-owned companies. All readers have access to the front page of the report. To access the entire report readers will need to become Alliance members.
This brief is part of a series looking into sustainability issues in the corporate sector relevant for emerging markets investors. We give some background on community consent and related issues — such as social license to operate, indigenous rights, FPIC and land tenure -- and summarize key insights from experts including Oxfam, CCSI the Responsible Mining Foundation and others. We also look at specific disclosures on community consent from EM corporates including Anglogold Ashanti, Antofagasta, Grupo Mexico, Norilsk and Petrobras.