F&C Asset Management, Standard Life Investments | Update: Invitation to support Extractive Industries Transparency Initiative

Ethical MarketsSustainability News

F&C Asset Management and Standard Life Investments invite you to support the Extractive Industries Transparency Initiative (EITI), a project endorsed by the G8 as part of its anti-corruption initiatives that is aimed at improving governance standards in resource-rich developing countries by boosting disclosure of revenues earned by governments from natural resource contracts. F&C and Standard Life ask you to support the EITI’s Investors’ Statement to send a clear message that the capital markets place a value on strong and transparent fiscal practices. Please note the draft Joint Investor Letter has now been updated as of 11 June 2008 (letter is here).

Invitation to join the EITI

What is the EITI?
The Extractive Industries Transparency Initiative (EITI) is a project endorsed by the G8 as part of its anti-corruption initiatives, and initiated by UK Prime Minister Tony Blair. It is aimed at improving governance standards in resource-rich developing countries by boosting disclosure of revenues earned by governments from natural resource contracts. It was announced by Mr. Blair at the Johannesburg Summit in 2002, and has subsequently been endorsed by several developing countries, including Nigeria, Azerbaijan, Gabon, Ghana, Guinea, Kazakhstan, the Kyrgyz Republic and Mauritania, in addition to the G8. It encourages host governments and extractive companies to sign agreements in which the companies publish what they pay and the governments publish what they receive.

Who is involved?
The EITI brings together extractive companies, investors, governments, non-governmental organisations and multilateral finance institutions.

Why disclose payments and receipts?
In developed economies in Europe and North America, payments such as taxes, royalties and signature bonuses are a matter of public record and governments are therefore accountable to their citizens. In many developing countries, these payments are deliberately confidential, which leaves them vulnerable to misappropriation by government officials. This not only leads to impoverishment of the local population, but often fuels civil conflict and political instability.

What has happened so far?
In June 2003, the EITI issued a Statement of Principles and Agreed Actions, which all interested parties were asked to support. Companies, investors, governments, multilateral institutions and NGOs indicated their support by issuing statements of support for the EITI Principles. Several host governments and companies have subsequently started to implement the EITI, and an EITI Board has been established to define the EITI’s governance structure and oversee and verify implementation. A detailed Validation methodology determines which countries and companies meet the EITI’s requirements according to two levels, EITI Candidate and EITI-Compliant status. In addition, some companies, notably Statoil and Anglo American, have started to publish details of all their payments to governments around the world, irrespective of the extent to which this is required under domestic law.

What is the response of oil and mining companies?
To date, most leading extractive companies and several industry associations have issued statements supporting the EITI; these include ExxonMobil, BP, Shell, Chevron, Total, Rio Tinto, Anglo American, as well as the American Petroleum Institute (API), the International Association of Oil & Gas Producers (OGP), and the International Council on Mining and Metals (ICMM).

Why would oil and mining companies support this?
The companies that have led this initiative all agree that poor governance and corruption breed social and political instability, which damages business prospects. In addition, companies are increasingly subject to accusations of complicity in corrupt behaviour, impairing their local and global “licence to operate”, rendering them vulnerable to local conflict and insecurity, and possibly compromising their long-term commercial prospects in those markets. Reform will give extractive companies an opportunity to be seen as contributors to, and not just beneficiaries of, economic development and reconstruction.

What are the obstacles to success?
The successful take-up of the EITI in any individual country is contingent on action by the host government to remove confidentiality requirements, permit or compel disclosure by companies and activate the process of disclosing audited statements of government receipts. Although 23 countries have recently achieved formal Candidate Status, and a few countries have achieved real progress in publishing audited figures, several key oil and mineral-rich nations remain reluctant. Progress is more likely to occur if host governments recognise that companies and their investors may downgrade them as investment locations as a result of poor governance practices. In addition, progress is sometimes hampered by poor cooperation of extractive companies operating on the ground. Investors therefore have an opportunity to encourage investee companies to ensure that the actions of their field offices are aligned with the commitments taken by corporate headquarters.

What is the role for investors?
• At the original launch of the EITI in June 2003, 38 investment institutions signed the ‘Investors’ Statement on Transparency in the Extractives Sector’ supporting the EITI. This group has since grown to over 75 investors, who collectively control over US $13 trillion. The process was led by F&C Asset Management, a UK-based investor with £103.6 billion under management, and signatories included CalPERS, Dresdner RCM Global Investors, Fidelity Investments, Merrill Lynch Investment Managers, New York State Common Retirement Fund, PGGM, Schroders Investment Management, SSgA Limited and TIAA-CREF.

• The Investors’ Statement is intended to demonstrate to extractive companies and host governments that the capital markets unambiguously support the EITI principles.

• Investors have formed an active working group that draws on support from the UNPRI Secretariat to coordinate dialogue with extractive companies, with a view to encouraging active participation by companies with operations in EITI Candidate Countries.
Does support by investors imply a change in investment policy?

• The purpose of the Investors’ Statement is to send a clear message to host countries that the capital markets place a value on strong and transparent fiscal practices, and support constructive moves towards better governance – but it remains a decision for the extractive companies themselves as to whether or not to invest in individual projects and countries.

• There is therefore NO EXPECTATION that investment institutions will refrain from investing in certain companies as a result of their involvement or otherwise in the EITI. However, by backing this statement, institutions are signalling that it is in the self-interest of companies to support the EITI.
Is there a cost for investors to sign the Investors’ Statement?

• Effective 2008, investor signatories are requested to make a financial contribution of US$500-1,500 determined according to their total assets under management. These funds are paid directly to the EITI Secretariat and are applied to the running costs of the Initiative.

Next steps for investors
• Investment institutions are invited to add their name to the Investors’ Statement on Transparency in the Extractives Sector.
• Interested investors are invited to join the investor working group if they wish to participate actively in specific company dialogues.
• The next biennial EITI Conference will take place in early 2009. The updated list of signatories and total amount of Assets Under Management will be announced at that time.
• The involvement of investors is coordinated by F&C Asset Management and Standard Life Investments.
Key documents
• Investors’ Statement on Transparency in the Extractives Sector – December 2007
• EITI Investor Briefing Note is available here.
• Company statements on the EITI website: www.eitransparency.org
• Draft Joint Investor Letter is available here (updated 11 June 2008).