Corporate risks in controversial regimes

05-06-2014 | Engage | Daniëlle Essink, Francis Condon

Controversial regimes are countries or regions associated with systemic risks such as poor national and corporate governance systems, systematic human rights violations, or a lack of adequate environmental policy. Over the last few years, Engagement Specialists Francis Condon and Daniëlle Essink have been talking to energy and resources companies on their management of these risks. They highlight some of their key findings as this engagement comes to a close.

Sticky risks for energy & resources companies
The energy and resources sector, whose global footprints are largely driven by the location of opportunities, are particularly exposed to governmental and local community risks that could potentially harm the company’s reputation and license to operate. Political instability could jeopardize the company's ability to keep its operations running. The long lifespan of energy and mining assets means that operations cannot simply be moved to avoid emerging, dynamic risks such as conflict and political violence. This all could have a negative impact on company financials.

One starting point for identifying specific controversial regimes is our own Exclusion List, which identifies countries subject to UN, EU and US sanctions and that we wish to exclude from our investment universe. Currently, the DR Congo, Iran, Iraq, and Myanmar – which are significant to the energy and resources sectors – are included on the Exclusion List. Maplecroft, a UK-based risk research provider, also identifies risks in countries using governmental and social criteria. It also currently rates as ‘extreme risk’ DR Congo, Iraq, and Myanmar, as well as Libya, Yemen, and Pakistan. A number of other significant energy and resource producers including Nigeria, Russia, Kazakhstan, and Guinea are also rated by Maplecroft as ‘high risk’ countries.

Distinct improvement in risk management
We began engaging with a short list of six companies in 2008, which was expanded by another ten companies in 2010, and an additional company was added in 2011. Of these, our engagement with 14 companies has been closed successfully, while three companies did not respond to our requests for dialogue. During the engagement, most companies showed a marked improvement in several areas: de-risking of country exposure, an increased role for risk assessment, strong stakeholder engagement frameworks, the development of human rights policies, the management of security forces and the reduction of nationalization risks.

During the course of the engagement, we learned from several companies that they had reduced their exposure to controversial regimes. A number of companies are now focusing primarily on OECD countries, including Shell, ConocoPhillips (which has sold its assets in Kazakhstan and Nigeria), Rio Tinto and BG Group. Nevertheless, pockets of exposure remain in a number of companies including BP (Azerbaijan, Russia), Rio Tinto (Guinea), and Chevron (Angola, Kazakhstan, and Myanmar). Generally speaking, energy and resources companies have begun to identify and manage their corporate risks more systematically. During our engagement, good examples of integrated financial, environmental and social risk assessment have surfaced from Chevron and Shell. BP still appears to be catching up with its peers in this area given its more pressing need to manage the aftermath of the Macondo oil spill in the Gulf of Mexico.

Stakeholder engagement and human rights
At the half-way point of our program, we identified stakeholder engagement as the strongest area across almost all of the companies we analyzed. For example, mining company Anglo American has developed a comprehensive Social & Environmental Assessment Tool (SEAT) used to understand its socio-economic impacts and to set out a framework to build a constructive, open-minded and candid dialogue with their stakeholders. This sets the standard for the sector. In addition, over the course of the engagement, the energy and resources sectors have made considerable strides towards more the systematic management of human rights risks.

Companies have also improved their management of security forces following incidents of serious human rights abuses. The establishment of the UN Voluntary Principles for Security and Human Rights (VP) in 2001 created a framework for managing these risks, best practice transfer and reporting. Of the 14 companies active in this engagement, 12 are members of the VP initiative while both ENI and Glencore Xstrata have yet to become members.

Finally, most companies believe that their exposure to nationalization risks has eased. Nevertheless, Repsol’s settlement with the Argentine government in the first quarter of 2014 is a reminder of the potential risks. BP commented to us recently that while nationalization risks are currently perceived as low, broader geopolitical risk is higher than for a number of years.

Corporate risk oversight in the mining sector
We formally closed the engagement with energy and resources companies in controversial regimes in May 2014. Nevertheless, some of the topics will continue to be addressed in other engagement themes. In particular, the engagement theme ‘Corporate Risk Oversight in the Mining Sector’ will delve deeper into the management of material ESG risks among the major mining companies.  

Daniëlle EssinkDaniëlle Essink

Senior Engagement Specialist
RobecoSAM Governance & Active Ownership

"Many companies have reduced their exposure to controversial regimes."

 



Francis CondonFrancis Condon

Senior Engagement Specialist
RobecoSAM Governance & Active Ownership

"The long lifespan of energy and mining assets means that operations cannot simply be moved to avoid conflict."

 



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danielle-essink.jpgDaniëlle Essink
Senior Engagement Specialist
RobecoSAM Governance &
Active Ownership



francis-condonFrancis Condon
Senior Engagement Specialist
RobecoSAM Governance &
Active Ownership