IPE Views: Investors need to dig deeper into 'Myanmar miracle' to protect portfolios
Kathy Mulvey of the EIRIS Conflict Risk Network examines how companies involved with Burma are managing the risks of conflict.
A year ago this week, President Thein Sein became the first leader of Burma to visit the White House in almost 50 years. A few days later, new US government reporting requirements took effect so that all US companies making major investments in Burma became obliged to reveal information related to human rights, anti-corruption, the environment and other responsible investment issues.
Burma’s opening has helped catalyse investment flows to the extent that the World Bank is predicting economic growth for the country of 6.8% in 2013-14 – leading some, perhaps optimistically, to proclaim a ‘Myanmar miracle’. The reporting requirements have also had an effect and so far a handful of companies, including the likes of Coca-Cola and Western Union, have produced reports about their policies and procedures to address the impact of their business activity in the country.
Despite this progress, the political and economic reforms driving growth in Burma remain fragile. The military continues to be powerful, conflict is ongoing and there are still reported cases of human rights abuses (including persecution of the Rohingya Muslim minority), bribery and illegal confiscation of land.
In general, the level of transparency of major corporations in Burma remains unsatisfactory for most institutional investors. Too many do not report at all – for example, companies not considered US enterprises are not bound by the US reporting requirements. Even among the corporate reports submitted so far, there are issues of missing information and uneven quality. Investors need more and better corporate reporting if they are to ensure the risks of doing business in Burma are safely managed and do not come at the expense of social freedoms and justice.
Our research has looked at the policies, systems and reporting of companies active in the country. We found that Coca-Cola and telecoms firm Telenor are doing the best job of managing the risks associated with their investments.
These two companies have both taken steps to manage operational and reputational risk in areas such as human rights and anti-corruption. However, even the companies in the sample that have done the best due diligence face enormous challenges to fulfil the responsibility to respect human rights as articulated in the United Nations Guiding Principles on Business and Human Rights. For example, Coca-Cola provides little information about its procedures for managing business partners’ relationships with security service providers or how it engages stakeholders in security-related decisions.
Issues such as illegal land acquisitions or corruption pose real business risks to investors, particularly in conflict zones.
In recent years we have seen how health and safety mismanagement led to the explosion at BP’s Macondo oil rig in 2010 and the collapse of the Rana Plaza garment factory in Bangladesh in 2013, causing not only human tragedies but serious damage to the value of the affected companies. Within 97 days of the Macondo tragedy, BP’s share price dropped 54% and BP was forced to suspend its dividends for a year. As of March last year the disaster had cost BP $42.2bn (€30.8bn). Similarly, ING faced a shareholder rebellion in 2013 when 59.8% of shareholders supported a proposal to stop it investing in companies linked to the genocide in Sudan’s Darfur region.
Investors can help to avoid exposure to similar risks from corporate activity in Burma if they seek the right information. Indeed, that is why institutional investors played a pivotal role in the development of the US Reporting Requirements — a role recognised by the State Department.
Furthermore, investors can make a positive difference. If responsible investors come together to demand that effective policies are in place and due diligence is carried out before companies begin to do business in Burma, they can help to ensure that the operations they fund in Burma contribute to peace, stability and broad-based economic development.
Burma continues to be one of the biggest growth stories in the Asia-Pacific region, which itself is set to be perhaps the biggest engine of global growth during the next decade. It is a wonderful opportunity for investors to generate impressive long-term returns, but only if they ensure that growth does not come at the expense of the people of Burma.
Investors must continue to push for more transparency about corporate activity in the country, and to utilise available information. This can play a major part in both advancing the country’s reforms and protecting their returns.
Kathy Mulvey is executive director of the EIRIS Conflict Risk Network