Battle over Western Sahara is moving into court rooms – with major consequences for companies and investors alike

 by Linda Björk, Senior Engagement Manager at GES

Yesterday the Polisario Front, recognised by the United Nations as the legitimate representative of the people of Western Sahara (WS), announced that it will initiate new legal proceedings before EU Courts. The announcement came after the EU Council authorized the EU Commission to negotiate with Morocco for a new fisheries protocol. Interestingly, the EU council said that that the fishing agreement negotiations will also cover WS, a former Spanish colony which was annexed by Morocco in 1975. As recently as in February this year, the European Court of Justice (ECJ) ruled that the EU’s fishing agreement with Morocco cannot be applied to WS or its adjacent waters.

The ECJ had also, in December 2016, ruled in favour of the Polisario Front, saying that the EU’s Association Agreement with Morocco could not apply to WS without the consent of the people of WS. Polisario is now planning to claim EUR 240 million per year in compensation from the European Union. The claimed damages are based on the export of products from WS to the European Union that took place after 2016.

There are other examples of how the battle for the self-determination of WS is increasingly being fought for in courts instead of in the desert.  A South African Court ruled in February this year that the Sahrawi Arab Democratic Republic (SADR), proclaimed by the Polisario Front, is the owner of a shipment of phosphate from WS and therefore Morocco’s state-owned company OCP was not entitled to sell the commodity. The cargo is now being put up for auction and an executive member of the SADR stated that any money raised will be transferred to the SADR authorities, so it can be used to pursue similar cases. The Polisario Front has further commenced proceedings in national courts in France and Spain against companies importing sand and agricultural products from the territory, as well as an airline company for initiating a service linking Paris to Dakhla in WS, without consulting the people of WS.

There are signs that companies are reacting to the increased risks. During 2017, there were no shipments of phosphate observed from Western Sahara to some of the previously big importers. Other companies that continue to import from the territory take new routes for the phosphate shipments in order not to pass South Africa and avoid potential legal problems. The companies PotashCorp and Agrium merged to form a new company called Nutrien. This new company, which accounts for about half of the global purchases of phosphate from WS, announced shortly after its creation that its goal is to end all imports from WS.  The company gives concerns raised by shareholders as one of the reasons behind this objective. Most recently, Kosmos Energy and Cairn Energy declared that they are withdrawing from the Boujdour Maritime licenses in WS, albeit pointing to the reason being technical rather than being related to politics or reputation. This strongly indicates that the recent rulings and the Polisario Front’s initiative to take legal actions against companies that benefit from the region provide a bigger, and more material, impetus to exit. Previously, the primary reason to exit was to avoid reputational damage.

In his efforts to restart the talks between Morocco and the Polisario Front, the new Personal Envoy of the United Nations Secretary-General’s approach for WS is to engage in broad and inclusive dialogue with different stakeholders. Stakeholder dialogue is also essential to companies that are involved in WS.  Company activities need to be in line with the interests and wishes of the Sahrawi people and hence companies need to consult the people of WS to respect their right to self-determination, which was confirmed in the rulings of the EU court. For many years, GES has been engaging with companies on their alignment with international law. With recent developments, it is timely to step up this engagement and show that dialogue is the way forward – on all levels.

ESG investing in Japan

 by Mr. Yoshikazu Maeda, Head of Responsible Investment, Governance for Owners Japan

In my last post, we illustrated corporate governance reform initiatives such as an introduction of the Corporate Governance Code that Japan had implemented in 2014. We also explained our perspective on sustainability issues that Japanese companies need to address. In this post, we present an instance of ESG investing in Japan.

The Government Pension Investment Fund (hereafter – GPIF) is a leading ESG investor in Japanese markets. GPIF is one of the largest asset owners globally and holds a total asset of JPY 163 trillion as of December 2017. Among its total assets under management, 26%, i.e. JPY 42 trillion, are its domestic equities which represent around 6% of the total domestic equity market. Therefore, GPIF is influential and can lead the market.

In fact, GPIF has been proactive in recent years. In May 2014, GPIF signed up to the Japan’s Stewardship Code, in September 2015 to Principles for Responsible Investment. It also joined the 30% Club and the Thirty Percent Coalition in November 2016. GPIF sees itself as a “Universal Owner” (a large asset owner who, as a consequence of its size, owns a slice of the whole economy and market through its portfolios), hence, the fund has a rationale to be proactive in ESG investment, by which the fund tries to minimise costs that can be caused by externalities of corporate activities.

GPIF initiatives are having a large impact. Japan has witnessed an exceptional growth in SRI assets (albeit from a low base) in recent years as the statistics below show. If we consider SRI assets as a proxy of ESG investment, ESG investment in Japan has seen a growth rate of 724% per annum while the global growth rate is 11.9%.

 

 

 

 

 

 

 

While we do not have the statistics updated for up to the end of 2017, we expect that the trend is continuing. In July 2017, GPIF selected three ESG indices,  namely: the FTSE Blossom Japan Index, the MSCI Japan ESG Select Leaders Index and the MSCI Japan Empowering Women Index. JPY 1 trillion of GPIF’s passive equities portfolio has been shifted to these three indices. JPY 1 trillion is a small part of GPIF’s passive equities portfolio given that 90% of its equities are held in a passive strategy method.

However, the message from the asset owner is very clear if we take into account GPIF’s initiatives relating to ESG in recent years, the fact that GPIF is expanding its ESG coverage to all asset classes and that GPIF has started to request an Environmental Stock Index for global equities..

Two interesting elections (and one not-so interesting) in emerging markets

 by Palle Ellemann, Lead Emerging Market Engagement at GES

Elections can be game-changers for companies and investors. An election and a new government can change the confidence that markets have in economies and either stimulate or hamper investments and belief in the future. South Africa is having one of these game-changing elections – hopefully – as the ruling party since the Mandela-elections in 1994, the ANC, has removed their own president (Zuma) after nine years of office and put in place a new presidential candidate for the elections set to take place in early 2019. The former Deputy President Ramaphosa now has about a year at the helm of the country to prove that he is worth electing to a full five-year term and continue the ANC’s hegemony of South African politics.

South Africa finds itself in a very difficult situation after nine years of extremely corrupt and incompetent leadership by President Zuma. Economic growth is low and unemployment is high, causing social tensions in a society that continues to be characterised by high wealth inequality. South African companies are suffering from a slow growth in the local economy, heavy bureaucracy, corruption and an extremely inefficient public sector that is often not able to provide basic infrastructure in terms of energy, water, health care and education. These are massive challenges, but the question is if a little less corruption and a more competent leadership can turn things around. Otherwise, the ANC’s track record of winning an absolute majority since 1994 may be in danger. The ANC losing the majority could be good for democracy in South Africa, because the ANC would be forced to collaborate more broadly in the political spectrum, but it could also turn out to be chaotic, because the ANC is not used to collaborating.

Another emerging market in political limbo is Brazil, which is scheduled to have presidential elections no later than October 2018. Since the impeachment of President Rousseff in 2016, the country has been led by interim President Temer, who has managed to stay in power despite a long trail of corruption allegations and massive protests against his economic reforms. The corruption scandal with the state-controlled oil company Petrobras has spread to involve a number of other large Brazilian companies and hundreds of politicians. A CEO from a large meat company admitted under a plea-bargain agreement that his company bribed more than 1,900 Brazilian politicians over the past decade, including President Temer. Ex-president Lula has also been sentenced in a corruption case, which means that he is unlikely to be allowed to run for president in 2018. He was leading the polls.

It is, in general, unclear who will be able to run for the 2018-elections in Brazil, and where Brazilian voters should turn, if they want to vote for a candidate free of corruption. The elections seem quite unpredictable, and it appears that there will be public protests before, during and after they take place. The continuous corruption cases also represent an unknown factor of who might be brought to justice. This will influence Brazilian politics for years to come, but hopefully also set new standards for politicians and companies.

Unpredictability is not a word that you would use to characterise the upcoming Russian elections. Putin has effectively over the years eliminated all political opposition, so the most that the opposition can hope for is to create a bit of noise and perhaps embarrass Putin with a low voter turnout. But Putin will probably overcome this potential embarrassment and continue business-as-usual. He is determined to put himself in the centre, when the world watches the 2018 football World Cup in Russia.

Understanding the macro-level context is key for engaging with emerging-market companies. This is one of the conclusions that GES will highlight in an upcoming webinar, where we discuss what has been learned after more than 500 face-to-face engagement meetings on emerging markets. Join us on 20th March – read more here.