Why should Investors support EITI?

David Diamond, member of the EITI Board and Co-head of SRI in Allianz Global Investors France, has authored an article on why institutional investors should support EITI in Pensions Week. The article was printed in the June edition of the magazine, and can be found here.

Investment Insight - Extractive Industries: Achieving Transparency
David Diamond - Co-head of SRI development/EITI board member, Allianz Global Investors France
1 June 2009 - Pensions Week

Oil, gas, and mining have always been dirty businesses. Companies in these extractive industries are often forced to operate in areas of political instability, violence, bribery, and corruption. They face business risks that can significantly affect their commercial prospects and returns to investors, and there is often no alternative to operating in these commodity-rich countries.

Institutional investors with exposure to extractive companies have an interest in supporting the Extractive Industries' Transparency Initiative (EITI) as a means to contribute to improvements in governance and transparency, to ultimately enhance the prospects of their investment returns. The EITI brings together representatives of governments, companies, investors, and civil society to improve transparency through the verification and publication of company payments and government revenues from extractive industry revenues. There is growing consensus that the initiative yields genuine benefits in terms of improved financial management, accountability and business climate, evidenced by the fact that it has now been joined by 26 countries.

Many believe that countries implementing the EITI have a competitive advantage in attracting greater investment in the current risk-averse climate. The high standards of accounting and reporting inherent in the EITI help to ensure greater openness and a more level playing field in the business environment. In addition, by establishing clear systems for reporting payments, and by including a focus on the issue of social development, companies are the clear beneficiaries of a more stable economic, political, and social environment.

There is still a long way to go before the EITI standards are implemented by most extractive industries and countries, but as EITI chairman Peter Eigen put it: "The current financial and economic crisis is ultimately one of governance, or lack thereof. A multi-stakeholder coalition like ours can strengthen the governance fabric. Let us, therefore, continue to ensure that natural resource extraction really does lead to benefits for the citizens to whom the resources belong."

Over the next year, the EITI community will focus on assisting member countries to meet validation deadlines in 2010. Validation is the EITI's quality assurance mechanism verifying a country's compliance and is essential for demonstrating that the EITI model is an effective and workable tool for countries in their efforts to improve governance standards and reduce corruption.