Why long term investors should engage with the Congo

World Humanitarian Day on August 19 is a good time for investors to reflect on the world we live in. The Melbourne Program Committee of Australia for UNHCR is holding its second event, which we hope will become an annual opportunity for the superannuation sector to support UNHCR’s work.
This year we will hear from Sister Angélique Namaika, a nun from the Democratic Republic of the Congo who works to assist women and girls who have been abused by the Lord’s Resistance Army, will present.

Sister Angélique – the 2013 recipient of the United Nations High Commissioner for Refugees’ Nansen Refugee Award for her work with Congolese refugee women – has seen at first hand the impacts of DRC Congo’s tumultuous past, which continues to play out today with news this week that 34 people have been charged with genocide.

It would be easy to conclude that after a decade of conflict that involved nine African countries and led to the deaths of 5.4 million people, mostly through disease and starvation, that DRC Congo is no place for investors.

However DRC’s huge natural resources means that long term asset owners already have some exposure to the country.

DRC is one of the most significant miners of coltan, which is used in a variety of electronics applications including every smart phones. With demand for coltan likely to increase over coming years we can expect to see more investment in the region with DRC already producing 20% of the global supply.

According to KPMG, the DRC is also the largest producer of cobalt globally, accounting for about 55% of the global output in 2012 and the second largest producer of industrial diamonds in 2012, contributing about 21% of global production.

The DRC is not only important for its minerals. DRC Congo is a huge country – the size of Western Europe. The Congo Basin, which spans six countries, consists of 500 million acres of largely undeveloped wilderness that is the companion to the Amazon as the Earth’s lungs.

What then should investors be doing in the DRC?

The first thing is to engage with mining companies to ensure that mining is conducted on a sustainable basis with benefits for the local population.
Investors need to also consider how to support the development of local infrastructure by working with development banks.

There is also a role for investors to engage around building frameworks that will support long term, sustainable economic development including the development of local stock exchanges.

Structures like the UN backed Principles for Responsible Investment provide the logical place for investors to collaborate to develop programs and practices that will support the sustainable development of countries such as the DRC – and indeed any other countries that are recovering from conflict.

World Humanitarian Day is a great place to start this engagement.

Melbourne Program Committee of Australia for UNHCR’s event will take place on Wednesday 19 August 2015, from 5:30pm – 7:30pm at First State Super Melbourne Seminar Room, Level 13, 15 William Street, Melbourne. To attend please rsvp to to Stacey Hynes on 03 8613 9732 or at stacey_hynes@firststatesuper.com.au

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The annual performance review is dead – good riddance

News that Accenture is getting rid of its annual performance review for its 330,000 employees is being greeted with announcements by other corporations including Deloitte and NAB to end the practice, which whilst universally unpopular has become a standard dance ritual in many organisations.

The criticism about the effectiveness of annual performance reviews have long been documented. How is it that the practice has continued for so long, for such little positive impact?

Elite sports are a good case study. Would a high performance footballer expect to only have an annual discussion on their performance? Would a coach be satisfied to only sit down with their players once a year to provide feedback on how they are performing?

The heart of the matter is that annual performance reviews are a lazy way of managing employees. Perhaps suited to an industrial world where jobs could be divided into constituent components, they are not fit for purpose for our modern economy.

So, how should an employee be managed?

It is timely to ask this question. One of the things that I have seen over the last twenty years is the disappearance of discussions on management from mainstream business focus.

Many will remember the focus on learning organisations and teams in the late 90’s. But as the economy recovered from the 90’s recession, the focus on management waned. As the economy boomed there didn’t seem time to focus on managing employees, and when the global financial crisis arrived the focus then became survival.

Now the economy has stabilised, and the day to day threat of economic collapse that the GFC threatened has subsided, it is time to focus on management quality. With rates of growth likely to be low over the coming years, good quality management is likely to become a key differentiator of performance.

Quality management requires time. Like a coach managing elite athletes, if a business wants to perform, then it will need to make sure that managers work with their team on a day to day basis. The end of the annual performance review is a recognition that lazy management is no longer acceptable. Good riddance I say.

Exploding the Porthos Retirement Myth

Increasing pension access age to 70 should only happen if we improve health adjusted life expectancy

In Alexandre Dumas’ famous novel, Man in the Iron Mask, Porthos, the musketeer known for his colossal strength passes away after heroically saving his fellow musketeers. Porthos dies, not via the sword of an enemy, but because his body fails him. Dumas writes “All at once, his knees buckled— they felt empty— and his legs softened under him! “Uh-oh!” he muttered in surprise. “My fatigue is tripping me up. I can’t walk. What’s wrong?” Dumas went on to write, “Oh!” replied the giant, making a supreme effort, uselessly tensing all the muscles in his body. “I can’t!” And uttering those words, he fell to his knees…..”

Fantastic fiction, but I am afraid that is just it. Fiction. The reality is that this is not how people live out their final years although we are setting national policy as if it was.

The age at which governments set access to old age pensions has always had an element of politics and guesswork. Germany’s Otto von Bismark, who introduced the first age pension in 1889 did so out of fear of the growth of socialism, introducing bills at the same time as legislation that sought to ban the emerging socialist parties. Bismark set access to the age pension at 70 when life expectancy was 72. The clear policy intent was that the pension would not cost the German government much because people would not live long enough to enjoy it.

But the current debate on increasing the Age Pension access age to 70 should not be based on politics and guesswork, but data.

Evidence from the Institute for Health Metrics and Evaluation (IHME) at the University of Washington is demonstrating that whilst we may be living longer, we are not healthy as we age.

IHME coordinated the Global Burden of Disease Study 2013 which estimates the burden of diseases, injuries, and risk factors globally for 188 countries. The study’s data on Years Lived with Disability (YLD) is particularly important. For Australia, whilst life expectancy at birth has increased from 76.9 years in 1990 to 81.5 in 2010, health-adjusted life expectancy at birth has increased from 66.4 years in 1990 to 70.1 in 2010.

Health adjusted life expectancy is of particular relevance to the current debate on access to the old age pension. It represents the age at which an individual is able to work productively. Unlike Dumas’ Porthos who worked like a titan until the moment his body collapsed, the evidence suggests that working up to 70 is simply not going to be an option for many.

The Global Burden of Disease Study reveal that the major causes of Years Lived with Disability (YLDs) in Australia are heart disease, low back pain, and pulmonary disease with diet and tobacco smoking the two major contributors. The key issue for policy makers to consider is that increasing the access to the Age Pension to 70, will not increase workforce participation. We will either see people moving onto disability support pensions, or accessing their superannuation to fund their exit from the workforce – which ill-health means will not be a choice.

If as a nation we do want to increase the nation’s productivity by getting people to work longer, then our key focus must be on the factors that are leading to ill health. Reducing smoking and improving diet should be seen as a major levers in enhancing national productivity. The good news is that Australia ranks well on health adjusted life expectancy. We should view this as a competitive advantage and focus on ways to increase this advantage.

We do need a debate on increasing the age pension but it must be focused on improving productivity not on delivering short term Budget savings. At the moment our debate would make Dumas, regarded as one of the fathers of modern fiction, proud.

LINKS
Global Burden of Disease Study
http://www.healthdata.org/gbd

ACKNOWLEDGEMENTS
Alexandre Dumas, The Man in the Iron Mask (Penguin Classics) (p. 387). Penguin Publishing Group. Kindle Edition.

Did asset allocation models lead to the Greek financial crisis?

As Greece continues to negotiate with the European Union, a significant question is whether asset allocation models contribute to financial instability?

An excellent case study is the German insurance market. As at the end of 2012, German life insurers held investments to the value of EURO 768.9 billion. Of this, 90% of total assets were held in fixed-income securities.

The current low-yield environment has led Germany’s Reserve Bank, Deutsche Bundesbank to raise questions about the potential for German insurers to become insolvent if low yields persist.

In a discussion paper issued in October 2014, Deutsche Bundesbank researchers Anke Kablau and Matthias Weiß analysed the impact of protracted low yields on solvency. According to Kablau and Weiß one option was for insurers to take on additional risk. “They could try to increase the net return in order to enlarge the allocations to the bonus and rebate provisions, part of which is recognised as own funds. Increased risk-taking would have to be viewed critically in terms of financial stability. Insurers’ risk management systems would certainly need to be progressively adapted.”

The German insurance dilemma raises the broader question of the macro-economic impacts of asset allocation. At a micro-economic level it makes complete sense for an insurer to adopt an asset allocation model where 90% of assets are invested in fixed-income securities. But when a whole system, which in this case is not just German insurers but pension funds globally, adopts the same asset allocation model we create problems.

What we need to see is differentiation, not herding, in investment strategy. Regulators have a role to play in supporting this. Rather than frowning upon risk, which the language of the Deutsche Bundesbank discussion paper implicitly does, regulators need to understand that by encouraging herding behaviour of investors we actually increase systemic risk.

The German insurance model, and others like it, created a platform where government bonds would be purchased, even where risks were deteriorating. We may be facing a Greek crisis today, but the makings of future crises exist in the sustainability of US debt.

The core message for investors is that whether we like it or not we have to step up and recognise that what we do contributes to the health of the global economy. Adopting investment strategies that look cost effective from a micro perspective, does not mean we don’t have responsibility at a macro level for their outcomes.

LINKS

Anke Kablau and Matthias Weiß, Deutsche Bundesbank, How is the low-interest-rate environment affecting the solvency of German life insurers?
https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Discussion_Paper_1/2014/2014_10_27_dkp_27.pdf?__blob=publicationFile

Vale Phil Spathis

I first met Phil Spathis when we were at the Finance Sector Union of Australia. For a number of years I worked for Unite in the UK. I remember making a call from a phone box in Spain to talk to the FSU about my return to Australia. I got the time zones wrong and ended up calling at some un-godly hour in the morning. The phone was answered by Phil, the only one in the office. This was typical of Phil. His studying for his law degree whilst working full time and looking after a family were the stuff of legend.

Years later when we both found ourselves working in the industry fund movement, Phil’s commitment to the trade union movement had not wavered. He continued for many years to serve on the state executive of the FSU, and continued to be passionate about working issues.

When I began consulting in the responsible investment space it was Phil that gave me my first assignment, which was to establish a Sustainability Reporting framework that benchmarked the progress that the ASX was marking improving reporting around sustainability. Phil was the quiet force for investors on the ASX Corporate Governance Council, working in a collaborative, yet determined manner to incrementally improve governance stances of the Australian market.

Phil’s best known contribution to corporate governance is the battle that he led with Michael O’Sullivan against News Corp’s transfer of listing from Australia to US that would have undermined minority shareholders rights and entrench the power of the Murdoch family.

When ACSI stood up on behalf of Australian investors, Murdoch initially thought that he could brush them aside. But ACSI started organising – skills learned in the trade union movement – and established a global coalition that in the end forced Murdoch to the negotiating table.

Eleven years later the importance of corporate governance is universally recognised. But it wasn’t always like this. ACSI’s News Corp campaign was not just important for Australian investors. It gave legitimacy for others to stand up. That in the end describes Phil.

My deepest sympathy to Phil’s family.

Links

ACSI’s News Corp story:
http://www.theage.com.au/articles/2004/10/08/1097089571715.html?from=storylhs
http://www.acsi.org.au/sustainability-reporting.html

How to manage house price increases caused by foreign investment

This week I had a good chat with a London cabbie who besides bemoaning England’s cricket team, said that one of the results of the property boom in London is that he rarely gets fares to Chelsea, which has emptied out as properties are bought by foreigners who do not reside in them. The story of foreign investors driving up property prices is the same in other global cities including New York, Toronto and Paris.

Returning to Australia, the subject of rising house prices is reaching fever pitch. With the real economy declining as a result of the fading of the resources boom, and with banks curtailing their investment lending, the finger is being squarely pointed at foreign investors.

The demand by foreign investors for property is a global phenomenon. And much of the investment is from emerging markets where individuals are seeking to transfer wealth to countries where the rule of law means provides long term security.

The desire to transfer assets from the developing world to the developed world is likely to be a permanent feature of the new global economy. But what are the implications?

In the short term governments may be happy to see housing markets buoyant and local construction stimulated, but in the long term are we creating economic imbalances?

The danger is that rising property prices in global cities will ultimately make these cities uncompetitive as higher wages and higher rents makes the cost of running a business unaffordable. The increasing cost of operating in the world’s global cities, may in turn cement the divide between the developing and developed world where business costs will be lower. The cycle of property investing is therefore likely to continue as wealth will continue to be built in developing countries and transferred to property investments in global cities.

What should governments and investors do?

The first thing is that there is a need to establish sensible constraints on the flow of capital.

Singapore took an early lead in this direction in 2011, introducing a foreign buyers’ sales tax, which is now 18%, after property prices boomed by 20-30% in 2008-09. Singapore provides exemptions from the sales tax for certain countries, the result of which has been to stabilise property prices.

We may also need legislation to prevent hoarding of housing. Requiring investors who do not rent out a property to pay a special levy may be one option that could ensure that increased housing supply actually results in an increase in availability of rental properties.

By structuring foreign sales taxes at a rate that allows for sensible investment there is the potential to raise revenue that could be used in ways that are in the long term interest of cities. Taxes on empty households and foreign buyer sales taxes are a good way of financing infrastructure, urban development and affordable housing.

The final area of focus needs to be on governance of emerging markets. We need to create a global environment where private wealth feels secure investing for long term in the economies where they create wealth. With growth in emerging markets likely to be higher than growth in developed countries it is also in the interest of institutional investors to focus on improving governance, which would allow greater flows of pension capital to be allocated to growth regions. This means that institutional investors should actively support measures to crack down on corruption wherever it may occur.

Foreign capital has the potential to be a source of development that can stimulate local economies, but like fire it is a good friend, but bad master, and must be managed.

Scientists call for action on radiation risks from mobile phones and wifi devices

Last week a global group of 190 scientists issued an international appeal, calling on the UN Secretary General and UN member states to address the risks of non-ionizing electromagnetic fields, which include radiofrequency radiation (RFR) emitting devices, such as cellular and cordless phones and their base stations, Wi-Fi, broadcast antennas and smart meters.

The scientists included Dr. Charles Teo, a prominent neurosurgeon at the Prince of Wales Hospital in Sydney, who founded the Cure Brain Cancer Foundation and publicly addressed the US Congress as part of US President Barack Obama’s vision to explore and map the human brain. Dr Teo has publicly warned that exposure to radiation should be minimised.

The action by the scientists comes on the back of the listing by the World Health Organisation of radiation from mobile phones as a possible carcinogen. The number of scientific studies showing links between radiation and a range of biological impacts – including cancer – continues to grow. The insurance industry refuses to provide insurance coverage against health impacts of radiofrequency radiation exposure. Why is it that so little is being done by governments to address the risks from the growing proliferation of radiation devices?

A small number of MPs have spoken up against the dangers of radiofrequency radiation with Greens Senator Scott Ludlum the most prominent, but they have been met with a wall of opposition from Labor and the Coalition.

It is hard not to conclude that governments themselves are conflicted. Governments receive significant revenues from the auction of spectrum and many government authorities also receive income from rent of public spaces for mobile phone towers. Governments may also face future legal claims for authorising the use of radiation exposure.

The risks from radiofrequency radiation are growing. NBN towers are now being installed across the country, with locals fighting to stop the installation of towers next to schools. Public education has become flooded with radiation. Every child in Victoria’s public education system is exposed to routers that have the capacity to simultaneously download content for a whole class on ipads and wireless devices.

When we look at the scientists that have joined together to raise the risk of radiofrequency radiation exposure, what we see is a lack of commercial self interest. These scientists are not funded by the corporate sector and indeed face the risk of campaigns against them if they speak up publicly – as Dr Teo has experienced first-hand.

Nevertheless they have the courage to speak out.

What we need is the courage to listen.

A full transcript of the scientists’ international appeal follows:

To: His Excellency Ban Ki-moon, Secretary-General of the United Nations, Honorable Dr. Margaret Chan, Director-General of the World Health Organization, U.N. Member States

Scientists call for Protection from Non-ionizing Electromagnetic Field Exposure

We are scientists engaged in the study of biological and health effects of non-ionizing electromagnetic fields (EMF). Based upon peer-reviewed, published research, we have serious concerns regarding the ubiquitous and increasing exposure to EMF generated by electric and wireless devices. These include–but are not limited to–radiofrequency radiation (RFR) emitting devices, such as cellular and cordless phones and their base stations, Wi-Fi, broadcast antennas, smart meters, and baby monitors as well as electric devices and infra-structures used in the delivery of electricity that generate extremely-low frequency electromagnetic field (ELF EMF).

Scientific basis for our common concerns

Numerous recent scientific publications have shown that EMF affects living organisms at levels well below most international and national guidelines. Effects include increased cancer risk, cellular stress, increase in harmful free radicals, genetic damages, structural and functional changes of the reproductive system, learning and memory deficits, neurological disorders, and negative impacts on general well-being in humans. Damage goes well beyond the human race, as there is growing evidence of harmful effects to both plant and animal life.

These findings justify our appeal to the United Nations (UN) and, all member States in the world, to encourage the World Health Organization (WHO) to exert strong leadership in fostering the development of more protective EMF guidelines, encouraging precautionary measures, and educating the public about health risks, particularly risk to children and fetal development. By not taking action, the WHO is failing to fulfill its role as the preeminent international public health agency.

Inadequate non-ionizing EMF international guidelines

The various agencies setting safety standards have failed to impose sufficient guidelines to protect the general public, particularly children who are more vulnerable to the effects of EMF.

The International Commission on Non-Ionizing Radiation Protection (ICNIRP) established in 1998 the “Guidelines For Limiting Exposure To Time-Varying Electric, Magnetic, and Electromagnetic Fields (up to 300 GHz)”[1]. These guidelines are accepted by the WHO and numerous countries around the world. The WHO is calling for all nations to adopt the ICNIRP guidelines to encourage international harmonization of standards. In 2009, the ICNIRP released a statement saying that it was reaffirming its 1998 guidelines, as in their opinion, the scientific literature published since that time “has provided no evidence of any adverse effects below the basic restrictions and does not necessitate an immediate revision of its guidance on limiting exposure to high frequency electromagnetic fields[2]. ICNIRP continues to the present day to make these assertions, in spite of growing scientific evidence to the contrary. It is our opinion that, because the ICNIRP guidelines do not cover long-term exposure and low-intensity effects, they are insufficient to protect public health.

The WHO adopted the International Agency for Research on Cancer (IARC) classification of extremely low frequency electromagnetic field (ELF EMF) in 2002[3] and radiofrequency radiation (RFR) in 2011[4]. This classification states that EMF is a possible human carcinogen (Group 2B). Despite both IARC findings, the WHO continues to maintain that there is insufficient evidence to justify lowering these quantitative exposure limits.

Since there is controversy about a rationale for setting standards to avoid adverse health effects, we recommend that the United Nations Environmental Programme (UNEP) convene and fund an independent multidisciplinary committee to explore the pros and cons of alternatives to current practices that could substantially lower human exposures to RF and ELF fields. The deliberations of this group should be conducted in a transparent and impartial way. Although it is essential that industry be involved and cooperate in this process, industry should not be allowed to bias its processes or conclusions. This group should provide their analysis to the UN and the WHO to guide precautionary action.

Collectively we also request that:

1.children and pregnant women be protected;
2.guidelines and regulatory standards be strengthened;
3.manufacturers be encouraged to develop safer technology;
4.utilities responsible for the generation, transmission, distribution, and monitoring of electricity maintain adequate power quality and ensure proper electrical wiring to minimize harmful ground current;
5.the public be fully informed about the potential health risks from electromagnetic energy and taught harm reduction strategies;
6.medical professionals be educated about the biological effects of electromagnetic energy and be provided training on treatment of patients with electromagnetic sensitivity;
7.governments fund training and research on electromagnetic fields and health that is independent of industry and mandate industry cooperation with researchers;
8.media disclose experts’ financial relationships with industry when citing their opinions regarding health and safety aspects of EMF-emitting technologies; and
9.white-zones (radiation-free areas) be established.

Links:
http://www.emfscientist.org/index.php/emf-scientist-appeal