Resource Nationalism Risk Radar

Risk Radar & Risk Shifts

ISSUE 08 RISK RADAR 2019

RESOURCE NATIONALISM & DEFORESTATION CRISIS & BACKLASH AGAINST MAXIMIZING SHAREHOLDER VALUE Photo by: Joel Vodell (Ubud, Indonesia) Vodell Joel by: Photo RISK RADAR & RISK SHIFTS RISK RADAR / 08 19 03

Photo by: Curioso Photography (Poland)

regulatory imposts in the DRC and in Tanzania. Both countries rewrote their mining codes, claiming that the existing regu- 1. Resource nationalism lations unfairly benefited foreign investors at the state’s expense. This tendency of resource nationalism has also reached Zambia, a country bordering both the DRC and Tanzania, and the world’s seventh-largest copper producer, as its govern- Recently, Indonesian president Joko Widodo announced a possible export ban on nickel ore sooner than anticipated ment has gradually been clamping down on private, and particularly foreign, influence in the mining sector. by the market, raising the risk of a tighter supply next year. The original plan was for Indonesia to ban exporting nick- Possible implications: el ore by 2022, as part of the country’s plan to build up its manufacturing base by using the country’s raw resources. Indonesia’s nickel miners association has urged the government not to advance the ban from 2022 and to pursue further “resource nationalism”. • The term “critical” is added to natural resources increasingly often, resulting from growing awareness of global trends, Resource nationalism is the tendency of governments to take greater control of natural resources. This can take the such as population growth, increased consumption, and pollution. As the criticality of resources increases, resource form of government measures such as tax pressures, changing contractual terms and strict regulations of the mining nationalism will further rise globally. sector. According to the latest Resource Nationalism Index, globally, the risk of resource nationalism has increased • As we wrote before, critical resources might in future no longer refer only to the usual suspects such as oil and min- over the past year, which can be explained by the emergence of protectionism and nationalism. As many as 30 coun- erals. Indeed, oil and rare earth metals are critical resources for our modern industrialized society. However, over tries have registered a significant increase in resource nationalism risk metrics, 21 of which countries are considered the last months, many alarming reports have informed us about a new class of critical resources. Traditional natural major producers of oil, gas and minerals. elements such as land, water and air are now increasingly being framed as such. For instance, in its latest report, the Resource nationalism is mostly a response to two cyclical processes in a country. The investment cycle pushes coun- internationally accepted authority on climate change, the IPCC, calls land a “critical resource”. The criticality of fertile tries rich in resources first to adopt liberal regulations. If investments are made, governments start to regain control land, freshwater and clean air are a risk to the basic foundation of living in all countries. over the resources. Another cycle is the electoral cycle. Incumbent governments often seek to increase their support by exploiting the populist appeal of resource nationalism, as is currently happening in Zambia. RISKS MARKED ON THE RISK RADAR AS NUMBER 1: RESOURCE NATIONALISM The index specifically mentions Russia and the DRC, which were downgraded to “extreme risk”. The DRC is a bellweth- er for a broader tendency of resource nationalism on the African continent. Although Africa has long been recognized as a high-risk area, the report shows that the risk has increased in 10 African nations over the past year. Over the past two years, international miners and their host governments have especially clashed over tax changes and other RISK RADAR & RISK SHIFTS RISK RADAR / 08 19 05

2. Deforestation crisis

The world’s largest rainforest is becoming a burning political issue. At the latest G7 meeting, the Amazon was among the most hotly-debated topics. Half the planet’s rainforests are in the Amazon, which has a crucial function not only as the “lungs of the earth” (it produces 20% of the oxygen we breathe) but also as an enormous air conditioner: keeping the earth cool (storing vast amounts of planet-warming carbon dioxide) and humid (by its water-recycling function). Moreover, it is the habitat of thousands of species and thus important to Earth’s biodiversity. However, Brazilian President Jair Bolsonaro has pledged to open up the two-million-square-mile forest to more farming and mining. Since he took office, deforestation has already gained speed. Over the last month, record numbers of raging wildfires linked to deforestation have been diminishing the Am- azon. Although Brazilian Minister of the Environment Ricardo Salles blamed “dry weather, wind, and heat” for the rising number of forest fires, the wildfires are accompanied by the surge in deforestation and there is clear evidence that the recent rise in deforestation is partly the result of pro-development policies of Bolsonaro. This has caused global anger and concern, and has led the other G7 leaders to offer 20 million dollars in emergency aid to help battle wildfires in the Amazon rainforest. However, Brazil rejected the offer, slamming the gesture as colonialist. Indeed, Bolsonaro’s success is partly due to his casting himself in opposition to the rich global North. In the past, the other G7 countries have certainly taken part in large-scale deforestation with the same motives of making room for agriculture, infrastructure, and urbanization as a result of industrial modernization. Now, Brazil likewise seeks to capitalize on the rainforest for the country’s economic development as it has done before. The world’s eighth-largest economy is a diversified economy, but a significant part of it was built on the destruction of the rainforest, a fifth of which has already disappeared. In Indonesia, the rainforest is also falling prey to pro-development policies. In the world’s tenth largest economy, the intentions of nationalistic president Joko Widodo are a cause for similar concerns over the world’s rainforests. As the country’s capital is plagued by insurmountable challenges such as catastrophic pollution and traffic congestion, the government has announced its plans to move the country’s capital from the megalopolis of Jakarta to the sparsely populated island of Borneo. However, these plans threaten the world’s third-greatest rainforests, which Borneo is home to. Kashmir Mountains The world’s second-largest rainforest, located in the Democratic Republic of the Congo, is also at risk. Defor- estation is gaining speed in the African country. According to a 2018 study, at current rates of deforestation, all primary forest in the DRC will be gone by the end of the century. The main cause of deforestation here is actu- ally small-scale clearing for subsistence agriculture.

Possible implications:

• The wildfires in the Amazon are a trigger for accelerated climate change. Instead of absorbing CO2 as the forest ordinarily does, a burning forest produces massive amounts of CO2, causing global warming. Experts fear that Brazil is entering such a vicious cycle.

• As resource nationalism is on the rise and forests are “claimed” by national leaders as a resource a country has a right to exploit (as Bolsonaro has expressed it), deforestation will not easily be curbed by international cooperation or global governance (as Bolsonaro’s rejection of the $20 million shows). RISKS MARKED ON THE RISK RADAR AS NUMBER 2: CLIMATE CHANGE, RESOURCE NATIONALISM Photo by: Alfred Kenneally by: Photo RISK RADAR & RISK SHIFTS RISK RADAR / 08 19 07

3. Backlash against maximizing shareholder value In August, the Business Roundtable, a prominent group of the U.S.’ largest and most powerful CEOs, stated that maximizing shareholder value should not be a company’s sole objective. The view that led the CEOs of the capitalist country to favor shareholders over stakeholders, such as employees and the environment, is no longer seen as apt. This is remarkable, since the Business Roundtable has a long track record of defending business against accusations of disregarding the broader interests of society. In light of growing inequality and the increasing risk of social upheaval, CEOs of leading corporates have start- ed to see their approach of maximizing shareholder value as a threat. The CEO-worker pay gap is now better documented than ever and wage inequality is still considered an underestimated risk for companies. More- over, with the 2008 financial crisis still fresh in mind for millennials, who will make up 50% of the U.S. work- force within the next year, the wish for more long-term value instead of short-term profits is well-represented. Also, millennial investors are focusing more on ESG than previous generations. Similarly, in times of great power of institutional investors and their turn towards more socially responsible and sustainable investments, such as the world’s largest asset manager BlackRock, CEOs are further pushed to abandon the long-held view of “shareholders first”. As a response to these tendencies, CEOs have no alternative but to emphasize that they value more than just their shareholders and to show their engagement with publicPhoto purpose. description But for now, - criticattribution and economist Jo- seph Stiglitz argues the announcement at the Business Roundtable remains a publicity stunt in the face of a popular backlash against widespread misbehavior and it remains to be seen whether it will lead to U.S. leading firms taking on a stakeholder value approach.

Possible implications:

• Share-price primacy has become a threat to businesses. Western capitalist society will increasingly de- mand more inclusion of the environment and of employees when it comes to benefiting from the value creation of corporates.

• Traditional shareholder-first companies will increasingly face competition from alternative organizational forms. For instance, in contrast to Anglo-American organizations that focus on short-term profits, Rhine model organizations focus on long-term relationships (e.g. enduring employment of managers, contracts with suppliers).

• As we wrote before, the widening gap in the U.S. has sparked debate on worker rights and seems to in- terest both Republicans and Democrats in the current U.S. presidential campaign. While Republicans are focusing on traditional strategies involving labor unions and co-ops, Democrats are taking a more radical approach by proposing worker ownership, i.e. measures to ensure that workers become board members or shareholders of the firms at which they work, or that they have priority in the right of acquisition of the firm.

• Companies will increasingly be publicly scrutinized as to whether they’re paying their fair share of taxes. COLEMAN JOSHUA by: Photo Especially growing awareness of big tech tax avoidance will lead to a global hunt to tax big tech or the coming of digital tax.

RISKS MARKED ON THE RISK RADAR AS NUMBER 3: RISING INEQUALITY RISK RADAR & RISK SHIFTS RISK RADAR / 02 19 09

RISK RADAR EUROPE

AUGUST 19

The potential political, sociological, economic and technological threats.

PRIORITY OF RISK

Is a determination of the likelihood of occurrence and the estimated impact.

NEW RISK

ESTIMATED IMPACT

LIKELYHOOD OCCURENCE

TIME HORIZON (IN YEARS)

5-10

3-5

1-3 RISK RADAR & RISK SHIFTS RISK RADAR / 02 19 011

RISK RADAR WORLD