LAST YEAR, WE wrote about why corporate Boards of Directors should care about their portfolios of non-controlled joint ventures. In short, these portfolios tend to be more material than realized, carry underappreciated and often inappropriately managed levels of risk, and contain latent performance upside – all of which are challenges to corporate Directors increasingly exposed collectively and personally to regulatory and shareholder scrutiny.
Add to that list an emerging trend: Investors increasingly care about corporate social responsibility (CSR) issues in non-controlled JV portfolios, putting a company’s overall social license to operate – and stock price – at risk. As one client recently told us, investors and other lobby groups see his company name involved in a developing country partnership and simply assume they have some kind of responsibility or ability to intervene and should be held accountable when something goes wrong, regardless of their contractual obligations as a non-operator.
This trend is particularly – though not exclusively – present across the natural resources sector, where oil and gas as well as mining companies now find themselves facing growing calls from outside groups to be more proactive about corporate social responsibility issues in their non-operated JV portfolio (Exhibit 1).
Exhibit 1: Corporate Social Responsibility and Non-Operated Joint Ventures
Pressures on corporate Boards to expand their CSR and other commitments to their large and growing portfolio of non-operated joint ventures
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Source: Water Street Partners. All rights reserved.
For example, in the oil and gas industry, the Environmental Defense Fund recently launched a campaign to highlight the potential impact of targeting methane emissions in the non-operated JV portfolios of 8 IOCs that have signed up to achieve methane reduction targets as part of the Oil and Gas Climate Initiative. The EDF campaign highlights that non-operated JVs account for 26% to 65% of the production of the IOCs in question, and challenges the industry’s ability to meet its targets without expanding methane reduction strategies to include non-operated assets. And while the report is ostensibly written for industry consumption, EDF’s true target for influence appears to be outside investors and activist groups that can vote with their shares to drive action by Boards and management teams.
The growing focus on non-operated JV portfolios also exposes state-owned oil companies (NOCs) to external CSR pressure that they traditionally avoid in the absence of public shareholders. Any IOC effort to address CSR issues like methane reduction will inevitably impact NOCs as the largest and most common IOC partners in many oil and gas non-operated JVs, particularly in developing regions.
A second example comes from the mining industry, where 27 of the world’s largest companies have formed the International Council on Mining and Minerals (ICMM). Membership in the ICMM requires full and transparent implementation of 10 Principles for sustainable development (for example, Principle 6 is “Pursue continual improvement in environmental performance issues, such as water stewardship, energy use and climate change”) in company projects.
Rather than waiting for external pressure, ICMM members have been proactively discussing whether to extend those principles to cover their But not all examples come from the natural resources sector. In the defense industry, Transparency International publishes an annual Anti-Corruption Index that sets standards for accountability, transparency, and anti-corruption programs in the sector and evaluates companies against them, with a goal of creating government, media, investor, and civil society pressure on defense companies to reduce corruption and its impact. For the first time, the 2019 version of the Index will now include analysis related to how defense companies are managing transparency and corruption issues in their non-controlled JVs.
Great corporate Boards and their Directors are waking up to the importance of getting a grip on their non-controlled JV portfolio. Facing pressure from regulators is bad enough, but facing activist investors with pitchforks and proxy votes as social responsibility issues cause stock prices to decline might be even worse.
Click here to listen to Isabel Mogstad (Manager, EDF+Business Energy at Environmental Defense Fund), Geoff Walker (Co-founder and Managing Director at Water Street Partners), and Nikos Tsafos (CSIS Energy and National Security program) discuss how oil and gas companies are moving to reduce methane emissions from their operations worldwide.