investor's guide to commodities - PRI Signatory Extranet - Principles ...

6 The Responsible Investor’s Guide to Commodities1EXECUTIVESUMMARY“The responsible investor’s guide to commodities” 1 concludes a multi-yearproject sponsored by the Swiss Federal Department of Foreign Affairs, the UNbackedPrinciples for Responsible Investment (PRI) and the UN Global CompactSecretariat. The goal of this work was to improve the understanding ofenvironmental, social and governance 2 (ESG) issues in commodity investmentswith a view to identifying and promoting best practice in this area.The best practice recommendations proposed in this report result fromextensive engagement with institutional investors and other stakeholders thatare active across the spectrum of commodity investments. These recommendationsare summarised on the next page.This report covers the full range of options available to investors to addcommodity exposure to their portfolios:• Investments in commodity derivatives, which can be traded on exchanges orover-the-counter (Section 4)• Investments in physical commodities (Section 5)• Investments in real productive assets, such as forest and agricultural land(Section 6)• Debt or equity investments in companies that own commodity producingassets or related businesses in the commodity value chain (Section 7).The report also includes a special section on investments in agriculture andfarmland, which is a part of the commodities spectrum particularly exposed toenvironmental and social issues (Section 8).Both the issues and the available strategies for responsible investors varygreatly across investment types. Where real asset and debt / equity investmentscreate direct exposure to ESG issues such as mine tailings or labourconditions, physical commodities or commodity derivatives require investorsto consider the “systemic” impact of their actions: physical commodities takenaway from productive use can harm growth and returns in other asset classesand their production leads to environmental and social externalities; excessivespeculation in commodity derivatives can lead to price volatility and ultimatelyharm investors’ “license to invest” in those markets.Further, even in the investment types characterised by direct exposure toESG issues, a distinction must be drawn between manageable and unmanageableissues. A real asset investor can select farm investments on the basis oftheir water and greenhouse gas footprint and a shareholder can challenge thesourcing policy of a listed food company, but the holder of gold bullion cannotknow whether it was mined by slave labour or by a professional miningcompany. The fungibility of physical commodities limits the extent to whichinvestors can identify and manage ESG issues associated with their production.Given these distinctions between commodity investment types, “TheResponsible Investor’s Guide to Commodities” also comments on the choicebetween asset classes (Section 3). Real asset investments and debt / equityinvestments appear preferable when evaluated for the possibility to activelymanage ESG risks and opportunities and contribute to sustainable developmentthrough the allocation of capital. For physical and derivatives investments,the risk of contributing to unwanted “systemic” effects and the limitedpossibilities to mitigate these put responsible investors in a dilemma.Throughout the report, we highlight areas for further research and engagementby investors. While this project has reached its conclusion, theinvestment community is just at the beginning of a period where innovativeapproaches will be needed in the field of commodity investing.1. Responsible investors are investors with a long-term view aiming to consider material ESG issues in the managementof their investments and in their ownership strategies2. The production and delivery of commodities involves a wide range of ESG issues, including the depletion of nonrenewableresources, pollution of air/water/soil, labour and human rights issues. An overview is provided in Appendix 1.