This article is part of a series based on the results of the 2019 RBC Global Asset Management Responsible Investment Survey. The Survey, entitled ‘Responsible Investing: An Evolving Landscape,’ revealed meaningful insights on the considerations of environmental, social and governance (ESG) factors by global institutional investors.
Institutional investors are concerned about corruption and its impact on investment returns, according to the 2019 RBC Global Asset Management Responsible Investment Survey.
Of the nearly 800 survey respondents from Europe, Asia and North America, about two-thirds considered anti-corruption a top concern when considering investments. It ranked along with water and cyber security in their top three ESG concerns.
Anti-corruption was a slightly higher priority in Canada, where it was the top concern for 69% of respondents. In the U.S., 66% ranked it as their top concern.
Corruption can take many forms, including bribery, embezzlement, money laundering and tax evasion. Corruption costs the global economy upwards of US$3.6 trillion each year, United Nations Secretary-General António Guterres said in 2018.1 That includes US$1 trillion paid in bribes and another US$2.6 trillion in stolen funds.
And while corruption tends to be worse in developing economies where the rule of law is weaker and enforcement may be deficient, it remains a global phenomenon. In the U.S. and Canada, corruption remains an issue in the real estate and construction sectors, according to Risk Advisory’s Corruption Challenges Index 2019.2
Still, the regions surveyed by RBC Global Asset Management (RBC GAM) are among the least corrupt in the world. And while corruption is not unique to lower-income countries, it has a profound effect on their economies and people.
“Corruption has a disproportionate impact on the poor and most vulnerable, increasing costs and reducing access to services, including health, education and justice,” says the World Bank in a policy brief on the issue.3
“Much of the world's costliest forms of corruption could not happen without institutions in wealthy nations,” the brief continues, pointing to financial institutions that accept corrupt proceeds and intermediaries who facilitate corrupt transactions.
The World Economic Forum (WEF) has been among the organizations calling for investors to be more mindful of their affiliations and financial ties. “Too many developed countries tolerate the export and enabling of corruption by their corporate and individual citizens,” the WEF wrote in 2016.4
RBC GAM’s survey indicates that investors know anti-corruption needs to be part of their investment strategy. In taking ESG factors into consideration across its own investment portfolios, RBC GAM sees regional complications in governance structures. For example, while corporate governance in China has improved since 2012, when the Chinese government initiated a crackdown on corruption, the government’s motives for doing so and the ensuing focus on security remain a concern in some cases.
According to Christoffer Enemaerke, Portfolio Manager with the RBC Emerging Markets Equity team at RBC Global Asset Management (UK) Limited, poor governance, including corruption, can have a negative impact on economic growth. “Corruption can result in shortages of resources such as land, water and health and education services,” adds Enemaerke. “It can also have a negative impact on public spending, especially on projects aimed at helping the poor. Within Emerging Markets, our team believes that government reforms will be key in order to address ESG risks such as corruption.”
There are signs that the private sector is starting to take its anti-corruption efforts more seriously.
For instance, dozens of multinational corporations have signed onto the WEF’s Partnering Against Corruption Initiative, agreeing to “join collective action initiatives to increase public trust in business, deliver fair markets and level the playing field by fighting corruption.”5
As with many ESG principles, investors know that understanding corruption risks and anti-corruption efforts at individual companies also makes good financial sense. The WEF and World Bank estimated in 2012 that corruption adds 10% to the cost of doing business globally, and 25% to the cost of procurement contracts in developing countries.
Increasingly robust regulatory regimes also make companies caught up in corruption more likely to face greater immediate consequences at home and to lose business opportunities abroad.
On the flip side, there’s an obvious demand for companies with strict anti-corruption policies and programs — and the ability to convey that integrity to investors.
According to the RBC GAM Responsible Investment Survey, a large majority of institutional investors agree that using ESG factors adds value to their portfolios, creating opportunities for asset managers and companies to capitalize on good governance and transparency.