AOG / 7 1 May The Financial Markets Are Beginning to Recognize the Value of the EITI Label,

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1 AO / 7 1 May 2013 INTERVIEW The Financial Markets Are Beginning to Recognize the Vale of the EITI Label, David Diamond, lobal Co-Head of ES at Allianz lobal Investors, tells AO It is far easier to generate revenes from the extractive indstries than to bild a strong and diversified economy. The economic performance of most natral resorce-rich contries lags behind that of other contries. 37 contries representing a total poplation of 900 million are crrently implementing the Extractive Indstries Transparency Initiative (EITI). AO : Why is the oil and gas indstry an important sector for large instittional investors sch as Allianz lobal Investors (AllianzI)? n David Diamond : While prices for natral resorce commodities, sch as oil, gas and precios metals, remain volatile, interest in extractive indstries - oil, gas and mining - shold contine over the long term, as investors prse ever greater diversification strategies and hedges against any potential rise in inflation. lobal demand for these non-renewable natral resorces is likely to be spported by three seclar trends: a) a 50% growth in world poplation by 2050 according to UN estimates; b) a 36% rise in global energy se by 2035 according to the International Energy Agency; c) a potential dobling of the emerging economies share of global DP within 15 years, assming IMF growth estimates contine at crrent rates. Moreover, many of or clients portfolios are managed relatively to an investment benchmark, sch as the MSCI Erope or MSCI World eqity indices. MSCI Erope is an eqity index comprised of Erope s largest, listed companies (abot 430 in total), whereas MSCI World brings together the largest companies worldwide (abot 1,600). The energy sector conts among the most significant constitents of MSCI Erope, 9.9% of the index, and acconting for a comparable 10% of MSCI World. Oil majors figre prominently in both indices with BP and Royal Dtch Shell ranking within the top ten largest companies in Erope by market capitalisation, and ExxonMobil and Chevron ranked within the top five world-wide. As a conseqence, the energy sector is an important sector for large instittional investors to consider, as it contribtes significantly to the risk/retrn profile of their investment portfolios.

2 1 May 2013 AO / 8 AO : What are for AllianzI the main risks linked to this indstry and how do yo manage them? n D. D. : Extractive indstries present nmeros environmental, social and governance (ES) challenges of interest to investors. After the BP-linked oil spill in the lf of Mexico higher costs linked to polltion controls are an isse for oil companies operating deep offshore platforms. Employee health and safety is an on-going concern for mining and metals companies seeking to redce workplace accidents, sch as Arcelor Mittal. One particlarly difficlt challenge is secring long term spply for resorces located in areas where political, economic and social instability is often the norm. Social nrest has reglarly threatened Royal Dtch Shell operations in Nigeria, and dring the Arab Spring for Eni in Libya. Reptational risk linked to accsations of bribery and corrption is also a recrring isse. Poor governance and lack of transparency often lie at the root of the problem, as local poplations fail to see any socio-economic benefits from the financial wealth generated by resorce exports. According to The Economist, resorce nationalism has recently jmped to the top of the list of worries for global mining companies, notably in Africa, as contries seek to boost their share of resorce revenes. In order to manage the risks, Allianz lobal Investors ES Team analyses companies on the basis of or enhanced ES (environmental, social and governance) research methodology. This consists of bilding a research framework identifying key, material ES risks for each sector of economic activity. In the case of the energy sector the material ES risks we identify center on a company s bsiness condct (relationships with sppliers and clients, anti-bribery and corrption policies and practices, license to operate), environmental risk management, hman capital management and lastly corporate governance practices. > David Diamond lobal Co-Head of ES, Allianz lobal Investors WHO S WHO Year of joining company : 2008 Nmber of years with company : 5 Years of experience in secrities bsiness/ portfolio management : 17 Employment History Allianz lobal Investors, lobal Co-Head of ES, since 2012 AllianzI France / Erope, Head of SRI, inclding SRI Research, Amndi rop (ex-caam), Head of Shareholder Engagement & Senior SRI Analyst, 5 years Crédit Lyonnais AM, SRI Analyst, 2 years BNP Paribas AM, Eropean eqity analyst, 3 years Paribas AM, International marketing & external distribtion, 2 years Academic Qalification 1996 : Doble degree ESCP-Erope (Paris-Oxford-Berlin) erman Diplom Kaffman 1990 : Williams College, Massachsetts, USA - Bachelor of Arts Indstry Initiatives Extractive Indstries Transparency Initiative (EITI): board member since 2009 (re-elected in 2011) EFAMA Responsible Investment Working rop ( ) French Social Investment Form (French SIF): board member since UN PRI / French SIF Eropean Research Prize Jry (2010) SRI Committee of the French Association of Investment Management (AF): member (ongoing) lobal Reporting Initiative: member of investor materiality & food sector spplement working grops ( ) Sorce : Allianz lobal Investors.

3 AO / 9 1 May 2013 Based on a thorogh analysis, we benchmark all companies inclded in the sector ranking them from best to worst in terms of or overall ES assessment. Frthermore, we challenge companies on their policies, practices and reslts throgh dialoge and engagement, notably with corporate managements. For example, in the oil indstry we exchange on the ES isses linked to activities in tar sands, shale gas and Arctic exploration. We also challenge them on other practices sch as gas flaring in Nigeria and elsewhere. Or ES research methodology incldes keeping a close eye on company newsflow and any controversies raised by stakeholders, sch as NOs. AO : AllianzI spports greater transparency within the extractive indstries. Why is this isse a key point for major instittional investors? n D. D. : overnments in resorce-rich contries are tempted to favor the export of natral resorces in order to benefit from the financial bonty that they represent: it is simply easier to generate income from extractive indstries than to bild a strong and diversified economy. On the face of it, this activity is very profitable at least in the medim term - for the governments themselves, the oil, gas and mining companies involved and their shareholders, inclding Allianz lobal Investors. However, this does not necessarily translate into sstainable long term approach. In regimes that are more freqently atocratic than democratic and rife with corrption, the income derived from resorce extraction is more commonly distribted to the political, military and commercial elites rather than being invested in economic and social development projects. Key is the fact that most contries rich in natral resorces have tended to nder-perform economically. Over 3.5 billion people live in contries rich in oil, gas and minerals, and the vast majority see few benefits. With good governance the exploitation of these resorces cold generate large revenes to foster economic growth and diversification, while redcing poverty. However, when governance is weak, it often reslts in corrption, poverty and conflict. Ensring the transparency of payments to a government can also help demonstrate the contribtion that a company s investment makes to a contry These effects are not inevitable and encoraging greater transparency in contries rich in these resorces cold mitigate some of the potential negative impacts. Benefits to companies and investors focs on limiting political and reptational risks. Political instability cased by opaqe governance is a clear threat to investment. In extractive indstries, where investments are capital intensive and dependent on long-term stability to generate retrns, redcing sch instability is beneficial for bsiness. Transparency of payments made to a government can also help to demonstrate the contribtion that the company s investment makes to a contry. AO : Yo represent instittional investors on the board of the Extractive Indstries Transparency Initiative (EITI). Is this volntary initiative really working? What is the added vale here? n D. D. : The Extractive Indstries Transparency Initiative is a scheme where contries volntarily commit to a pblic reconciliation of the financial payments made by extractive

4 1 May 2013 AO / 10 companies and the revenes received by the governments. EITI is a mlti-stakeholder initiative whereby governments, companies, civil society and investors oversee the fll process, locally in each contry, spervised by the EITI International Board. Today, 37 contries, totalling a poplation of over 900 million people, implement the EITI, and it is increasingly recognized as a global transparency standard, in trn spported by the 8, 20 and instittions like the World Bank. Key stakeholders spporting the initiative inclde over 60 of the largest oil, gas and mining companies, 80 instittional investors and dozens of civil society organisations. Moreover, after Norway, the United States and Astralia are the first OECD contries to express their intention to become EITI implementing contries. For investors the added vale of EITI is linked to the fact that financial markets are beginning to recognise the vale of the EITI label. Of the 37 contries now implementing EITI, Azerbaijan was the first contry to be declared EITI Compliant by the EITI Board in In May of the following year Fitch Ratings annonced that they pgraded Azerbaijan s long-term foreign and local crrency Isser Defalt Ratings (IDRs) to BBB- from BB+. In the press release, Fitch indicated that it draws comfort from the transparency of the SOFAZ [the State Oil Fnd that leads on EITI], nderlined by Azerbaijan being the first contry to be flly compliant with the international Extractive Indstries Transparency Initiative. Althogh other rating agencies sch as S&P have not yet followed sit so explicitly, the S&P Sovereign overnment Rating Methodology and Assmptions incldes a Political Score, where the transparency and accontability of instittions, data and processes inclding [a contry s] perceived level of corrption are considered. As sch, a commitment to EITI may contribte to a contry s improving its sovereign credit rating over the long term. AO : Many NOs, especially within the Pblish What Yo Pay coalition, spport the EITI bt they stress that volntary initiatives are not enogh and that stricter reglation is reqired. Yo seem to share this view, perhaps with some caveats. Cold yo elaborate on this point? n D. D. : Investors increasingly believe that both may be necessary. Beyond sch volntary initiatives, however, reglation is likely to play an increasing role in assring transparency for extractive companies. In the United States, Dodd-Frank legislation, as per the Secrities and Exchange Commission (SEC), now reqires all SEC registered companies from the extractive sectors Over and beyond volntary initiatives, reglation will probably play an increasingly important role in garanteeing greater transparency to pblish government payments on not only a contry-by-contry basis bt also project-byproject. The Eropean Union has signalled its intention to follow sit. Whether volntary or reglatory, the investment case for transparency is clear. It is the first step leading to better governance in resorce rich contries. Ultimately, this shold prodce a more stable investment climate of benefit to extractive companies, their shareholders and local poplations.

5 AO / 11 1 May 2013 AO : What is AllianzI s position on transparency provisions inclded in the Dodd-Frank Wall Street Reform and Consmer Protection Act and on draft transparency legislation proposed by the Eropean Commission? n D. D. : In October 2011 over twenty instittional investors representing over 2.5 trillion in assets, inclding Allianz lobal Investors, wrote to Michel Barnier, Eropean Commissioner for Internal Market and Services, in qalified spport for draft transparency legislation in the EU. This wold reqire mltinationals to disclose financial information sch as prodction shares with governments, bonses, royalties, and taxes for each contry in which they operate via their annal statements. The investors stated that they spport the EU s initiative for increased transparency both throgh volntary (EITI) and reglatory approaches. They stressed that the two are complementary and ltimately enhance the prospects for risk adjsted investment retrns by improving disclosre, which contribtes to more stable and transparent bidding It wold be desirable to shift towards a single global disclosre regime as far as transparency is concerned. markets for contracts, licences and permits, and lowers the risk that governments will seek to renegotiate or rescind contracts or nationalise projects. However, they also warned the Commissioner against exposing extractive companies to conflicting legal reqirements. To this end, the investors propose that reglators work towards a single global disclosre regime with a mtally recognised reporting process across jrisdictions in order to bild consistent reporting standards across global markets.