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HIV-AIDS emerges as big investment risk

In addition to being a major social and humanitarian disaster, HIV-AIDS is also emerging as a significant economic crisis, which could have direct impact on the shares of firms with emerging market exposure.

Companies in labour-intensive industries, such as Anglo American Corp. of South Africa Ltd., DaimlerChrysler AG, Unilever NV, Barrick Gold Corp. and Placer Dome Inc., stand to be most affected, through reduced productivity and higher operating costs.

However, the effects of the disease will also be felt in service sectors such as banking, life insurance and food and beverages. Amalgamated Beverage Industries (ABI), for example, which distributes Coca-Cola and other soft drinks throughout southern Africa, may see slower sales growth in the next 10 years because of a shrinking consumer base, according to a Deutsche Securities report.

With 40 million people now infected by HIV-AIDS worldwide, and the disease spreading fast in the key emerging markets of China, South Asia and the former Soviet Union, the big investment houses are scrambling to get a better handle on the issue.

Deutsche Bank AG, Dresdner Bank AG and HSBC Holdings PLC have all recently acknowledged that they will need to somehow incorporate the issue of HIV-AIDS into financial forecasting, asset allocation, stock selection and risk underwriting. Pension funds, such as Ontario Teachers Pension Plan Board and Britain's Universities Superannuation Scheme (USS), are also closely tracking the issue. Recently, a group of institutional investors initiated a study of the implications of the HIV/AIDS pandemic for investors in partnership with the Global Business Coalition on HIV/AIDS (GBC) and Innovest, a Toronto investment research firm.

Among investors' chief concerns is the lack of relevant information provided by companies on infection rates and response strategies. Accordingly, calls are intensifying for companies to disclose more on the issue in their financial statements. Companies trading on the Johannesburg Stock Exchange (JSE) will be required to report this information in 2003: Currently, about 30 per cent of South African companies are believed to report on the issue.

The global metals and mining sector stands to be particularly badly affected. Here, losses as a result of the virus have been estimated at $4 (U.S.) to $6 an ounce of gold, or 2 per cent to 5 per cent of lost profit per ounce for some companies, according to economists at Anglo Gold, a subsidiary of mining giant Anglo American. Gold Fields Ltd., another mine operator, estimates that AIDS- related deaths cost it $18,500 per employee and that the full impact of HIV-AIDS will increase production costs by $10 an ounce of gold.

"The problem is that in Africa, where companies are not permitted to test, fire or screen out workers for HIV-AIDS, it is difficult to keep a sick worker away from work if he is desperate for money and gets paid for punching in his card," says Michael Rea, a Toronto-based corporate responsibility consultant who has worked with mining companies in Africa.

Companies can do two things with HIV-AIDS: They can prevent it and they can treat it. According to research published in February's Harvard Business Review, HIV prevention programs cost firms between $10 and $15 a worker in 2001, producing an estimated 50-per-cent reduction in the infection rate for one South African mining operation employing 4,000 miners. At these prices, the study concluded that labour-intensive firms reap a positive return by investing in prevention.

Four of Africa's most prominent mining players (Canadian firms Placer Dome and Barrick Gold, Rio Tinto PLC of Britain and Anglo American) are taking significant steps to prevent the spread of HIV-AIDS. All four companies estimate that about a quarter of their workers in Africa are infected.

At Barrick, which has operations in Tanzania, 35 per cent of miners have taken advantage of the company's home ownership scheme for employees to purchase residences close to the workplace. One of the program's aims is to decrease at-risk sexual behaviour.

Placer Dome hands out close to 25,000 condoms a month to the 5,500 miners at its South African mine and the company is set to initiate a family housing plan.

"There is a cost to not doing something about it [HIV-AIDS]," says company spokeswoman Brenda Radies. "But it's one mine out of 17 for us, so part of the motivation is to protect our reputation."

Treating HIV with highly active antiretroviral therapy (HAART) is another way companies can deal with the HIV-AIDS problem. While HAART can cost as much as $500-$1,000 a patient, the Harvard study concludes that it can extend employees' working lives by five to eight years.

Anglo American has begun a program to make free treatment available to all of its estimated 30,000 HIV-AIDS-infected employees.

Because of the stigma associated with the disease, only about 10 per cent of the work force is likely to take advantage of the program, making for a cost of $3-million. This figure is expected to balloon in coming years.

"It's definitely a cost, but with earnings of about $1.7-billion, it's not going to kill us -- it will protect us," says Brian Brink, head of Anglo's medical program.
Toby Heaps is editor of Corporate Knights magazine (toby@corporateknights.ca) and Martin Whittaker is a Managing Director at Innovest (mwhittaker@innovestgroup.com) and Adjunct Professor of Environmental Finance at the University of Toronto.

© The Globe and Mail

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