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July 21, 2010
Extractive Industries Will Be Required to Disclose Payments to Governments
    by Robert Kropp

A provision in the financial reform bill requires energy and mining companies to report payments they make in return for oil, gas, and minerals.


A significant provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that President Obama is likely to sign into law this week seems to have gone largely unnoticed by the mainstream press, but is of importance to sustainable investors and others who consider corporate transparency to be essential to the best interest of their portfolios in the long term.

The provision grew out of the Extractive Industries Transparency Initiative (EITI), launched in 2006. EITI is an international coalition that calls for improved governance in resource-rich countries through disclosure of company payments and government revenues from oil, gas, and mining. The provision reached the US Senate in September 2009 as the Energy Security Through Transparency Act (ESTTA).

In November 2009, members of the
Social Investment Forum (SIF) issued an Investor Statement of Support for the Energy Security Through Transparency Act, stating, "The scenario of underdevelopment and social unrest that often plagues developing countries with significant natural resource income is aggravated by secrecy in the transactions between oil, gas and mining companies and the governments of the countries where they operate."

The Investor Statement continued, "The ESTT would provide the information required to assess investments in the oil, gas and mining sector in the full light of day."

During the conference negotiations for the financial reform bill, Senator Patrick Leahy of Vermont introduced the provision as an amendment, which was accepted by the conference committee.

As a result of the provision's inclusion in the financial reform bill, energy and mining companies registered with the Securities and Exchange Commission (SEC) will be required to disclose their payments to foreign countries and the US government in return for oil, gas, and minerals. The SEC will write the rules governing such disclosures, and the information is expected to be included in company reports to the SEC by 2012.

One of the signatories of the Investor Statement was
Calvert Asset Management, which launched its Large Cap Value Fund in September 2008. Unlike Calvert's traditional screening process, which normally is underweight in companies in the energy sectors, criteria for inclusion in the firm's Sustainabilit y Achieved through Greater Engagement (SAGE) funds prioritize companies in sectors with high environmental and social impacts, and engage with those that do not meet environmental, social, and corporate governance (ESG) standards.

Along with nonprofits
Publish What You Pay and Oxfam America, Calvert played a critical role in shaping the provisions of ESTTA. Citing the "hundreds of hours (that) have gone into research and advocacy in support of this legislation," Bennett Freeman, Senior Vice President for Sustainability Research and Policy at Calvert, stated, "Calvert has played a truly unique role in supporting oil, gas and mining transparency."

An important contribution by Calvert to research in support of ESTTA is a paper entitled
Materiality of disclosure required by the Energy Security through Transparency Act, authored by Paul Bugala, Extractive Industries Analyst at Calvert.

Stating that "the extractive industries have unique exposure to material country-specific, reputational, and tax/regulatory risks," the paper, which was published in April, found that "current disclosure of extractive industries companies’ exposure to these risks is inadequate," and concluded that ESTTA "requires disclosure that would help capital providers account for these risks in their investment decisions."

SocialFunds.com spoke with Bugala, who has also worked at Oxfam America, about the issues that led to passage of legislation relating to disclosure by companies in extractive industries.

"The issue is revenue transparency, in particular as it relates to developing countries," Bugala said. "The tendency of these countries is to develop more slowly, or to be prone to greater conflict or other development challenges, if they are overly dependent on natural resources."

"One of the key factors is the mismanagement of proceeds from these projects," he continued. "If there’s no accountability, the likelihood of mismanagement is higher. It has detrimental effects on the people of those countries, and makes it less likely that those countries will move beyond the development stage."

"It is also creates instability, which is of great concern to investors," he added.

An example of such instability, cited by Publish What You Pay in its
press release hailing the passage of the legislation, can by found in Equatorial Guinea, a poverty-stricken African nation with a population of only 650,000. There, according to the press release, "The president’s son is under investigation by the US Senate Permanent Subcommittee on Investigations…for laundering millions into the US for the purchase of luxury cars and homes."

"Despite amassing billions in windfall oil revenues, Equatorial Guinea has been unable to prevent poverty for its tiny population," the release continued.

Because of Calvert's SAGE portfolio, which according to Bugala, includes many oil and gas and mining companies, "Our interest in these companies went from the abstract to very applied," he said. "We had to get better at analyzing risk."

At a Congressional hearing, Newmont Mining, the second-largest gold company in the world and a constituent of Calvert's Large Cap Value Fund, testified in support of the legislation, according to Bugala. Dave Baker, Vice President and Chief Sustainability Officer for Newmont Mining, stated, "The responsible development of mineral resources can bring great benefit to a country and its people, but only when good governance is in place to monitor the distribution of those benefits."

Newmont Mining already publishes what it pays to government for mineral extraction, according to Publish What You Pay.

Because advocates for the legislation "had trouble finding a consolidated piece of research on the subject," Bugala said, "We went ahead and put together the paper which was published in April 2010. It received an excellent reception on the Hill."

The legislation, according to Bugala, seeks to improve transparency and minimize risk in a sector where risk is only likely to grow.

"The era of easily available resources is coming to end, and awareness of the risks in these sectors is at a high right now," Bugala said. "The political risk is likely to grow as the industries operate in environments where they haven't before."

"The legislation is also part of the broader trend of incorporating ESG into financial reporting," he added.

As the rulemaking process by the SEC commences, "Publish What You Pay and Calvert will be involved in the discussions" that will determine the form in which disclosure will be mandated, Bugala said.

"I would encourage investors who are interested in these issues to get involved in the rulemaking process by reaching out to Publish What You Pay and Calvert," he added.

 

 
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