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February 22, 2011
SEC is Urged to Issue Regulations Mandating Reporting on ESG Issues by Extractive Industries
    by Robert Kropp

Oxfam America and Calvert support strong regulation on disclosure by companies in extractive industries of payments to governments.

The Dodd-Frank Wall Street Reform and Consumer Protection Act passed by Congress last summer directed the Securities and Exchange Commission (SEC) to address disclosures by extractive industries, which include the oil and gas and mining sectors, in three areas.

The Commission responded to the Congressional mandate by proposing rules that would require companies to disclose whether they use conflict minerals originating in the Democratic Republic of the Congo or an adjoining country; require mining companies to disclose additional information on health and safety in their reporting; and require companies engaged in resource extraction to disclose payments made to the US or foreign governments.

Addressing the issue of disclosure of payments to governments, Ian Gary, senior policy manager for extractive industries at Oxfam America, told, "We believe this provision has a dual purpose. One is to inform investors about the types of risks these companies are exposed to. But an important second purpose is to support good governance, transparency, and accountability for payments."

"The benefits of extractive industries are more often than not theoretical rather than practical for many communities that see only the negative impacts," Gary continued. "Over 1.5 billion people live on less than two dollars a day in countries that are defined as resource-rich."

A striking example of income disparity was reported this week in Th e Guardian, where economics editor Larry Elliott wrote, "Income per head in Equatorial Guinea is more than $30,000 a year." Yet, he continued, "Most of its citizens live on less than a dollar a day."

"The explanation for this disparity…can be explained in two words: oil and corruption," Elliott wrote.

Oxfam has been engaged in efforts to address such disparities since 2003, through its work with the Extractive Industries Transparency Initiative (EITI), as well as through its efforts to encourage the World Bank to establish new social and environmental policies when it provides funding to companies in the sector.

"There are continuing issues with the World Bank," Gary acknowledged. "In very few instances has funding of extractive industry projects led to a reduction in poverty. But we have had some constructive engagement, and the World Bank has changed some of its policies for the better. As of 2007, the World Bank has required companies to disclose payments to host governments as a precondition for receiving financing."

In addition, contracts between the International Finance Corporation, an arm of the World Bank, and companies in the sector now require free, prior, and informed consent of communities before financing is provided.

Regarding the provisions of Dodd-Frank addressing extractive industries, Gary said, "We've been working for four years with members of Congress, and last year standalone legislation was folded into the Wall Street Reform Act."

"The draft rule put out by the SEC is something we're largely happy with," Gary continued. "One of the issues we're concerned with is how you define project level reporting, which is something that the companies have been resistant to. The companies want the SEC to define each country as a project. That's not something that Congress intended."

"Another important issue is whether disclosure of payments should be filed or furnished. We believe that the information should be filed, because these disclosures are material and information that is furnished is not subject to the same liability. It's important that a higher level of liability is attached to this information."

According to Oxfam's comments letter to the SEC, "Requiring filing will significantly strengthen incentives for compliance."

"The possibility of private liability under Section 18 would represent a powerful spur for compliance by regulated issuers," the letter continued.

Paul Bugala, Sustainability Analyst for Extractive Industries at Calvert, concurred with Oxfam's emphasis on filing over furnishing of information, telling, "If something is filed, then the burden shifts from the Commission to the market."

"Companies get the investors that they ask for," Bugala said. "The disclosures included in Dodd-Frank recognize an environment in which ESG (environmental, social, and corporate governance) risks are material for high-risk industries. Investors are attracted to companies that are open to disclosure. As this information is utilized by the market, investors will shift their assets away from companies that do not manage risk adequately and toward projects that avoid externalizing costs."

Calvert has been using ESG criteria in its evaluation of companies since 1976, and Bugala explained how the process works for companies in extractive industries.

"Over time, Calvert's method has evolved to require the integration of sustainability assessments and sensitivity analysis around materiality in our equity evaluation," he said. "When we do a discounted cash flow analysis for extractive industries, we discount the amount of cash an entity is generating based on the risks associated with sustainability concerns."

"We look ahead longer than Wall Street will, to a ten-year neighborhood," Bugala continued. "The provisions in Dodd-Frank will give us a much more accurate way of assessing risks."

"The Commission should be commended for the transparency and inclusiveness that has characterized the Dodd-Frank implementation process. I think this will be strong regulation that will benefit investors and communities where mining takes place."

Bugala pointed out that in recent days, French president Nicolas Sarkozy has indicated his support for mandatory reporting of payments to governments by companies in extractive industries.

"We're seeing the rest of the world respond, and I think the net effect will be that the extractive industries account for externalized costs in a more equitable manner," Bugala said.


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