The crisis in Libya and its impact on the energy markets shows the importance of oil, gas and mining companies fully disclosing the political, legal and regulatory risks they face, investors said.
Paul Bugala, Calvert: Filing risk information "not burdensome"
The US Securities and Exchange Commission (SEC) has been consulting on proposed rules governing the disclosure of tax, royalty and bonus payments made by oil, gas and mining companies to the governments of the countries where they extract resources.
The rules, proposed in December and expected to be finalised in April, are based on amendments to US securities legislation featured in the financial regulatory reform law passed by Congress last year, commonly known as the Dodd-Frank Act.
“We feel there are positives both for investors here and for civil societies in countries that are dependent upon these resource revenues,” said Paul Bugala, a Bethesda, Maryland-based sustainability analyst focused on extractive industries at Calvert Asset Management.
Investors welcomed the SEC’s fidelity to the plain language of the law, but voiced concerns about specific provisions of the proposed rules.
One major challenge is the SEC is not treating this information as material disclosures, leaning toward a ‘furnished’ rather than a ‘filed’ approach, Bugala said. Information that is furnished to the SEC is not subject to the liability provisions of securities legislation. Under that approach, the SEC deals with any incorrect information featured in the disclosures.
But taking a filed approach would allow investors and the market to hold companies responsible for ensuring that their disclosures are error free, Bugala said.
There is also significant concern among investors about possible exemptions for small entities, foreign and asset-backed issuers.
“Smaller companies are often the first comers in the most risky environments,” investor George Soros said in a response to the SEC’s consultation. “Such exemptions would undermine the value of this reform to investors by excluding issuers that are exposed to significant political and project- and country-specific risks.”
The argument in favour of exemptions for smaller companies engaged in resource extraction is driven largely by cost concerns. But the mandatory disclosure requirements would lead to only a 0.33% increase in the estimated costs of annual filings, according to an SEC analysis. “We feel like that is a strong indication that these are not burdensome,” Bugala said.
Greatest investment risk in countries that ban disclosure
Soros and other investors also hit back at an exemption for companies operating in countries which prohibit disclosure. “It is precisely in these countries, which prevent transparency and disclosure of information, where the greatest investment risk lies,” Soros said.
Royal Dutch Shell identified Cameroon, China and Qatar as three out of the 90 countries it operates in that prohibit such disclosure, Frank Curtiss, head of corporate governance for UK pension trustee Railpen Investments, said in a submission. “This suggests that an outright conflict of law is not likely to occur in practice in much of the world,” he said.
Although the Libyan political crisis makes this a timely issue, there are many examples of crises in other countries, such as Nigeria, that supply a significant portion of US oil supply that have created price spikes at the pump, Bugala noted, which demonstrates the need for improved disclosure of these risks. “This is a persistent problem that is only going to get worse,” he said.
By. Gloria Gonzalez