GES Newsletter
January 25, 2013

Currently, the European Union is deciding on the European Accounting and Transparency Directives, which are seen as a positive development in achieving more responsible and sustainable extractive sector. However its main challenge will be finding the right balance in meeting expectations of civil society, investors and companies at the same time. Key debates circle around level of disclosures, provisions for legal exemptions and consistency with already established initiatives, such as EITI. While the content of the directive is being negotiated, GES gathered three experts to discuss the legislation and its implications for companies as well as investors.

On January 17, GES hosted a well-attended webinar on this topic, where Standard Life Investment, Statoil and the EITI (Extractive Industries Transparency Initiative) presented their perspectives on revenue transparency and proposed legislation.

The EU Directive is being brought about in response to Dodd-Frank Act in US and to increasing demand from civil society for more transparency on multinational companies. The legislation is likely to require the companies to disclose information on the payments they make to governments of their host countries, including taxes, bonuses, dividends, royalties etc., although the content is still being negotiated. The European Commission believes such disclosure will provide civil society in resource-rich countries with the information needed to hold governments to account for any income made through the exploitation of natural resources, and also to promote the adoption of the Extractive Industries Transparency Initiatives (EITI) in these same countries.

Julie McDowell, Head of SRI at Standard Life Investment, presented an investor perspective and pointed out that Standard Life Investment supports the revenue transparency initiatives in the right context, such as EITI. ‘However’, Ms McDowell said, ‘specific payments to governments made by companies are not considered as material information and as such are not relevant for Standard Life’s investment analysis. The new EU legislation, which only concerns unilateral revenue transparency disclosures, does not engage governments and is of doubtful value in empowering citizens and leading to an improved investment climate.’ Furthermore, she raised concern about the burdensome nature of the proposed requirements, a very low threshold for exclusions (payments of less than $100,000) and no exceptions for legally or contractually prohibited disclosure.

Sam Bartlett, Technical Director at EITI International Secretariat, gave an update on the Extractive Industries Transparency Initiative. In 2012 EITI noted a 50 per cent increase in the number of reports and it now works in 37 resource-rich countries. The Initiative is currently undergoing a strategy review where the key proposals for future changes are discussed and will be presented at the EITI Global Conference in May 2013. Mr Bartlett identified some most important challenges for the future: “One of the key issues will be seeing whether and how we can harmonise EITI with the new regulations. We are awaiting to see where the legislation ends up.” Other key proposals for development of EITI in 2013 include level of disaggregation of disclosures (company-by-company, project-by-project, contract-by-contract), and whether to require disclosure of contracts, in kind revenues, transit and transportation revenues and social expenditures.

Baiba Rubesa, Statoil’s Vice-President for Corporate Social Responsibility, emphasized that Statoil, as a recognised industry leader in revenue disclosures, believes transparency is a cornerstone of good governance and a productive business environment. While the company welcomes the new proposed directive, it deems vital the achievement of consistency and harmonisation of various initiatives (e.g. EITI) and regulations. Statoil also believes there should be provisions for legal exemptions, and the balance should be kept between the requirements of transparency and burdensomeness of reporting, as it would take a lot of additional resources for companies to report on project-by-project basis. Additionally, common understanding and implementation of terminology are essential (e.g. what is defined as ‘project’).

Nathalie Rasmussen, Engagement Manager at GES, highlighted that the directive is of relevance to investors as they will be provided with additional information about the payments, costs and profits, which companies make in the different countries they operate in. Another possible effect is that these rules will fight corruption and companies will perhaps be seen as more sustainable and responsible.

You can listen to the presentations and view the slides here.

For further information, please contact:
Nathalie Rasmussen, Senior Engagement Manager