Back in August 2012, when the U.S. Securities and Exchange Commission (SEC) issued detailed rules under Section 1504 of the Dodd-Frank Act, I was among those who commented that it was a huge step toward transparency in the oil, gas and mining industries, likely to resonate worldwide.
And it did. The European Union’s 28 member states as well as Norway have now adopted strong rules requiring companies listed or registered in their jurisdiction to publicly disclose payments to all foreign governments. Disclosure of these payments will both inform investors and enable citizens in countries receiving payments to better combat corruption and improve accountability in some of the poorest, yet most resource-rich places in the world.
The irony is that while an ever-increasing number of countries have responded in kind to the original U.S. law, we are yet to actually see any disclosure by extractive companies listed on the U.S. stock markets regulated by the SEC rule. This is because the rule was challenged by the American Petroleum Institute (API) and other extractive industry associations. In July 2013 a U.S. federal court demanded that the SEC rewrite its rule. We are still waiting for the SEC to do so.
In effect, Europe has leapfrogged the U.S. and taken the lead on transparency. And it doesn’t end there. In 2010 the White House, in championing this initiative in the U.S., was also taking leadership in the global push for transparency, and committed then to working with other countries on mandatory disclosure. Now some of those very same countries are wondering what is causing the holdup in the U.S.
Just last week British Prime Minister David Cameron, who championed this initiative under the UK’s presidency of the G8 last year, called on the US to act. He said: “Europe has already agreed to rules for public, company-by-company and project-by-project reporting of payments to all governments [in the extractive industries]. Canada plans to follow suit. We now need the U.S. to do the same, so we can work together to deliver common global standards.”
All parties agree that the SEC should quickly reissue a rule for implementation of section 1504 of the Dodd-Frank Act. Following delays, the agency has recently indicated that it will initiate a rulemaking—by March 2015. It should move more quickly. The challenge is not just an issue of timing; importantly it is also about the specific disclosure requirements of the rule.
It would be simple to portray the differences between the proponents and critics of detailed transparency along the lines of an old-fashioned ideological divide, such as liberal versus conservative governments, citizens versus industry, critics versus advocates of business and investors. That would be misleading.
Granted, the U.S. law was passed under President Obama’s Democratic administration. But this was only made possible due to bipartisan support for the provision championed by Senator Ben Cardin, a Democrat, and Republican former Senator Richard Lugar. Conservative Prime Minister David Cameron has put his full weight behind these detailed rules. And Canada’s Prime Minister Stephen Harper, also a conservative, has committed to Canada having its own rules by next year. These pro-business politicians recognize the importance of transparency.
Ideology also plays no part in the strong demand for disclosure from resource-dependent producing countries in the global south. The scores of governments that have committed to transparency through the complementary Extractive Industries Transparency Initiative (EITI) are not of one particular ideological persuasion. Likewise parliamentarians from the full political spectrum desperately need Dodd-Frank’s disclosures in order to hold their executives accountable. And civil society groups need the information to follow the money coming into government coffers from foreign oil, gas and mining companies. Recently over 500 civil society organisations across 40 countries called on the SEC to act by issuing strong rules.
Nor are we talking about a unified corporate sector opposed to real transparency. There are certainly some companies which are opposed; some are oil giants, wielding great lobbying power. They oppose numerous facets of the SEC’s 2012 rule including public disclosure by individual companies, project-level information and payments to all governments without exception.
But at the same time, a number of forward-thinking oil companies such as Tullow and Statoil already disclose the details of their payments to governments, without yet being compelled by law to do so. And mining companies generally are embracing transparency, with companies like Rio Tinto releasing ever more granular disclosures into the public domain each year. Canada’s two largest mining associations—as part of a working group including the Natural Resource Governance Institute and Publish What You Pay Canada—have also been proactive in recommending that Canada’s upcoming rules should at least match those in the European Union.
The evidence more generally also points to significant heterogeneity in the private sector. There are many companies that focus on efficiency and innovation and can compete on a level playing field, and take a longer view. Others tend to derive gains from rent-seeking, outright bribery, monopolistic power or tax avoidance. Members of the latter group have an interest in maintaining the opaque status quo and stand to lose on a level playing field resulting from effective transparency, while the entrepreneurial and competitive firms stands to gain from transparency. In one study we found evidence of significant gains accruing to competitive firms that didn’t bribe; in another we pointed to the impact of transparency for reducing bribery by firms. And a study at Columbia University showed that highly transparent firms in the natural resources field were likely to have much higher (by about 50 percent) returns on equity than non-transparent firms.
Further, many investors also recognize the importance of greater transparency for their financial interest. Two letters to the SEC this year from a wide array of investors representing assets under management amounting to trillions of dollars have explained why strong rules can help manage investment risk in individual companies as well as improve “systemic stability” in the countries where extractive companies operate—all to the benefit of shareholders.
Even though there are still some holdovers protecting opacity, across the ideological (and stakeholder) spectrum, there is strong support for transparency in the extractive industries. Many companies and investors recognize that transparency “pays” in terms of their bottom line. It also “pays” for poor people around the globe; research shows significant gains in income per capita in countries where governance improves. We have characterized this as the “300 percent development dividend of good governance.”
A few days ago the G7 reiterated support for these important extractives transparency measures (the G8 this year excluded Russia). All stakeholders have a role to play and it is important that all companies deliver on transparency. Passage and implementation of legislation which has an international impact such as Dodd-Frank section 1504 and its analogues around the world is one critical dimension among others in improving governance in extractives, as spelled out in the Natural Resource Charter.
The SEC, regulator of the world’s largest capital market for the extractive sector, has an unique opportunity in ensuring that the U.S. retakes leadership on this quest for global transparency and joins the growing ranks of countries committing to detailed disclosure.
On June 9, 2014, the Development Assistance and Governance Initiative at Brookings, in collaboration with Natural Resource Governance Institute (formerly the Revenue Watch Institute), and Global Witness, hosted a discussion on international developments in natural resource transparency.