By Madison Condon
In my last post, I discussed shareholders suing extractives companies for failure to disclose material risks in the wake of a major environmental disaster. The Securities and Exchange Commission (SEC) recently proposed changes to its disclosure requirements for mining companies that could increase the liability potential of companies that fail to accurately disclose environmentally related risks to their investors.
Under the proposed rules, mining companies must submit a “technical report summary” for each mineral resource or reserve that is significant enough of an asset to be considered material. The SEC outlined specific requirements for the contents of the technical reports, including, most relevantly: “the final identification and detailed analysis of environmental compliance and permitting requirements, including the finalized interests of agencies, NGOs, communities and other stakeholders, together with the completion of baseline studies and finalized plans for tailings disposal, reclamation and mitigation.”
If finalized, this rule would require companies, such as Barrick Gold, to be upfront about their compliance with environmental regulations protecting glaciers. It may also require companies like Southern Copper to provide an honest analysis of the concerns of the community living near the mine and provide predictions of stakeholder opposition. Southern Copper’s Tia Maria mine project has been on hold for more than a year following massive protests over its potential impact on groundwater.
These technical reports must be prepared by a “qualified person,” who may be an employee of the reporting company, but must meet certain qualification requirements as outlined by the SEC. This “qualified person” would likely be liable as an expert under the Securities Exchange Act for any material misstatements made in the report. This creates a genuine risk of litigation were an expert to inaccurately describe a mining company’s ability to legally secure enough water for its operation, or its ability to comply with the host country’s environmental laws. The proposed rules specifically outline that the “qualified person must examine the regulatory regime of the host jurisdiction to establish that the registrant can comply (fully and economically) with all laws and regulations (e.g., mining, environmental, reclamation and permitting regulations) that are relevant to operating a mineral project using existing technology.”
Even if these rules are finalized, they are simply requirements regarding disclosure of information regarding environmental risk, they don’t necessarily guarantee better environmental performance. However, there is evidence suggesting that these types of reporting requirements do have a genuine impact on the behavior of the company doing the reporting.
In April 2010, an explosion at the Upper Big Branch coal mine in West Virginia resulted in the deaths of 29 miners. The mine had received more than 600 citations for safety violations in the 18 months prior to the explosion. In reaction to this disaster, a senator from West Virginia added a provision to the working draft of the Dodd Frank Act, requiring that mining companies disclose their safety records in their earnings reports and make a filing with the SEC each time a mine received a safety warning.
In a recent paper, researchers from the University of Chicago and Rice University compared mine safety records of publicly traded mining companies subject to this Dodd Frank provision with those that were privately held and under no disclosure obligations. They found that the decrease in safety citations at the disclosing mines was 11 percent greater than those that did not disclose. The publicly traded mining companies also experienced a 13 percent greater decrease in worker injuries.
The mine safety violations reported to the SEC were already publicly available through the Mine Safety and Health Administration’s website. Interestingly, this same study found that the same violations, once they were submitted to the SEC, resulted in mutual fund ownership of the disclosing company declining twice as much than if the violation had only been reported through the Mine Safety and Health Administration. Similarly, stock prices fell significantly more when the safety violations were reported through the SEC.
These findings suggest that when evidence of socially undesirable behavior is made readily available to investors, investors choose to penalize the misbehaving company with their wallets. The authors of the study noted that the decline in mutual fund ownership was, not surprisingly, “most pronounced for funds with explicitly stated preferences for ‘socially responsible investment.’”
In addition to the proposed changes in disclosure requirements for mining operations, the SEC also made a call for public comment on whether it should require broader disclosure on environmental, social, and governance factors across all industries. In a comment letter organized by the nonprofit Ceres, many institutional investors wrote: “[W]e believe it is critical for the SEC to improve reporting of material sustainability risks . . . because we need it to make informed investment and proxy voting decisions.”
Not all are in support of this trend toward mandatory disclosure. In its own comment letter, the U.S. Chamber of Commerce asserted that these disclosure rules would “contribute to an environment that makes it more difficult for businesses to innovate, compete and grow” and that “investors [would] become inundated with information that is not useful.” The American Petroleum Institute argued that the cost of compliance with the proposed disclosure rules would put an undue financial burden on its member companies.
The comment period for the SEC’s proposed disclosure requirements for the mining industry closes Aug. 26.
Madison Condon is a postdoctoral research scientist at the Columbia Water Center. She conducts research in water risk in the mining industry and natural resource governance.