HONG KONG: Stock Exchange to Require Greater Transparency

On June 3, the Hong Kong Stock Exchange (the HKEx) will put into effect new disclosure rules for mineral companies, marking a significant step forward in the global campaign to establish greater transparency and accountability in the extractive industries.

In addition to changes that will improve the general standard of reporting for companies listed on the HKEx, the revised rules require applicants to the exchange to include in their listing request additional information that should result in significantly more detail—furnished country-by-country—on tax, royalty and other payments to host governments. Companies would also be required to provide material information on other important social and environmental issues, liabilities, and mitigation practices.

These changes could offer significantly more data to transparency campaigners, investors, and stakeholders in resource rich countries.

The HKEx's new rules, announced May 20 after a two-month formal consultation process and several months of internal review, require disclosure of "material" information regarding:

"(a) project risks arising from environmental, social, and health and safety issues;

(b) any non-governmental organisation impact on sustainability of mineral and/or exploration projects;

(c) compliance with host country laws, regulations and permits, and payments made to host country governments in respect of taxes, royalties and other significant payments on a country by country basis;

(d) sufficient funding plans for remediation, rehabilitation and closure and removal of facilities in a sustainable manner;

(e) environmental liabilities of its projects or properties;

(f) its historical experience of dealing with host country laws and practices, including management of differences between national and local practice;

(g) its historical experience of dealing with concerns of local governments and communities on the sites of its mines, exploration properties, and relevant management arrangements; and

(h) any claims that may exist over the land on which exploration or mining activity is being carried out, including any ancestral or native claims."

While the vagueness of the "materiality" standard is cause for some caution, Revenue Watch is hopeful that, if interpreted and applied in good faith, this new disclosure requirement will result in significantly greater transparency of oil industry payments. Though the change applies only to disclosures made in an initial listing document and does not impose a similar annual reporting requirement, it marks a step forward.

RWI's submission to the consultation process stressed the value of disaggregated reporting of company payments to governments and argued for mandatory disclosure. RWI is pleased that the HKEx decided to require these social and environmental disclosures.

Such disclosures aim to give investors much-needed information relevant to a proper risk assessment. Making them mandatory also levels the playing field to the benefit of socially-responsible mineral companies and should promote convergence by the major stock exchanges toward best practice for the extractives industries.

The advent of these more robust reporting rules is a sign of positive momentum, as the International Accounting Standards Board considers actions that may have even greater reach.

The fact that the HKEx report on the consultation process mentions the IASB rulemaking process in describing the new rules on host government payment disclosures is especially encouraging.  An international accounting standard requiring extractive companies to report payments to governments and other key information on a country-by-country basis may be the best way to prevent "forum shopping" by extractive companies seeking the most lax reporting requirement.

Until such an international standard is in place, unilateral action by the individual exchanges is a major step forward. While the HKEx rule is not perfect, it weakens the case of those in the U.S. and Europe who would argue against greater disclosure by extractive companies on the basis of the disadvantage born by any "first mover." And, through its normal operation, it should markedly increase the amount of information available to investors and resource rich communities.

LEARN MORE

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• HKEx Publishes Consultation Conclusions On New Listing Rules For Mineral Companies (Mondo Visione)
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