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In Defense of Transparency: Why Extractives Companies Should Remain Committed

TUESDAY NOVEMBER 7, 2017

By

ALISON TAYLOR, Senior Advisor, BSR

#Energy and Extractives, #Stakeholder Engagement, #Sustainability Management,

Last week, the U.S. government’s decision to withdraw from the Extractives Industry Transparency Initiative (EITI) landed with the thud of inevitability. The stated explanation for the decision—which affirms a commitment to EITI principles and focuses on unique aspects of the U.S. tax system—has little credibility, given the current state of play in the anti-corruption field.

While the U.S. policy environment may be shifting, extractives companies would nevertheless be well advised to continue to pursue holistic, innovative approaches to stakeholder engagement, strategy, and values in order to restore and maintain the public trust, which is increasingly essential to protecting their reputations and licenses to operate.

The EITI was created in 2002 as a joint effort by government, business, and civil society to help citizens of resource-rich countries hold their governments accountable. EITI aims to provide the public with knowledge of exactly how much money oil, gas, and mining companies pay to governments in taxes, royalties, and other fees.

Its essential goal, however, is the protection and support of fundamental human and civic rights. The premise? With access to this information, citizens can try to ensure that these vital financial resources are used for public health, education, and infrastructure, rather than to enrich powerful figures linked to national governance. 

Corruption used to be viewed as a problem afflicting developing countries, but this is no longer the case. The release of the Paradise Papers by the International Consortium of Investigative Journalists has picked up and amplified Lux Leaks, the Panama Papers, and other whistleblowing efforts. Just as money launderers can easily buy property in New York and San Francisco, offshore tax havens are used by politicians, the children of dictators, and some of our most prestigious multinationals.

Transparency activists immediately slammed the U.S. decision on EITI, emphasizing that traditionally recalcitrant Russian and Chinese energy companies now adhere to higher disclosure standards than the U.S. demands of American enterprises. America has already stepped away from its goal of being a role model on human rights, climate justice, transparency, and international cooperation under the current administration. The turn away from EITI is more of the same.

Of greater interest than Washington’s isolationist agenda is what energy and extractives companies might gain from the U.S. decision to stall on transparency regulations. The short answer is: not much. But responses to the EITI debate provide fresh evidence of a widening split over how oil and gas majors regard the sector’s long-term future, as well as their relationship with investors and the public.

Those companies that have made corporate commitments to meet the EITI’s standards of payment transparency include BP, Repsol, Shell, and Statoil. It is no coincidence that these are the very companies that have also chosen openly to embrace the Paris climate agreement while touting their investments in gas and renewables. Exxon Mobil, too, publicly supported the Paris Agreement in the wake of Donald Trump’s election.

The big strategic distinction in the oil industry is no longer over whether to acknowledge and plan for the existential challenges facing the sector; it is about how transparent companies ought to be while the energy transition proceeds. To this end, two strategies have emerged.

The first has been to acknowledge the science of climate change and the problematic history of the sector’s relationship with the government, and then to model best practice on disclosure to regain trust. Some companies, mainly based in Europe, are making headway in this direction—with the understanding that, when it comes to transparency, the horse long ago bolted from the stable. Because companies today must act as if everything they say or do might become public, disclosure has become the optimal approach to issues like payments to governments and political candidates, plans for stranded assets, or strategies to meet a low-carbon future.

The second option has been to invest in the carbon transition and support transparency aspirations publicly while privately obstructing and stalling specific regulations and disclosure efforts for as long as possible. This approach may seem foolish to observers, but it buys some time for big investors and incumbents of the C-suite, who seem to think they might squeak through to retirement before the deluge strikes.

Oil and gas companies are perfectly aware of the deep deficit of trust. Some corporations seem to have concluded that efforts to move beyond a defensive public relations stance are destined to fail; indeed, the reputational benefits accruing from a more progressive approach have been mixed. So, with much of the debate polarized and entrenched and no clear path to public approval, some companies are retreating to the practices of habit as they wait to be dragged into the present after all other options have been exhausted.

With traditional approaches to managing corporate reputation no longer fit for purpose, companies need to devise strategies that extend far beyond reactive communication and public relations. Those corporations that hope to be considered innovative will need to embrace a holistic approach to stakeholder engagement, strategy, and values that prioritizes the importance of restoring trust, regardless of whether public policy requires them to do so.