House of Commons - The Extractive Industries - Business, Innovation and Skills Committee

The Extractive Industries - Business, Innovation and Skills Committee Contents

3 Regulatory control

40. The UK is seen as one of the strongest regulatory regimes in the world. In evidence to us, the CBI Mineral Group summarised the UK's regulatory position:

The UK's strong listing and corporate governance standards are vital for continuing to attract international companies to list here. Development of the UK's corporate governance regime has enabled London's markets to flourish. The UK is consistently ranked as having the world's strongest standards of corporate governance.[55]

41. If a company is listed in the UK, it must abide by UK standards, regardless of where it operates. Given the high level of standards attached to a UK listing, there is therefore a perception that for a company to list elsewhere would mean that it would be listing in a less rigorous regulatory framework where disadvantage would inevitably fall on those least able to resist it (the poorer workers and local populations). From that point of view, it is beneficial for the UK to continue to hold the listings of as many of the extractive companies as possible so that it can exert a level of control over their conduct. Christian Aid wrote to us and summarised this point, it said:

Given the number of extractives companies listed on the London Stock Exchange, and therefore subject to UK regulation, the UK has a substantial degree of influence in regulating the extractives industry worldwide and ensuring the population of developing countries benefit from their mineral wealth.[56]

42. The CBI Minerals Group agreed and argued that the benefits of a strong regulatory regime were also felt by companies:

Strong listing and corporate governance provides a stable base on which a company can operate, and also generates investor conference in that company. Therefore strong corporate governance and listing standards are not just important for how a company is perceived by investors, they, they also have a bearing on a company's long term financial performance.[57]

BHP Billiton, one of the largest extractive companies, also said that the strong regulatory framework in the UK provided "clarity and confidence to investors".[58]

RISKS TO HOSTING EXTRACTIVE COMPANIES

43. However, a number of organisations which submitted evidence believed that improvements should be made to the regulatory framework. WWF-UK argued for a further tightening of the regulatory regime:

In spite of threats to the contrary, companies rarely relocate due to an increase in regulation. Instead they simply adapt and, especially with new environmental regulations, compliance with them usually amounts to less than two per cent of business costs. Therefore, we would strongly support greater levels of regulation to improve the environmental and social governance of UK and UK listed companies.[59]

44. WWF-UK went on to argue that the existence of a core of potentially unpopular companies based in the UK presented the country with potential reputational risks. In particular it said that when the reputation of one company was undermined, the reputations of its peers also suffered, and that, "unfortunately, UK or UK-listed companies are often included in these allegations".[60]

45. In a similar vein, the London Mining Network submitted evidence outlining several examples of extractive companies which were listed in the UK which it said had been reported as being connected to poor behaviour abroad.[61] It told us that if the UK continued to host those companies, there was the potential for a negative outcome for the UK's reputation.[62] This argument was echoed by Publish What You Pay:

Corporate governance concerns about EI companies listed and registered in the UK, and reputational risks for the UK and for UK financial institutions, are considerable and will remain significant and in some cases high for as long as the EI globally exhibit a lack of transparency and accountability and do not visibly contribute to equitable and sustainable patterns of economic development.[63]

46. When were in South Africa, these concerns were raised by the Bench Marks Foundation—a Johannesburg organisation which is a non-profit, faith-based organisation operating in the area of corporate social responsibility. It told us how it monitors corporate performance against international measuring instruments known as the Bench Marks Principles. It was clear from our conversations with the Bench Marks Foundation that mining companies do not always live up to the high standards we would expect from either UK mining companies or companies listed in the United Kingdom. Specifically, the Bench Marks Foundation highlighted its own research into the corporate responsibility of mining companies in South Africa known as the 'Policy Gap Series' on the legislative environment and the policies and practices of mining corporations in Southern Africa.[64] It told us that that work had helped to shed further light on the running of those companies as well as highlighting deficiencies in accountability, transparency and several other aspects related to sustainable development and corporate social responsibility.

47. Alexander Scrivener, Policy Officer at the World Development Movement, questioned the ambition for London to be the leading centre for the extractives industry:[65]

When we talk about a fundamental reorientation of the economy, we are asking why we want to be a centre for an industry that, if we are to keep our legally binding targets, we need to be moving away from. Why can we not be a world centre for renewable investment, for example? Those are the kind of fundamental reorientations that we are advocating: a move away from 19th and 20th century history and a move towards the 21st century.[66]

48. When she gave evidence, the Minister agreed that there was room for improvement in the listing landscape. That said, she was confident that the benefits to the UK of hosting companies in the extractive industries outweighed the reported risks:

As long as we adapt our listings rules and ensure our corporate governance structure is adequate and strong, we will be able to mitigate those reputational risks. The advantages to getting companies operating in a strong, trusted environment outweigh some of the reputational risks, because we can have a positive impact on the way companies behave in developing countries.[67]

49. The extractive industries sector is always likely to be controversial. Negative impacts on local and indigenous communities abroad could undermine the reputation of the sector more widely, including the UK, where many companies are hosted. We therefore welcome the work being done to increase transparency and improve corporate governance in the industry—in particular by organisations such as the Bench Marks Foundation. Notwithstanding controversies, we believe that the benefits to the United Kingdom of hosting extractive companies outweigh the risks, providing that the UK aspires to lead the world in both the transparency and corporate social responsibility agendas.

Listing Regulations

50. Listings regulation is overseen by the Financial Conduct Authority (FCA). When he gave evidence to us David Lawton, Director of Markets at the FCA, summarised the process of being listed on the LSE:

In order to be listed, an issuer would have to take a number of steps. The first is, typically, it would have to appoint some advisers to work with it to prepare it to go through the process. If an issuer wanted to be on the premium segment of the Official List […] it would also have to appoint a sponsor, typically an investment bank, to co-ordinate the process. It would have to produce a prospectus, which sets out details about the company, its business plan, its revenue expectations and so on, in order to provide investors with all the information that they need to make an informed assessment about the pricing of the security, and then it would need to apply to us for admission to the List and satisfy the admission criteria. In parallel, it would also need to apply to an exchange to be admitted to trading.[68]

51. While this is a thorough process, we received submissions which argued that the concentration on financial checks was not enough to ensure that undesirable companies could not base themselves in the UK. The World Development Movement told us that the FCA's remit was too restrictive and should be expanded to include social, environmental and climate criteria in order to "prevent firms with dubious records from using London as a base to raise money for their destructive activities".[69]

52. Christian Aid argued that the FCA should be enabled to "hold companies to account for their behaviour",[70] and gave examples of other stock exchanges (for example the Hong Kong Exchange) which it claimed had "higher reporting requirements for the environment and human rights".[71] The organisation concluded that:

The adoption of similar reporting requirement to that of the Hong Kong Exchange would certainly improve the capacity of the FCA to implement due diligence.[72]

53. In response to those arguments, the FCA wrote to us in the following terms:

Our review of an application for listing focuses on ensuring the applicant meets the admission criteria and is therefore eligible for listing. We do not consider whether it is suitable for listing [FCA's emphasis]: so for example, we take no view on the appropriateness of an issuer's business model, nor whether it might be the sort of company that we would like investors to have the opportunity to invest in. Similarly, in our engagement with existing listed companies, we do not challenge the merits of any particular commercial proposal or course of action; rather, we consider when such a proposal needs shareholder approval, disclosure to the market in a particular form, or some other regulatory process designed to keep investors informed and able to exercise their rights.[73]

54. When we asked the Minister why the FCA's remit was limited in this respect, she said that there were concerns that a wider remit would conflict with existing corporate governance rulings.[74] For example, there was a requirement for companies to provide information about risk and identify certain types of corporate behaviour, but that this was covered by corporate governance policies—overseen by the Financial Reporting Council (FRC)—and not by the FCA.[75] She further argued that additional regulatory requirements would be brought in under new EU Directives:[76]

It would be very different from its role in other ways. Our rules on corporate governance and transparency, and the increasing transparency we will have following the implementation of the [EU] Transparency Directive and the [EU] Accounting Directive, will mean that the information that is out there for members of the public, civil society organisations, shareholders and so on will be much better. Members of the public and organisations will be in a much better position to challenge companies and Governments.[77]

55. We discuss the EU Directives in more detail later in this Report. The Minister repeated the view that the Government did not see the FCA's role in the policing of social, environmental or corporate governance:

The listing rules are administered by the FCA. In the Government's view, the FCA is not the right body to look at human rights abuses, environmental impact and so on. The way that we ensure that information is made available publicly so companies can be held to account for their activities is through the corporate governance rules, which are going to be extended.[78]

56. There is a wider discussion related to the regulation of the activities of these companies. We were reminded of our recent inquiry into the Kay Review. In that inquiry we scrutinised the role of the proactive shareholder and made recommendations on how to ensure that these shareholders were equipped with the information to hold these companies to account. In that Report we discussed reporting outside of financial accounting and felt that narrative reporting was one solution. We recommended that "the Government outlines how it proposes to implement auditing and monitoring of narrative reports". We concluded that "ongoing shareholder scrutiny and transparency must be at the heart of this".[79]

57. When we visited South Africa we witnessed at first hand, how the reporting of data other than finances was helping responsible investors and shareholders to hold their companies to account, and therefore were influencing and encouraging good behaviour in the companies that they owned. We report in detail about the methodology of doing this through an alternative 'Socially Responsible Index' but are encouraged that a country as reliant on the extractive industries as South Africa has found a positive way for its listing authority to positively engage with and meet the needs of shareholders as well as businesses. We look to the UK Listing Authority to learn from this good practice.

58. The current regulations governing transparency and reporting in the industry will be enhanced by forthcoming EU Directives. We believe that the Government should consider expanding the FCA's remit to include not only oversight of financial transparency, but also the social, environmental and corporate governance reporting for companies applying to list on the London Stock Exchange. If it is not felt appropriate for the FCA, the Government should determine which body should have the remit to do so.

PREMIUM LISTING AND THE ROLE OF THE SPONSOR

59. When a company lists on the FTSE, it may also decide to hold a Premium Listing.[80] Such a listing is advantageous to the company as it allow greater access to finance because potential investors are given an additional level of confidence with which to invest. The London Stock Exchange summarised the Premium Listing as follows:

A Premium Listing is only available to equity shares issued by trading companies and closed and open-ended investment entities. Issuers with a Premium Listing are required to meet the UK's super-equivalent rules which are higher than the EU minimum requirements. A Premium Listing means the company is expected to meet the UK's highest standards of regulation and corporate governance—and as a consequence may enjoy a lower cost of capital through greater transparency and through building investor confidence.[81]

60. A full description of the process for achieving Premium status in the FTSE is outlined at Annex 1. New applicants for a Premium Listing are required to submit a three year revenue-earning record which has been be independently audited without qualification. Furthermore, any prospectus accompanying the float is required to make an unqualified statement that the company has sufficient working capital for the company's present requirements. According to the FCA, any application for a Premium Listing also needs to be accompanied by:

Confirmation from a 'sponsor firm' that, having made due and careful enquiry, the directors have a reasonable basis for the statement on working capital (that will be contained in the prospectus) and have established procedures which provide them with a reasonable basis on which to make proper judgments on an ongoing basis as to the financial position and prospects of the applicant and its group.[82]

61. However, the FCA told us that not all of these requirements applied to mineral companies wishing to gain a Premium Listing. In particular, mineral companies were not required to supply the three-year earnings track record. However, any record a company has would still need to be independently audited and reported on without modification. The FCA also explained that companies did not need to control their assets, but if they did not they would have to "demonstrate they have a reasonable spread of direct interests in the mineral resources and rights to participate actively in their extraction".[83]

62. David Lawton, Director of Markets at the FCA, explained the rationale for this position:

It is largely due to the technical nature of the industry. It is certainly not the case that the different criteria imply a lesser standard. […] In relation to mineral companies, the thing that investors particularly focus on is an independent expert's report on the reserves and mineral assets that they have access to, so that takes the place of the three-year track record.[84]

63. In order to ensure that there was no less rigour in the process, the FCA emphasised the fact that an applicant company would still have to employ a sponsor:

The rules require premium listed companies to retain a sponsor firm in certain instances to advise the company on its obligations under the listing regime and to report to the FCA.[85]

64. When we questioned the FCA and the Minister on the potential for a conflict of interest in the role of the Sponsor—in so far as its fees and future fees depended on a successful application—David Lawton told us that there was a process to prevent the sponsor acting inappropriately. He explained that the FCA had the ability to take action "including discipline" where necessary and confirmed that this had happened in the past.[86]

65. The Minister agreed that the current powers available to the FCA were sufficient to prevent any potential conflict of interest from materialising or affecting the listing regime's reputation in a negative fashion:

In general terms, there are rules around the behaviour of sponsors, as part of the listing rules. The FCA does work with sponsor companies. It must approve companies if they are to be on the list of those that may act as sponsors. When there are conflicts of interest and so on, it is the responsibility of the sponsor company to have in place appropriate policies to identify when there are potential conflicts of interest, and policies to identify how they would then tackle them, and if they do think there is a conflict of interest it is their responsibility to cease to act as a sponsor. Those are monitored by the FCA reasonably closely, to make sure that companies do have those policies in place and that they are able to act accordingly.[87]

66. Both the FCA and the Government have acknowledged the risk of a conflict on interest in the role of a company's sponsor for a Premium listing. Whilst they indicated that they were alive to that risk, both must guard against the fact that the perception of potential misconduct could be as damaging as the practice itself. The Government should review the role of the sponsor and consider strengthening the terms attached to the role along with the range of a sponsor's remit.

A SOCIAL INDEX

67. During the course of our inquiry, we considered whether the London Stock Exchange and the Financial Conduct Authority could—or should—influence the corporate, social and environmental governance and behaviour of a company. When we were in South Africa we met senior executives of the Johannesburg Stock Exchange (JSE) to discuss the work of the JSE in this area. Mr Rothschild, Head of Government and International Affairs at the JSE, explained that the JSE had established a Socially Responsible Investment (SRI) Index which collected and published additional data on companies' social, corporate and environmental records. The SRI Index's objectives are to:

· identify those companies listed on the JSE that integrate the principles of the triple bottom line and good governance into their business activities;

· provide a tool for a broad holistic assessment of company policies and practices against globally aligned and locally relevant corporate responsibility standards;

· serve as a facilitation vehicle for responsible investment for investors looking for non-financial risk variables to include in investment decisions, as such risks do carry the potential to have significant financial impacts; and

· contribute to the development of responsible business practice in South Africa and beyond.[88]

68. When ranking companies the SRI Index considers four main areas of corporate impact:

Environment

· Addressing all key issues

· Working toward environmental sustainability

Society

· Training and development

· Employee relations

· Health and Safety

· Equal opportunities

· Community relations

· Stakeholder engagement

· Black economic empowerment

· HIV / AIDS

Governance and related sustainability concerns

· Board practice

· Ethics

· Indirect Impacts

· Business value and Risk management

· Broader economic issues

Climate change

· Managing and reporting on efforts to reduce carbon emissions and deal with the anticipated effects of climate change[89]

However, we also heard in meetings with the JSE, that if a company holds a dual listing (on both the LSE and JSE) and has Premium Listing status in London then it is exempt from engaging with the SRI.

69. In written evidence, WWF-UK compared the requirements of the JSE to the London Stock Exchange:
Table 4: Brief comparison of the Johannesburg Stock Exchange (JSE) and the London Stock Exchange (LSE)[90]

70. In 2001, a series of environmental and social corporate governance focussed indices were launched called FTSE4GOOD.[91] The FTSE website stated that FTSE4GOOD was "designed to measure the performance of companies demonstrating strong environmental, social and governance practices".[92] It went on to explain that companies were included in the FTSE4GOOD indices if they met a number of environmental, social and governance criteria which were set by "NGOs, governmental bodies, consultants, academics, the investment community and the corporate sector".[93] For a company to be included is a demonstration that they are considered to be environmentally and socially responsible. FTSE4GOOD fulfils an important role and supports the call for of responsible investment. That said, it was not cited any of our by witnesses in either written or oral evidence.

71. There is a demonstrable benefit in the Government introducing enhanced transparency and accountability in the mining sector. We recommend that the Government conducts a detailed comparison of the Socially Responsible Investment (SRI) index (found on the Johannesburg Stock Exchange) and the FTSE4GOOD index which features on the LSE. That assessment should demonstrate both the levels of information which are collected and published and the level of information companies are required to disclose. The Listing Authority should consider whether the FTSE4GOOD indices can be adapted to address transparency in the extractive industries, or whether a separate Social Responsible Index for extractive companies is required in the UK.

72. Where the requirements in the UK (including those of the FTSE4GOOD initiative) fall below those in Johannesburg, they should be strengthened so that investors in the UK have the same opportunities and information about the environmental and social corporate governance practices of companies listed in the UK as they do on companies listed in Johannesburg or other exchanges. We further recommend that the Government looks to close the potential loophole in which a company can avoid engaging with the SRI index by holding a Premium Listing on the LSE.

55 CBI Minerals Group (EIS 28) para 9.1 Back

56 Christian Aid (EIS 23) para 2.3 Back

57 CBI Minerals Group (EIS 28) para 9.1 Back

58 BHP Billiton (EIS 11) para 38 Back

59 WWF-UK (EIS 06) Back

60 WWF-UK (EIS 06) para 10 Back

61 London Mining Network (EIS 43) Back

62 London Mining Network (EIS 43) para 3.9 Back

63 Publish What You Pay UK (EIS 19) para 2.2 Back

64 More information on the Bench Marks Foundation and its research may be found here Back

65 Q277 [Alex Scrivener] Back

66 Q277 [Alex Scrivener] Back