Mining companies are under pressure from stakeholders to provide more relevant environmental, safety and governance (ESG) disclosures. Since 2010, the US Securities & Exchange Commission (SEC) has required a range of mine safety disclosures in an effort to elicit more ESG disclosures for companies with mining operations. After over a decade of this disclosure regime, I believe there are lessons we can learn from this subset of ESG disclosures. This post will summarize my thoughts on this.
ESG disclosures are difficult to get right even for the most experienced mining companies because stakeholder expectations are constantly evolving and it is difficult to determine which disclosures are material. Because what is material for one stakeholder (e.g., local communities) may not be material for another (investors). Mining companies provide ESG disclosures in their sustainability reports and disclosures (e.g., annual reports) filed with the market (e.g. those filed with the SEC). In the annual report, including comprehensive ESG performance data could be unwieldy. To keep it short, one has to make significant calls on what is material and what is not. Regulators such as the SEC have also struggled with what is material and what they should elicit.
The SEC’s mine safety disclosures are an example of a regulator attempting (although the US Congress required the SEC make rules to elicit these disclosures) elicit material disclosures. The rules (17 CFR § 229.104 ) require companies with mining operations to provide a summary of their safety performance in Exhibit 95 (17 CFR § 229.601(b)(95)). The rules also require that companies that operate mines should provide certain mine safety disclosures (imminent danger citations, pattern of violations, or potential pattern of violations) on Form 8-K within four days (see Item 1.04 of Form 8-K). The rules do not allow mining firms to evaluate whether these incidents are material or not. Thus, all US mine operators provide these disclosures. My collaborators, Drs. Brett Olsen and Daniel Bumblauskas, and I recently reviewed data on Form 8-K Item 1.04 disclosures by coal mining companies to examine whether investors react to these disclosures. You can read our paper here.
We found that:
- There is no statistical evidence that investors respond to mine safety disclosures; although our conclusion is limited to imminent danger citations since most of the data in our study period covered these citations;
- The regulation has led to strange decisions in mine safety disclosures. For example, we found several incidents where companies have not provided immediate reports of fatalities to the market (because the rules do not put fatalities on the list of things that have to be disclosed within four days on Form 8-K) but there are many reports of inconsequential imminent danger citations.
- There is some limited evidence (limited because our sample of such cases was small) that the market reacts negatively to mining stocks when there are major safety incidents (we defined these as those with more than five fatalities).
So what is the broader lesson for ESG Disclosures as a whole? I believe materiality is a big issue. ESG disclosures to the market, in particular, have to be material to investors or else it just creates noise. In fact, I believe the SEC’s mine safety disclosures are creating “noise” and increase the likelihood that investors will miss even important mine safety disclosures. So we should all evaluate materiality for each disclosure item we put in.