Social and environmental expenditures

MSGs should identify whether companies make social or environmental expenditures, including whether these are mandatory or discretionary. In order to identify whether companies provide social expenditures, the MSG is advised to consult:

• Extractive companies and industry associations with a view to understanding the type and nature of any social or environmental expenditures, and whether expenditures identified are discretionary or part of the companies’ legal and/or contractual obligations. 
• The legal and regulatory framework governing the extractive sector to identify whether social expenditures are mandated by law. Where mandated by law, the MSG may wish to include a reference to the relevant legal provisions in EITI disclosures.  
• Agreements and contracts, where available, in order to understand whether social and environmental expenditures are mandatory or voluntary. 

It is recommended that the findings from this work are documented in MSG meeting minutes, scoping studies or in EITI reporting. 
Types of social and environmental expenditures include:

• Social payments versus expenditures. Social payments and expenditures can take multiple forms, and may involve cash payments such as donations, grants or other types of cash transfers, the transfer of assets such as the construction of roads or schools, or the provision of services like training and health care. In some cases, these social expenditures and payments are based on legal or contractual obligations. In other cases, companies make voluntary social contributions. 
  
  While terms “social expenditures” and “social payments” are often used interchangeably, the general understanding is that social payments typically refer to payments made directly by the company to a government entity, while social expenditures can also be used to refer to transfers made to third parties (e.g. a construction firm to build infrastructure or a school). Where these are mandated by law or the terms of the contract governing their extractive investment, the EITI Standard requires that material expenditures are disclosed and where possible reconciled (EITI Requirement 6.1.a). Disclosures of voluntary social expenditures are encouraged (Requirement 6.1.d).
   
• Environmental payments. Environmental payments are typically made by companies to the government to compensate for or mitigate potential environmental impact by oil, gas and mining operations. Such payments can be mandated by law, regulation or contract and may consist of fees related to environmental licenses, specific taxes or payments related to emissions, pollution or water and energy use, waste fees, and contributions to environmental protection agencies or funds. Where these payments to the government are material, the EITI Standard requires that these are disclosed and reconciled. This provision is aligned with EITI Requirement 4.1. on comprehensive disclosures of taxes and revenues. These payments are not always generally considered material, although they are often of interest to citizens and local communities. Environmental expenditures made to third parties that do not represent a government entity (e.g. a service provider performing activities required by environmental work programmes) are typically not considered within the scope of the requirement.

Additional sources of definitions of social and environmental expenditures include IMF’s Technical Guidance Note on Government Finance Statistics, which categorises the following: 

• Mandatory social payments as “Compulsory transfers to government (infrastructure and other), 1415E4”
• Voluntary social payments as “Voluntary transfers to government (donations), 144E1” 
• Environmental payments as “Emission and pollution taxes, 114522E” 

In some cases, EITI Requirement 6.1 may apply beyond these categories to also include social expenditures made to non-governmental entities.

The MSGs might wish to consider reviewing the definitions of social and environmental payments provided by the IMF’s Technical Guidance Note on Government Finance Statistics, noting that the scope of Requirement 6.1 extends to social expenditures made to non-governmental entities.

Where the MSG has determined that extractive companies make i) mandatory or ii) discretionary social and environmental expenditures, the MSG should first identify the existing government and company disclosures of information on such expenditures. These could include annual reports, websites or data portals managed by the ministry overseeing the industry or sustainability reports by companiesHideSome companies publish sustainability or corporate social responsibility reports in accordance with Global Reporting Initiative (GRI) Standards. Among the environmental-related aspects recommended to be reported under the GRI framework are: energy consumption, use of water, effluents and waste, emissions, biodiversity impact, compliance with environmental laws and regulations, and number of environmental grievances filed. MSGs might also wish to consult the GRI sustainability disclosure database..  

Second, the MSG should agree which payments and revenues are material and need to be disclosed in accordance with the general approach set out in Requirement 4.1.b on selecting appropriate materiality thresholds. When considering the threshold for social and environmental expenditures, the MSG may wish to take into account the importance of these revenue streams for stakeholders and local communities.

In some cases, the data needed to make this assessment will already be publicly available from companies, government authorities or other sources. In other cases, it may only be possible to estimate the size of the payments through consultations with stakeholders. While the absolute value of social and environmental expenditures may be insignificant in comparison with taxes and royalties, the impact on small local economies and social and institutional arrangements may still be considerable.

In accordance with Requirement 6.1, where the MSG determines that mandatory social expenditures or environmental payments to the government are material, the implementing countries must disclose and, where possible, reconcile these transactions (see Step 3). If the MSG concludes that these flows are immaterial, the basis for this assessment should be documented. In such circumstances, it may be useful to provide a summary in EITI disclosures. 

Where the MSG determines that discretionary social and environmental expenditures or transfers to government entities are material, the MSG is encouraged to cover these flows in EITI reporting (Requirement 6.1.d). 

Where the MSG has established that social and environmental expenditures or transfers to government entities are material, additional work may be needed to design appropriate reporting templates and agree procedures for disclosure and data assurances. In order to agree an appropriate reporting procedure, the MSG is advised to review:

• The nature of the social and environmental expenditures, including whether the social expenditure is provided in-kind (for example through access to services or infrastructure), through financial transactions, or a combination of these. In accordance with Requirement 6.1.a, where mandatory social expenditures are provided in-kind, it is required that the nature and the deemed value of the in-kind transaction are disclosed.

• The parties involved in the transaction (i.e., the provider and the recipient of the social or environmental expenditure), which in addition to the extractive company, may include a government entity, or a third-party recipient such as a charitable organisation or other types of associations. The beneficiary of the social expenditure is the recipient of the benefit, i.e., the person or body who owns or controls or uses the asset or service. In accordance with Requirement 6.1a, “where the beneficiary of the mandated social expenditure is a third party, i.e., not a government agency, it is required that the name and function of the beneficiary be disclosed”.

Where feasible, the MSG could consider disclosing the data in a way that addresses information needs of different genders and subgroups of citizens This could be done by disclosing detailed and disaggregated data on beneficiaries, shedding light on whether women, youth or subgroups of citizens are amongst the beneficiaries of such expenditures (e.g. scholarships and trainings, as reported in Liberia). Similarly, gender-sensitive data can help track the extent to which these are allocated to priorities identified by women, which may include staffing of existing facilities for education and health services, as well as environmental remediation. It can also highlight whether women and subgroups of citizens have been consulted in identifying priorities for such expenditures, and whether they are included in follow-up and monitoring.

Depending on the nature of the social and environmental expenditure and the parties involved in the transaction, the MSG needs to determine whether the transactions can be reconciled, or whether it is more appropriate that the company making the payment and/or government entity receiving the benefits unilaterally disclose the nature and the value of the transaction.

Where the social or environmental expenditure is a financial transaction between an extractive company and a government entity, or a community development or environmental rehabilitation fund, reconciliation will in most cases be feasible. However, where the social or environmental expenditure is provided in-kind or the payment is made to a contractor for the implementation of a project or service or to an NGO, reconciliation may well be challenging. In such cases the reporting template should be designed so that the extractive company describes the nature of the social or environmental contribution provided and the deemed monetary value at the time that the expenditure was made. Similarly, where the beneficiary is not a government agency but a third party, the reporting template should enable the name and function of the beneficiary to be disclosed.

The MSG is advised to explain and document the agreed approach for reporting on social and environmental expenditures. The MSG may also wish to task its technical team, a relevant government entity, or Independent Administrator with proposing templates for reporting on social and environmental expenditures.

Prior to or after publishing information on social and environmental expenditures, the MSG could review and analyse the information identified and collected, consider findings from the report and agree recommendations for the MSGHideFurther guidance on developing recommendations from EITI reporting available here. or other stakeholders to address. If the MSG has agreed work plan objectives related to social development, environmental impact or contributions to local communities, the MSG could consider how the disclosures could be used to help meet the objectives.

Examples of such recommendations from EITI disclosures includes:

• A recommendation for the government to consider establishing a mechanism to monitor extractive companies’ compliance with social and environmental obligations, and to trace the execution of social expenditures with a view to maximise the impact on local populations (see, for example, Cameroon’s 2013 EITI Report, p. 75).
• A recommendation for the government to review the audited accounts of the Environment Protection Fund and to engage the Fund Board to ensure greater transparency in the management of the fund (see, for example, Zambia’s 2016 EITI Report, p. 79).

Questions the MSG could consider include:

• How do the provisions related to social and environmental expenditures compare to actual practice?
• How does the government monitor and account for mandatory and discretionary social and environmental expenditures?
• How can the information be presented to help stakeholders understand the nature of social and environmental expenditures and who the recipients/beneficiaries are? 

Disclosures related to social and environmental expenditures have been used by stakeholders in EITI implementing countries to inform debates on how expenditures are managed and used, their efficiency and how to make sure expenditures contribute to positive social impact and environmental protection.