Congress: Companies Must Account for Conflict Minerals
Its wealth is unearthed by the poor, controlled by the strong, then sold to a world largely oblivious to its origin. So reads the “African natural resource curse” – a paradox of plenty.
In few African nations has this curse brought greater conflict and environmental damage than in the Democratic Republic of Congo (DRC). When perpetrators of the genocide in Rwanda crossed the border, battles escalated with rebels and foreign armies for control of valuable mineral deposits. In Africa’s Eastern Congo and neighboring Uganda and Rwanda, the extraction and transport of “conflict minerals” – tin, tungsten, tantalum (the “3T’s”) and gold – has helped rebel forces amass vast wealth which they use to militarize mines and wage devastating violence and human rights abuses against civilians in eastern Congo. According to a recent report by the U.S. Government Accounting Office, since 1998, an estimated five million have died as a result of the fighting.1
Government stabilization efforts, UN peacekeeping initiatives and various international campaigns are working to reduce the violence, but little yet has been effective in containing the flow of funds to rebel forces responsible for the widespread killings and abuses.
Targeting Economic Drivers of the Conflict
For the past few years investors and nongovernmental organizations (NGOs) have been pressing companies to take responsibility for the risks deep in their supply chains, viewing it as an investment issue and a moral imperative. A broad cross section of manufactures from tool makers to chip manufacturers are dependent on one or more of the 3T’s and gold and their ores, for the functionality of their products. The DRC currently is the sixth largest producer of tin and provides 20 percent of the world’s tantalum. Growing industrial demand for these minerals contributes to the conflict. Tin is used in circuit boards; tungsten makes cell phones vibrate; tantalum is used in electrical capacitors found in consumer electronics and medical devices; and gold is used to coat wiring. Until companies conduct adequate due diligence of their supply chain, investors will not be able to assess the operational and reputational risks from the probable sourcing of minerals from conflict areas such as the Eastern Congo.
To their credit, several technology companies working through the Electronic Industry Citizenship Coalition (EICC)/Global eSustainability Initiative (GeSI) have begun audits of their supply chain. No reports of these audit processes have been made public, but this is set to change in the next 18 months when all U.S. publicly traded companies manufacturing products containing any one of the 3T’s or gold will be required to report if they use conflict minerals and if so, whether the minerals originated in the DRC or adjoining countries. Companies that do source from the Congo must submit a report on the due diligence processes they are taking, if any, to trace the origin of these minerals.
This requirement, tucked away in the historic Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is unprecedented in U.S. federal securities law.
Section 1502 begins, “It is the sense of the Congress that the exploitation and trade of conflict minerals originating in the Democratic Republic of Congo (DRC) is helping to finance conflict characterized by extreme levels of violence… and contributing to an emergency humanitarian situation.”
The legislation directs the Securities and Exchange Commission (SEC) to promulgate rules addressed to companies traded on the U.S. stock exchanges that are responsible for the manufacture of products that contain any of the 3T’s or gold. If the mineral is necessary to “the product’s functionality”, the company will have to undergo a due diligence process sufficient to determine if any minerals were sourced from the DRC. The legislation’s key provisions require companies sourcing from the DRC to conduct a due diligence process that includes a third part audit. The General Accounting Office, the SEC and the State Department are responsible for setting reporting standards. Companies also must describe products that are not DRC conflict-free – that is, those that contain conflict minerals that directly or indirectly financed or benefited armed groups in the DRC. The carrot provided is that all who demonstrate due diligence deemed reliable by the SEC, and who thereby certify no minerals are sourced from conflict zones in the DRC, can label their product “DRC conflict-free.” Another critical piece of the law directs the Secretary of State and the U.S. Agency for International Development to develop a strategy “to address linkages between human rights abuses, armed groups, mining of conflict minerals and commercial products.” There is considerable ambiguity around the definitions in the bill, but the SEC comment period gives stakeholders an opportunity to provide input on definitions and directives in the rule-writing process.
Trillium has engaged several companies on this issue, including Intel, Medtronic and Veeco Instruments and joined the DRC Policy Working Group with NGOs, other investors, and companies working together to make recommendations to the SEC rule making process. The DRC Policy Working Group is a subcommittee of the Multi-Stakeholder Initiative, spearheaded by Patricia Jurewicz from the As You Sow Foundation and Business for Social Responsibility.
Corporate Action in Anticipation of the Rulemaking
Technology companies were the first to develop mineral verification schemes. GE, Motorola, Intel, Advanced Micro Devices, Hewlett Packard, Dell and IBM, working together under the auspices of the EICC and also as members of the DRC Working Group, are advancing a smelter verification process. The process allows manufactures to identify smelter operators that use a legitimate chain of custody process to track minerals from mine to smelter. Three tantalum smelters have been audited under the verification process, and members of the EICC have visited ten tin smelters in six countries.
We can’t help but observe that it’s consistently been the same handful of companies who are investing resources to trace conflict minerals and engage investors and NGOs about the complexities of their supply chains. Companies outside the tech sector need to step up and support the industry verification schemes. Investors are urging companies to be transparent in discussing the progress and challenges of meeting the provisions in the SEC conflict minerals disclosure ruling. The DRC Working Group is urging companies from the automotive and medical device manufacturing sectors to join supply chain work. Additionally, more companies need to follow the leadership of several EICC/GeSI member companies and publicly disclose policies to address conflict minerals. Investors need to understand where companies stand on assessing this material supply chain risk. IBM, for example, is very involved in EICC; a senior executive from the company acts as its chair. Yet, because IBM has not disclosed how it is approaching the issue of tracing conflict minerals in its supply chain, its exposure to this risk is unclear to investors. For IBM and others, regulatory change demands the disclosure of risk factors.
Done right, this unprecedented rule will compel companies to understand the operational and regulatory risks in their supply chain and hold them accountable to a robust due diligence process. This will give investors a uniform flow of information necessary to make informed investment decisions. Done right, the rules could compliment international efforts to deal with conflict minerals, such as a system for the responsible sourcing of minerals designed by the Organization for Economic Cooperation and Development, which has received the endorsement of eleven African countries.2
Done poorly, the law could trigger a ban in the region. The DRC Working Group is in agreement that the law and implementation process should not deter smelter operators to abandon even the legally run mines in the Congo.
The Working Group is set to deliver consensus recommendations to the SEC in November that will help draft meaningful reporting that drives ethical and environmentally sustainable behavior in sourcing conflict minerals. It will take multiple fronts – government engagement and diplomacy, supply chain responsibility, and economic development – for a path to open up to end the violence and this particular manifestation of the natural resource “curse” in Africa.
1. “The Democratic Republic of the Congo: U.S. Agencies Should Take Further Actions to Contribute to the Effective Regulation and Control of the Minerals Trade in Eastern Democratic Republic of the Congo” (U.S. Government Accountability Office, September, 2010).
2. “OECD Standards Taken up in Fight Against Conflict Minerals,” October 4, 2010 (www.oecd.org.)