By now, four years into the process, public companies are no doubt starting to get the swing of the Securities and Exchange Commission’s conflict minerals rule. Next up: an evolution of the still-controversial supply chain due diligence mandate and an expansion into new materials, geographies, and social ills.
Human trafficking and child labor, already on the radar for many businesses, may soon be joined by cobalt as the next mineral to demand their scrutiny as corporate sustainability reporting becomes even more ambitious in the months ahead.
Before getting too far into the future, however, the current conflict minerals environment is still causing confusion.
Rules adopted by the SEC, as mandated by the Dodd-Frank Act, require companies to assess products they manufacture to determine whether any contain so-called conflict minerals [the so called 3TGs of tungsten, tantalum, tin, and gold] and then further determine whether the source of those minerals is the war-torn Democratic Republic of the Congo or an adjacent country. The mining of those raw materials in that region is responsible for funding violent militia groups.
A legal challenge against the rule by the National Association of Manufacturers and others was filed shortly after the rule was finalized. The current status, now that the SEC has decided not to appeal to the Supreme Court, is that a requirement to perform an “independent private sector audit” to confirm conflict-free claims is on hold. The D.C. District Court will decide its fate. Last month, a decision moved closer and the case was assigned to Judge Ketanji Brown Jackson.
“We always knew that at some point a district court judge was going to be appointed to the case. It isn’t a surprise that this has happened. If anything, it is a surprise that it took so long,” says Michael Littenberg, a partner at law firm Ropes & Gray and a nationally recognized conflict minerals expert.
His advice for companies is to stay the course and not make assumptions about the audit requirement one way or another. As the court’s decision lingers, there is another uncertainty that may also affect the rule and its compliance. “New senior leadership at the Commission once the new administration is in will likely have their own view,” he says.
An, SEC rule or not, customers and activist groups alike are paying attention.
“Many large companies have indicated that, even if the conflict minerals rule were to go away, 3TG traceability will remain part of their corporate social responsibility program, and they intend to continue to drive responsible 3TG sourcing through their supply chain,” Littenberg says. “The bottom line is they are going to expect suppliers to provide traceability information whether it is required by the law or not.”
Leading companies in most of the larger industries with sprawling supply chains—technology, automotive, and aerospace—will continue to drive requirements through their supply chain whether or not required by law.
Aside from conflict minerals, Littenberg describes the past year as “a tipping point on corporate CSR disclosures.”
“If you were to go back to 2009, there were no mandatory CSR [corporate social responsibility] disclosures,” he says. Within a year, a slew of new rules and initiatives began to come into focus, starting with the California Transparency in Supply Chains Act, then the conflict minerals rule, the Federal Acquisition Regulation’s anti-human trafficking requirements, the U.K. Modern Slavery Act, the SEC’s Resource Extraction Issuer Disclosure Rule, new Hong Kong Stock Exchange disclosure requirements, and a non-financial reporting directive that is being implemented in Europe.
“We always knew that at some point a district court judge was going to be appointed to the case. It isn’t a surprise that this has happened. If anything, it is a surprise that it took so long.”
Michael Littenberg, Partner, Ropes & Gray
“We have now reached a point where CSR disclosures have gone from being entirely voluntary to having many mandatory disclosures and, in some cases, substantive compliance obligations,” Littenberg says. There is also an increasing push for greenhouse gas disclosures and escalating discussions about whether the SEC should be adding more reporting requirements around CSR issues to public company disclosure requirements.
“Even though the SEC has said it doesn’t think that is necessarily appropriate, the amount of dialogue on this subject has increased exponentially over the last few years,” Littenberg says. “Now, a significant number of companies are making voluntary disclosures. A large percentage of companies in the S&P 500 now publish sustainability reports, when, just a few years ago, it was a relatively small percentage.”
What’s ahead?
“By the middle of next year, we are going to see significantly more companies with supply chain disclosures by virtue of the U.K. Modern Slavery Act,” Littenberg says. “It will require thousands of companies to publish anti-human trafficking compliance statements, which is driving both awareness and compliance program enhancements at companies.”
He is also seeing a significant number of companies starting to, for the first time, assess human trafficking risk, whether in their business or supply chain, and asking whether they have appropriate policies and procedures. “It is analogous to where we were five to ten years ago on environmental issues,” he says. “We are also going to see more focus on these issues in the C-suite and at the board level. It will increasingly be part of their business assessment and risk management framework.”
Many companies are grappling with how to rationalize all of these different requirements, including how to put supplier-facing anti-human trafficking, conflict minerals, restricted substance, anti-bribery, and anti-corruption compliance together under a common framework. “The goal is to increase efficiency, reduce cost, and more effectively mitigate risk,” Littenberg says. “Companies are, for the most part, at the very early stages of thinking about this, and it is going to take time to formulate and implement a holistic approach.”
He is also seeing legal and compliance becoming more involved with CSR. “It doesn’t sit only in procurement or a separate social responsibility or environmental sustainability group,” he says. “These issues are now also being viewed from a compliance perspective, as a ‘must have,’ not just a ‘nice-to-have.’ ”
Speaking during a recent webcast sponsored by Source Intelligence, a supply chain consultancy, Patricia Jurewicz, founder and director of the Responsible Sourcing Network, echoed many of those observations.
She noted that the Organisation for Economic Co-operation and Development’s conflict minerals framework, accepted by the SEC as the only one of its kind, is not limited to a specific geography. It could be implemented beyond the Congo, outward to Brazil, Venezuela, or Columbia.
Jurewicz’s advice to companies is to think beyond narrowly constructed rules and disclosure requirements.
“Given the various human rights benchmarks and reporting that is out there it is kind of crazy for companies to get so caught up in specific details and only researching what is necessary to meet the needs of a specific law or regulation, around the world and not just in the U.S.,” she says. “It is important for companies to be looking holistically at all their sustainability issues and human rights risks.”
Feeling blue
While companies are pressured to deal with human rights issues, a very tangible problem—more directly akin to conflict minerals issues—needs to be considered.
APPLE AND COBALT
The following, posted on Apple’s website in October, addresses its sourcing of cobalt.
Apple began mapping the cobalt supply chain in 2014 to determine the flow of cobalt from the extractive level to our finished product. We are applying what we learned in tackling the challenges associated with conflict minerals to our responsible sourcing of cobalt.
Roughly 80 percent of the cobalt we use comes from mines associated with well-established responsible sourcing practices. The remaining 20 percent comes from sources that don’t currently have responsible sourcing programs in place to meet our rigorous requirements, and we’re working closely with these suppliers to develop them.
Apple could shift 100 percent of its supply chain to companies with verified responsible sourcing programs for cobalt and avoid any association with the di cult problems facing the industry, but that wouldn’t effect change. We’ve consciously chosen to stay engaged with mines and smelters that are not yet meeting our high standards and will work with them to develop responsible practices.
If they are ultimately unwilling or unable to change and improve, we will terminate our relationship with them.
The problems in the DRC are far-reaching and complex and will take a collective e ort to drive resolution. Apple does not purchase enough cobalt to solve this problem alone. We spearheaded, along with the China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters, the formation of the world’s first Cobalt Working Group with companies across the cobalt supply chain, as well as representatives from the OECD, to undertake collective action in addressing the social and environmental risks of cobalt.
We also created standardized audit protocols that can be used by cobalt suppliers and adopted by peer companies and industry associations.
Additionally, we have funded programs with international NGOs, local stakeholders, and industry partners to increase the number of registered miners in conflict-free channels and have provided educational and health care support to mining communities. We are developing programs that seek to eliminate child labor in cobalt mining; codifying best practices for small-scale miners to improve their productivity, health, and safety; and improving methods for tracking and trading materials from the mine to the smelter or refiner.
We are proud to support the work of those tackling human rights challenges directly on the ground in the DRC. This support includes working with PACT, the internationally renowned NGO, with whom we are developing specific programming to address child labor in cobalt mining in the former Katanga province. We have also made a grant to the Fund for Global Human Rights, an international organization that provides financial and other support to grassroots human rights activists in the DRC who are working to end child labor and stem human rights abuses in mining communities.
Source: Apple
Cobalt is used as a blue pigment in many paints and is widely used as a component of lithium ion batteries. Its strength and durability has also made it a preferred metal in tool construction, notably drill bits, and for artificial joints, limbs, and medical devices.
As for its use in lithium batteries, demand for the material is expected to grow exponentially with the popularity of electric cars. Unless a viable substitute is found cobalt demand will continue to rise, it is estimated that, by 2020, nearly 75 percent of all such batteries will contain cobalt.
According to a recent report by RCS Global, a leading Independent Private Sector Audit provider, as demand increases, there seems little prospect of significant increases in output from other cobalt producers, such as Australia and Brazil, meaning the market will continue to be concentrated in the Democratic Republic of Congo.
The DRC, targeted by the conflict minerals rule, is also the largest producer of the world's cobalt supply. The Enough Project estimates that 60 percent of that production comes from illegal mines. Unsafe working conditions and child labor were also uncovered by the human rights watchdog.
In 2014 approximately 40,000 children worked in mines across southern DRC, many of them mining cobalt, according to UNICEF.
The call for additional supply chain due diligence was also made in a recent report by Amnesty International that cites a prevalence of child labor in cobalt mining. The report charges that major electronics brands “are failing to do basic checks to ensure that cobalt mined by child laborers has not been used in their products.”
“This will expose an increasing number of manufacturers to legal and reputational risks,” says Harrison Mitchell, director at RCS Global.
Already, some industry leaders, among them Apple, are mapping of their cobalt supply chains to understand their exposure.
The Electronic Industry Citizenship Coalition (EICC), which governs the Conflict Free Smelter Program for conflict minerals, has also announced its Responsible Raw Materials Initiative to develop responsible raw material sourcing strategies for their members. Also, the OECD is working with the China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters (CCCMC) on new cobalt standards.
“The biggest error we see is companies not realizing that in the eyes of the OECD Guidance, they are responsible for the conduct of their partners throughout their supply chain right down to the mine,” Mitchell says. “The OECD is looking at a whole range of raw materials, including cobalt, palm oil, and cotton. Each of these supply chains has its own unique set of risks depending on where they are sourced.”
The growing focus drives home that “it is crucial for companies to have strong policies and programs that support their ability to uncover risks in their supply chain.”
Nicholas Garrett, also a director at RCS Global, suggests adapting existing conflict minerals programs and “incorporating a wider environmental, human rights, and working conditions lens.”
Expanding that program, of course, won’t be an easy task.
“There is a huge effort that has been put into 3TG compliance work,” Mitchell says. “Companies start out by mapping their supply chain, and one of the key questions companies might have is whether they need to do that entire process again.”
Mitchell is, nevertheless, optimistic about the future.
“The industry has learned some lessons from 3TGs, and what’s likely to happen, hopefully, is that we see more information sharing at the lower levels of the supply chain,” he says. “By the time it gets to the end-user or the near-end user there will be a lot of work that was already done, from the smelter and beyond, and that will help keep those supply chains clean.”
The global focus on CSR may similarly benefit companies with added pressures at all points in the supply chain. “Ultimately it will be in the supplier’s best interest to demonstrate they can comply with a company’s requirements,” Garrett says.
Risk mitigation has to live and breathe within suppliers for CSR efforts to be successful.
“It is not just about setting up a system and walking away, or just doing audits here and there,” Mitchell says. “It requires developing a suppler engagement strategy and a program that works to effectively get suppliers on board with the whole issue. They can then start making inquiries down their own supply chain and take much of the burden off you.”
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