S.E.C. Approval of Conflict Minerals Rules: a landmark in supply chain disclosure requirements

August 23, 2012 EcoVadis

This Wednesday, 22nd of August, the long awaited Conflict Mineral rules , section 1502 of the Dodd-Frank Act, were adopted by the US Securities and Exchange Commission (SEC) amid a round of fierce debates and negotiations in the past months. The amended final rules propose a more flexible scheme than the previous proposal and introduce differentiated requirements for companies reporting to the S.E.C. according to parameters such as their activities, size, use of recycled materials.

Conflict Minerals in a Nutshell

The purpose of the Conflict Mineral rules is to put an end to the extremely violent conflict in the Democratic Republic of the Congo, which has been partially financed by the exploitation and trade of conflict minerals originating in the region. Such minerals comprise ores (coltan, cassiterite, wolframite and gold) used for core metal derivatives such as tin, tantalum and tungsten). It is estimated for example that the DRC region contains 80% of the world’s coltan reserves. It is worth mentioning that other minerals could be designated by the U.S. Secretary of State as conflict minerals in the future. Countries covered by the new rules in addition to the DRC include South Sudan, Uganda, Rwanda, Burundi, Tanzania, Malawi, Zambia, Angola, the Republic of the Congo and the Central African Republic.
Implications for companies and disclosure highlights

As highlighted in a KPMG study, released in August 2011, it is estimated 6000 companies are soon going to be affected by the rules ranging from different sectors including electronics, automotive, aerospace, jewelry, industrial machinery, construction and medical equipment. But, what are the main obligations contained in the final rules?

  • Does Section 1502 apply to your company? Full diagram on p33.
  • First specialized disclosure report to be filed on May 31, 2014 (for the 2013 calendar year) and annually on May 31 every year thereafter.
  • The requirements apply equally to U.S. and foreign issuers.
  • The reporting company must have influence over the manufacturing. The minerals must be “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company. For example, a company that uses its own brand to a fully generic product manufactured by a third party will not be impacted.
  • Issuers using recycled or scrap sources are not automatically required to conduct due diligence of their supply chain and file a conflict minerals report.
  • A company that uses conflict minerals is required to conduct a ‘reasonable country of origin’ inquiry (RCOI) to determine whether any of its minerals originated in the list of countries or are from scrap or recycled sources. In this case, A “Form SD” must be made publicly available.
  • The Company must undertake “due diligence” on the source and chain of custody of its conflict minerals and file a Conflict Minerals Report disclosed on its website if a company determines minerals originate in the listed countries and are not from scrap or recycled sources.The report must undergo an independent private sector audit.
  • Existing due diligence guidance to produce the Conflict Minerals report can include the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or other national or international frameworks.
  • The final rule provides two years for companies unable to determine the source of their conflict minerals after conducting due diligence. Smaller reporting companies may use the “conflict undeterminable” characterization for four years.
  • Last but not least the final rule exempts any conflict minerals that are “outside the supply chain” prior to January 31, 2013. Under the final rule, conflict minerals are “outside the supply chain” if they have been smelted or fully refined or, if they have not been smelted or fully refined, they are outside the list of critical countries.

EcoVadis to support companies in Conflict Mineral due diligence

The SEC estimated section 1502 would cost companies $3 billion to$4 billion initially to meet compliance with the new rules and would cost $206 to $609 million for annual compliance. We can anticipate the adoption of the final rules will have a ripple effect in the supply chain. Implementing a supply chain management system for that purpose is going to be a daunting task, with the burden being put on 1st tier suppliers. Some companies already have demonstrated a proactive approach, as shown in the August 2012 report from The Enough Project, but most remains to be done.

In order to support companies in due diligence actions necessary for compliance on the Dodd-Frank Conflict Minerals regulation, EcoVadis has taken steps to integrate conflict minerals into the Supplier Performance (SP) solution. The EcoVadis Supplier Performance (SP) tool allows its clients both to benchmark suppliers on their CSR performance and allows collaboration with suppliers towards performance improvement.


This article was written by Simon Gargonne, CSR Analyst at EcoVadis
Photo credit Sasha Lezhnev/ Enoughproject.org on Creative Commons license.

Resources:
– S.E.C. Press Release
– S.E.C Final Rules
– OECD Due Diligence Guidance

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