What impact do the following have on your Midwest organization?
- Mining operations in the Democratic Republic of the Congo (DRC)
- The Dodd-Frank Act of 2011
If you are a small or mid-sized manufacturer, the answer could be quite a lot. At the heart of both issues is the concern over “conflict minerals.” It’s a concern that may directly impact your sustainability position, your upstream customer relationships, and your bottom line.
International scrutiny over conflict minerals has grown, and manufacturers around the globe are taking notice and taking action. Conflict minerals are those minerals mined by means of serious human rights abuses and violence. Most notorious are mining operations in the Democratic Republic of the Congo (DRC) and surrounding countries where war is waged, often over control of the lucrative mines themselves. Proceeds from the mines and the illicit trade that result are used to further fund rebel groups and violent conflicts.
There are four main minerals that come from the DRC—tin, tungsten, tantalum, and gold, sometimes referred to as 3TG. Demand for the minerals has been driven in recent years by the electronics industry, a key user of the metals needed to create mobile phones, laptops, and MP3 players. Certainly, numerous other industrial products depend on 3TG materials.
Enter the Dodd-Frank Act
Most manufacturers view the Dodd-Frank Act as legislation that applies strictly to the financial services industry. While that is primarily true, Section 1502 addresses conflict materials. When Congress failed to pass the Congo Conflict Minerals Act in 2009, it was added into the Dodd-Frank legislation.
For publicly traded companies whose products include 3TG materials, Section 1502 outlines specific disclosure requirements that begin this year, 2013. It includes an audit rule that requires publicly traded companies to report on whether conflict materials are used in the manufacturing of their products.
On the surface, you may think none of this affects your company (i.e., not publicly traded, do not manufacture laptops). But if your company uses tin, tungsten, tantalum, or gold in its manufacturing processes, and you’d like to keep your upstream customers, you may very well need to show that those materials have been responsibly sourced.
Put another way, companies listed with the SEC must perform an inquiry regarding the origin of the conflict minerals they use and disclose the information to the SEC. If it’s determined that the minerals were sourced in any of the so-called “covered countries” (see box-out), companies must also perform supply chain due diligence to determine both the source and the chain of custody of their minerals. They must then file a report that includes an independent, private-sector audit of their findings.
Section 1502 of the Dodd-Frank Act covers conflict minerals sourced in the following “covered countries”:
- Central Africa Republic
- Democratic Republic of the Congo (DRC)
- The Republic of the Congo
- South Sudan
If it’s ultimately determined that some or all of a company’s products are not conflict-free, that information must be included in its report. There is no de minimis. Even if only trace amounts of conflict minerals are used in products, the rules apply. For many of today’s publicly traded companies so deeply committed to sustainability, such an acknowledgement could cause serious reputational damage.
It’s a safe bet then that most public companies aren’t waiting to chase down their supply chain partners for proof of responsible sourcing. In fact, as publicly traded companies put systems in place to comply with the new law and to confidently declare conflict-free supply chains, they are already pushing similar audit requirements down the supply chain. Indeed, many cannot fulfill their conflict-free obligations without cooperation from their entire supply chains.
According to one SEC survey, nearly 6,000 public companies will need to complete the required reporting on conflict materials. Another 278,000 companies will be targets of subsequent inquiries from these 6,000 companies because they are downstream suppliers.
Most SEC-listed companies are developing due diligence protocols for their numerous suppliers. Staying in a supply chain will mean satisfactorily responding to requests to show where minerals are sourced. If you’re a downstream supplier using 3TG minerals from the DRC, you could find yourself without a buyer in the near future as companies look to purchase from suppliers that obtain their materials responsibly.
Ensuring Supply Chain Transparency
As a supplier, providing evidence of where minerals are mined is an endeavor that requires considerable time and resources. Tracking, validating, and documenting sources can be a cumbersome and challenging process. Such transparency includes identifying not only mines, but also smelters and points of transit. The exercise alone may bring to light the need for better tracking capabilities overall within a supply chain or the need to invest in new technologies to shore up the process.
In most cases, compliance further requires that a supplier obtain an independent audit—a third-party assessment that provides an expert, unbiased opinion on the validity of the verification process.
Thus far, the only supply chain due diligence system specifically acknowledged by the SEC is guidance provided by the Organization for Economic Cooperation and Development (OECD). Though not required, it does provide a framework of standards for compliance and gives suppliers some insights into the upstream assurance requests they will likely receive. OECD’s five due diligence steps are:
- Establish strong company management systems, including a company policy to govern the supply chain of materials from conflict-affected areas.
- Identify and assess risk in the supply chain that a supplier’s operations could cause harm to people, reputational damage, or legal liability. The risk assessment will differ, depending on the mineral involved and on the supplier’s location in the mineral supply chain. If no risks are identified, no further steps are required. If risks are identified, the next steps must be undertaken.
- Design and implement a strategy to address identified risks; this could include disengaging with a supplier if necessary.
- Carry out independent third-party audits of supply chain due diligence where required, based on the supply chain risk assessment. (Smelters/refiners would need to undergo this type of audit.)
- Report on the company’s supply chain due diligence.
As evidenced, it will be important to put processes in place that document your supply chain and verify the country of origin for the materials in question. But the conflict minerals rule also brings the issue of social responsibility and sustainability to the forefront.
Should you discover your company is using minerals from the DRC, your upstream buyers may no longer purchase your products. You will have to assess what this means for your company and the potential impact on both your brand and bottom line. There will be key decisions needed regarding your business relationships and your organization’s corporate responsibility. Should you develop a conflict minerals policy? Are there other sources for these minerals? Do you have adequate resources to validate sources and put compliance processes in place?
Public Scrutiny, Professional Assistance
On the surface, the Dodd-Frank Act appears to affect relatively few entities. In reality, however, the law places significant obligations on scores of manufacturers and supply chains. Reputations are on the line, and so are sales. As human rights violations become more visible to the public, visibility into supply chains will become more crucial. Wipfli can help your organization address conflict-mineral provisions, provide assistance in establishing stronger supply chain processes, help your company meet upstream compliance demands, and deliver reliable third-party audits.