The U.S. SEC’s ‘conflict mineral rule’ now requires companies to disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country. The rule could increase supply chain transparency, including aspects such as labor conditions and environmental impact.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, mainly focused on strengthening the U.S. banking and financial system in the wake of the Great Recession, included a lesser-known provision.
The ‘conflict mineral’ provision required companies to conduct due diligence on their supply chains and certify whether their products incorporated tungsten, tin, gold, or tantalum and if so, whether these minerals were sourced from the Democratic Republic of the Congo (DRC) or neighboring states.
These four minerals all played a role in helping finance militias involved in the long-running internal conflict in the DRC, a particularly ugly struggle marked by widespread human rights abuses.
An April 2014 U.S. appeals court ruling modified the rule’s impact, decreeing that a requirement for companies to positively ascertain whether their supply chains were “conflict free” was an unconstitutional violation of freedom of speech rights.
Nonetheless, publicly listed U.S. firms were still required to demonstrate that they had conducted an appropriate investigation, with the initial reporting requirements for the 2013 calendar year due at the beginning of June.
Approximately 1,300 companies (out of an estimated 6000 companies required to do so) have filed reports with the U.S. Securities and Exchange Commission (SEC). Here are three key takeaways from the reports filed so far:
1. Baby steps first
The initial set of submissions last month were a mixed bag, to put it gently. The majority of companies submitting reports declared no concrete information on the use of conflict materials in their products.
This was a predictable result –multinational corporations often rely on a large multitude of third-party suppliers, and previously lacked incentive to closely track supply sourcing. However, we can expect more detailed and more accurate reports in coming years, as companies adjust to the new expectations of transparency and disclosure.
2. Market pressure: a greater motivator than statutory requirements
That only 25% of the initially estimated 6,000 companies required to comply with this SEC regulation have done so by the initial June deadline demonstrates the absence of a genuine enforcement mandate.
The conflict minerals provision is self-enforced – companies make the determination whether they are legally obligated to comply with the reporting requirement. Some reports indicate the recent U.S. appeals court ruling may have produced some confusion on whether the overall provision had been voided.
Although the SEC has the authority to sanction companies that fail to submit any reporting, it is less clear what, if anything, the agency can do to companies that provide low quality reports.
Some companies may be more influenced by social activists and NGO groups that apply public pressure for greater transparency and disclosure. Indeed, such groups are already reviewing the initial submissions and producing their own evaluations on whether companies have made the grade.
3. The spoils go to the proactive
While many companies opted to provide minimal information or refrain from submitting a report at all, there were several notable exceptions. Companies like Apple, Boeing and Intel provided significant detail in their reports, not only summarizing their supply chains, but identifying specific entities, allowing third parties to conduct further investigations and ensure accountability. These firms chose to provide this level of detail for entirely pragmatic reasons – it furthers the principles laid out in their corporate responsibility statements and facilitates a bond with those consumers who prioritize such issues. These firms recognize that supply chain transparency is not only an inevitable cost of doing business in the 21st century, but if properly handled, can also represent a growth opportunity.
