We are engaging with policymakers and companies on supply chain transparency.
In 2010, the US Congress passed the Dodd-Frank Act, one provision of which requires companies filing reports with the US Securities and Exchange Commission (SEC) to disclose whether conflict minerals – namely tin, tungsten, tantalum and gold – are used in the manufacture of their products.
Congress enacted Section 1502 of the Act because of concerns that the exploitation and trade of conflict minerals by armed groups has helped to finance conflict in the Democratic Republic of Congo (DRC) and adjoining regions and contributed to an emergency humanitarian crisis. The minerals must be certified by the country of origin before they cross any borders. This is done by a so-called tag-and-bag system operating in the DRC.
A company that uses any of the four minerals in its products is required to determine whether they originated in the DRC or adjoining regions and declare publicly in the required conflict minerals report whether they are “DRC conflict-free”, “DRC non conflict-free” or “DRC conflict undeterminable”. The latter status is only temporary, two years or four years for smaller reporting companies, and means that companies do not need to obtain an independent private sector audit for their conflict minerals report. Minerals from scrap and recycled rather than mined sources are considered conflict-free.
The due diligence measures that companies apply in determining and disclosing the existence of conflict minerals in their supply chain must conform to a nationally or internationally recognised due diligence framework, such as the comprehensive guidance approved by the OECD.
We worked together with other shareholders, beneficiaries, NGOs and industry bodies such as the OECD, Enough Project and the Electronic Industry Citizenship Coalition on the implications of the Dodd-Frank Act. The Act has recently been accused of contributing rather than alleviating the conflicts it tries to address.5 But despite causing regulators and companies some difficulties since its introduction, it has undoubtedly brought the issue to the front of the industry’s attention, enshrined the human relevance in civil and corporate law and increased visibility into the supply chains of companies.
Impact in the US
When the Dodd-Frank Act came into force, we engaged intensively with US companies on their preparedness for the legislation to ensure that they managed legal and reputational risks arising from conflict minerals.
As part of industry working groups, including one set up by the Principles for Responsible Investment, we collaborated to encourage the expansion of disclosure beyond the requirements of the Dodd-Frank Act and for companies to introduce auditing in their supply chain. We had a good degree of success and were able to conclude a large number of our engagement objectives on the issue.
Software giant Microsoft, for example, acknowledged that additional reporting and further discussion on this issue, internal as well as external, was warranted. The company substantially improved its disclosure and committed to adhering to industry best practice on conflict minerals in its supply chain. After gaining significant reassurance about the extensive supply chain management procedures the company has in place, we met our engagement objective.
Similarly, we successfully completed our engagement objectives on conflict minerals with peer Intel after the company’s submission to the SEC, detailing its efforts to discover and eliminate conflict minerals from its supply chain. In addition, our assessment of its further efforts to combat conflict minerals, such as expanded smelter auditing and certification, indicated the company’s leadership on this issue. This meant Intel was able to confirm that its suppliers are conflict-free.
Many Japanese technology companies have significant presence in the US, which is why they – to satisfy the requests from their US customers – have also significantly improved their supply chain visibility.
For example, we welcomed the progress Panasonic made in its work towards eliminating conflict minerals from its supply chain. It told us that it had surveyed 1,500 suppliers in 2015, 86% of whom responded.
No conflict minerals have been found in its supply chain to date. However, Panasonic assured us that it has policies and procedures in place in case conflict minerals are found. If they were detected, the company would request the supplier to rectify the problem and cease trading in the absence of improvement. Positively, Panasonic has reiterated its position that it does not want to withdraw sourcing from the entire DRC and neighbouring conflict regions as it would penalise legitimate suppliers and workers producing conflict-free minerals.
Australia released due diligence guidelines for the responsible supply chain of minerals in 2010 to mitigate the risk of providing direct or indirect support for conflict in the DRC.
European law-makers have been catching up and the EU has over the last year begun to develop a similar piece of legislation, in which we continue to be involved.
In 2015, the European Parliament voted to require all EU importers of tin, tungsten, tantalum and gold to be certified to ensure they do not fuel conflicts and human rights abuses. We had previously called on the European Commission to consider introducing such legislation and go beyond the much weaker and more limited voluntary rules it had proposed earlier in 2015. We were part of a group of global investors that urged the European Parliament to strengthen its proposal by expanding the scope of the legislation to ensure that all companies placing minerals on the market, be they raw, semi-finished or finished goods, are legally required to source responsibly. Members of the European Parliament backed a law covering not just European importers sourcing minerals from conflict zones but also companies that use the four minerals in their manufacturing process. We view this as a significant step that will put European companies more in line with their US-based peers. We are also encouraged that the European Parliament voted to support a mandatory and inclusive approach that will stimulate more robust supply chain due diligence and public reporting along global supply chains.
In collaboration with other investors, we petitioned the European Commission to respect the outcome of the European Parliament’s vote by taking steps to enact a mandatory conflict mineral due diligence reporting framework for companies placing conflict minerals on the European market. We pushed the European Commission to seize the important opportunity to show leadership and mainstream a risk-based approach to conflict minerals along global supply chains, as envisaged in the OECD Due Diligence Guidance standards.
We will maintain our work with European policy-makers to make sure a good final version of the conflict minerals law is drafted and implemented. The passage of the law is likely to take place in 2016.
Wave of reform
The wave of reform on conflict minerals is spreading. China introduced new industry guidelines for carrying out mineral supply chain checks in December 2015. These set a precedent for Chinese companies to recognise and reduce supply chain risks. It also indicates that more countries and regions are likely to take up conflict minerals legislation. Many technology companies have also introduced their own individual guidelines.
As a result of the impending European law, we are now focusing on the preparedness for and implementation of the legislation by European companies affected by it. We will ask those companies to look into their supply chain, disclose their traceability efforts and declare that they are free from conflict minerals.