September 10, 2013

Posted: Conflict Mineral Questionnaires

In response to a question posted in our Q&A Forum, I have posted several questionnaires that you can use both internally and for third-parties in our “Conflict Minerals” Practice Area. Meanwhile, the Elm Group alerted me to:

– Comments from EU Commissioner for Trade Karel De Gucht provide a six-point framework for the EU’s conflict minerals directive still under development.
– NGOs Enough and Responsible Sourcing Network, along with Socially-Reponsible Investment firms, published their expectations and specific recommendations for SEC filings on conflict minerals.
– A NY Times article exposing flaws in CSR audit practices – and a LinkedIn discussion explores the potential foreshadowing for conflict minerals audits.

Also see the answers in response to Topic #7765 in our “Q&A Forum” for some practical advice about how to handle the questionnaires (remember you can search by key word or topic number with the search tool in our Forum)…

An Indicator of the Conflict Mineral Appeals Case

Here’s a blog from Davis Polk’s Ning Chiu:

A preliminary statement of issues filed by the National Association of Manufacturers, the Chamber of Commerce and the Business Roundtable on August 13 provided a glimpse of the arguments that will be made in their appeal of the district court decision to uphold the SEC conflict mineral rules, which we previously discussed here.

The appellants plan to address several areas where they believe the Commission erred in its conclusions and acted in an arbitrary and capricious manner. This includes the SEC’s conclusion that it lacked authority to adopt a de minimis exception, interpreting the statutory language “did originate” to mean “reason to believe, and including non-manufacturers who contract for the manufacture of products. In addition, the appellants intend to question the merits of providing a shorter transition period for larger companies, since larger companies will have to depend on smaller companies to comply with the rule. The adequacy of the economic analysis and free speech arguments also will be made.

Meanwhile, Ning blogs that a group of 44 investors, including many socially responsible funds, recently sent a letter to Chair White urging the SEC to defend the resource extraction rules that were struck down by the courts. However, the SEC stated that it won’t appeal (as the deadline for appealing was crossed) – the SEC intends to rewrite the rules instead.

Today, Conflict Minerals; Tomorrow, Conflict Wood and Conflict Water?

Loving this news brief from Cooley’s Cydney Posner: According to this article in Compliance Week, “New Breed of Regulations Won’t End With Conflict Minerals,” the Dodd-Frank provisions regarding conflict minerals and related SEC regulations may well just be the beginning of an onslaught of social-activist-driven legislation related to foreign conflicts and sustainability. (Legislation? Congress? Huh? ) Of course Congress is not the only source of legislation; state and international legislators also step in from time to time. Moreover, companies are often pressured by activists directly or indirectly to take action or cease certain conduct.

Below are some of the potential “problem materials” identified in the article that may hit the radar of legislators or regulators:

– ‘Blood Diamonds’: The sale of “blood diamonds” to finance violent rebel groups, particularly in Africa, was the impetus for development of the “Kimberley Process,” which provides conflict-free certifications intended to eliminate the use of blood diamonds. The Clean Diamond Trade Act, signed into law by President Bush in 2003, provided for U.S. participation in the Kimberley Process. However, the article reports that there have been “growing complaints… that the Kimberl[e]y Process is failing in its effort, [and, as a result,] additional regulations might lurk in the future.”
– ‘Death Metal’: Tin mined in Indonesia, particularly the Bangka Island region, “is controversial, not just because of ongoing human rights concerns, but for environmental reasons as well.” Military and police violence in the area “have long been concerns for human rights groups.” In addition, environmental protestors have targeted a number of electronics manufacturers regarding damage done to tropical rainforests from tin mining in the country.
– Palm Oil: Producers of palm oil, which is produced in Indonesia and elsewhere, are also under the gun for “environmental destruction and the abuse of human rights,” including alleged widespread child labor, human trafficking, violence against workers and slavery. Palm oil and its derivatives are found in many products, including cooking oil, soap, lipstick and fuel.
– Wood: According to the article, sustainability issues, such as biodiversity and deforestation, are becoming more prevalent in connection with the use of wood: “[w]here companies get their wood, and how they ensure that proper reforestation programs are in place, is a growing concern.” Furniture manufacturers have been under pressure from activists to bolster use of certified timber and avoid illegal logging.
– Cobalt: The article speculates that cobalt may eventually be added to the list of the four conflict minerals currently regulated under Dodd-Frank. Apparently, the DRC is the largest producer of the world’s cobalt supply, and the Enough Project, concerned regarding unsafe working conditions and child labor, estimates that 60% of that production comes from illegal mines. Cobalt is used as a blue pigment in many paints and is widely used as a component of lithium ion batteries, in tool construction and for artificial joints and limbs.
– Dirty Water: According to a commentator cited in the article, “‘[a] lot of people are talking about water footprints; it is not only about carbon footprints anymore…. Water is the reason for several wars around the world. There isn’t a lot of public reporting about that yet because companies really need to think about it before they announce all the problems they are causing with their water use.'”The article also suggests that, in addition, numerous other physical commodities could easily become subject to this type of regulation, including cotton, leather and some food items.

Poor sourcing practices may also lead to future legislation. For example, poor factory conditions, as illustrated by recent reports of harsh working conditions, including employee suicides in China and the fire at and collapse of a garment factory in Bangladesh, are of grave concern The article reports that “many retailers agreed to sign onto a legally binding European accord that requires retailers fund fire safety and building improvements at the Bangladesh factories they employ. A non-legally-binding effort spearheaded in the U.S. for its companies has been less successful…. Although federal legislation to force an EU type of agreement is unlikely, expect to see shareholder activists push a similar agenda.”

The article speculates that we may also see rules for public companies regarding human trafficking and slavery, based perhaps on the California Transparency in Supply Chains Act, which requires many companies doing business in California to disclose efforts they have taken to eradicate human trafficking and slavery from their direct supply chains for tangible goods offered for sale. The law applies to retail sellers and manufacturers with annual worldwide gross receipts exceeding $100 million that do business in California.

The article suggests that, in light of “the lengthy list of supply chain issues that could eventually spur new regulations, companies may want to leverage their ongoing conflict minerals efforts to gear up for what is to come.” That doesn’t mean, as one commentator noted, buying “a new technology solution for all upcoming legislation…. Instead, especially larger companies, should look to maintain a broader compliance perspective, and conflict minerals demands ‘should be seen as part of the bigger change in the regulatory environment.'” Companies may want to focus on these issues from a larger perspective as questions of risk management.

– Broc Romanek