Conflict Minerals and Electronics Sourcing | 12th Apr 2011
What are conflict minerals?
Conflict minerals are a class of minerals which are mined in conditions of armed conflict. Typically, in these armed conflicts there are human rights abuses, including forced labor in mining. The area where this has most notably been reported is the Eastern region of the Democratic Republic of the Congo. In addition to horrible conditions, some of the profits from the sale of these minerals typically finance continued fighting and control of the mines.
The minerals that are in question here are cassiterite, columbite-tantalite, gold, wolframite, or their derivatives. It sounds very exotic, but actually what we are really talking about are tin, tantalum, gold and tungsten. These minerals are essential for many products in the electronics and other industries – everything from jewelry, cell phones to jet engines.
What are the drivers and challenges of these conflict minerals?
The Dodd–Frank Wall Street Reform and Consumer Protection Act that was adopted recently required the Securities and Exchange Commission (SEC) to set up disclosure and reporting rules for minerals mined in the Democratic Republic of Congo (DRC), as well as surrounding countries including Rwanda and Burundi.
The SEC issued these proposed reporting rules December 5, 2010. It has caused a bit of a scramble in the electronics industry because basically all companies are now required to disclose annually, whether or not they use conflict minerals that are necessary to the production and/or functionality of a product that they either manufacture or contract to be manufactured, and that originate from the DRC or adjoining countries.
Therefore, customers particularly in the electronics industry, as well as NGOs, are putting a lot of pressure right now on companies to disclose the source of tin, gold, tungsten, tantalum, in the minerals that they use in their products.
Are there any specific reporting requirements for the Dodd–Frank Wall Street Reform and Consumer Protection Act?
Yes, it is quite onerous actually. The reporting requirements are based on section 1502 of Dodd-Frank. They apply to all companies trading on a major stock exchange. If you are not a publicly traded company they would not apply to you.
Such companies need to establish whether any of their products contain any of these pre-defined conflict minerals in theory. If they do, they need to report whether any of those minerals come from the conflict minerals area, which is the DRC and surrounding areas.
An exercise in due diligence on the source and chain of custody of such materials is required. This is all completely new for the electronics industry. There have been some efforts in the past in the mineral trading industries to do some traceability. However, this is the first time that a buying industry of metals is required by law to identify the source and to be able to get a chain of custody of such metals.
Companies are required to describe the products manufactured that are not conflict free and disclose it. Clearly, as soon as they do that there will be pressure on the companies to make the products “conflict free.” They are required to disclose the entity that conducts an independent audit of their systems. They are required to disclose facilities and the specific country of origin that they identify that use and process conflict minerals. They also have to report what efforts they have made to determine from which mines and locations the minerals for their products come.
It is quite an extensive set of reporting requirements that are basically already in effect.
What about the SCC guidelines?
There are Security and Exchange Commission Guidelines (SEC) which have been issued. The comment period for those has just finished. They basically follow in a very similar manner the reporting requirements described earlier. There are some additional details. For example, referencing nationally or internationally recognized standards or guidance for due diligence.
This is the big question for a lot of our clients right now. The due diligence question was a big subject of debate under when the RoHS directive was adopted a few years ago. It is a big debate right now under conflict minerals. The question revolves around what constitutes nationally or internationally acceptable due diligence in this area.
A lot of people are initially just saying “look this is impossible, the whole metals industry is a series of brokers and the brokers have no economic interest in disclosing their sources.”
Some people are saying this is going to be very challenging and all the industry can do is make a paper effort to comply. Real compliance is going to be elusive for many years. Others are out there trying to solve this and crack the nut, uncovering smelters and doing other things. The electronics industry citizenship coalition (EICC) is working on industry-wide initiatives with its membership and is helping to establish international standards as well. A lot of standards development is currently underway.
What other international guidelines should people be aware of?
The other international guidelines outside of the United States, in addition to Dodd-Frank and these SEC guidelines being developed, are OECD guidelines. This is an international economic cooperation organization. They have also adopted conflict mineral management and mitigation guidelines that include requirements or recommendations to establish strong company management systems in this area, to identify and assess risk in the supply chain of non-compliance or of conflict minerals, to design and implement a strategy to respond to those risks identified, carry out independent third-party audits and supply chain due diligence, and identify points in the supply chain at the discretion of the buyers to figure out which points are appropriate. Finally, report publicly on the supply chain due diligence undertaken.
These are very general guidelines that are not binding, but they do constitute an emerging international standard which is significant in itself, in addition to the fact that SEC guidelines explicitly refers companies to use international guidelines when conducting due diligence.
This is one of the more challenging industry-wide part level and supplier related compliance issues that the electronics industry has faced in several years. Companies are really wrestling with it right now. It is a bit early to say exactly how much impact this will have in the electronics industry. There are certainly concerns and there have been price disruptions on key minerals such as tantalum#, which are in short supply to begin with. There is concern whether or not other impacts will be felt, or whether this is also the beginning of further overall demands for supply chain transparency in the electronics industry.
It is certainly quite a significant development and people are concerned about the emerging regulatory requirements in this industry.
About Chris Hazen
Chris Hazen has been in the environmental consulting field since the early 1990s. He spent about half of his career in Asia, primarily in China – Hong Kong and Shanghai. The other half of his career was spent in Silicon Valley, working very closely with some of the leading electronics companies in the world to define environmental risks and opportunities for their companies and help them to manage them.
Christopher Hazen, Director (Asia)
WSP Environment & Energy