Since its passage in July 2010, the Dodd-Frank Act has gotten a lot of attention, mostly for its sweeping new regulations affecting the financial industry. But buried in all those pages, in Section 1502 to be exact, is also a small provision aimed at addressing the problem of conflict minerals originating from the Democratic Republic of Congo (DRC). Along with requiring the US Secretary of State to develop a strategy to address the issue, Dodd-Frank requires companies under the jurisdiction of the SEC to report annually on whether they are using minerals from the DRC or its nine immediate neighbors. All companies must also report on the due diligence they have undertaken to verify their supply chain and avoid tainted metals. The SEC has until April 2011 to develop regulations to carry out this mandate.
In December 2010, MSCI ESG Research published an Industry Report on makers of semiconductors and related equipment. Along with other key ESG metrics, we looked at how the 34 firms in this space managed their supply chains. Our analysis included, in the wake of Dodd-Frank, an assessment of company efforts to keep conflict minerals out of their products. We found a wide variation in supply chain-related ESG risk exposure between leaders and laggards; click here to get access to the full report.
The Metal Equivalent of Blood Diamonds
Conflict minerals are the metal equivalent of blood diamonds: they are mined illegally in conflict zones, and revenue from their sales fuels an ongoing civil war. Conflict in the DRC has been marked by human rights violations including forced labor, child soldier conscription, and widespread sexual violence against women and girls.
The four primary conflict metals are tin, tungsten, tantalum, and gold (the first three sometimes also referred to with the names of their ores, respectively cassiterite, wolframite, and columbite–tantalite, sometimes called coltan). While coltan reserves also exist in Australia, Brazil, and Canada, the DRC’s coltan reserves are thought to be among the world’s largest.
Though the quantities involved are small, these metals are widely used by electronics manufacturers throughout the world. Tantalum is a key material for capacitors, tin solder is used in many electronics, and tungsten is used for the vibrate feature of devices like cell phones. Gold is often used in electrical connectors.
Industry Responses to Human Rights Advocacy
Human rights advocacy organizations such as the Enough Project and makeITfair have been pressing electronics companies on the issue of conflict minerals for years. Major firms like Dell, Intel, Hewlett-Packard, and others have been involved in efforts by the Electronics Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI) to better manage the metals supply chain.
EICC and GeSI pre-date Dodd-Frank, but with the signing of the bill, companies that previously ignored the conflict mineral issue will be forced to address it.
Section 1502 Requires Audited Disclosure of Metals Sourcing
Last month, the Securities and Exchange Commission revealed the first draft of the proposed rules in Dodd-Frank’s Section 1502. These would require any company that files reports with the SEC to disclose if they use conflict minerals from the DRC or its neighbors. The rules also require a certified independent audit of an annual “Conflict Minerals Report” on each firm’s due diligence of their sourcing, and the “chain of custody” of their minerals.
The biggest challenge posed by Dodd-Frank on this issue is that companies now have to establish reliable chain of custody documentation, from mine to device. An industry-wide effort will be required to accomplish this.
Requirements to Disclose Will Trickle Down
Although Dodd-Frank only applies to companies traded on major US stock exchanges, industry associations expect that its requirements will spread rapidly throughout the supply chain due to the globalized nature of the electronics industry. Although the maker of a microprocessor might not be traded on a U.S. exchange, products that contain that chip are probably sold by companies that are. And so even though the SEC has yet to issue Section 1502 regulations, electronics companies have begun to take action.
In research for our December 2010 sector report, we found that firms in the semiconductor industry are responding in very different ways. Some have quietly added new statements to their websites. Others have posted no public statement on the issue, but have added language about conflict mineral avoidance to their supplier contracts. And firms that have already shown advocacy and leadership on custody certification schemes may have an advantage in the marketplace, as their competitors scramble to catch up. Conversely, late adopters may “free ride” on certification programs that they didn’t pay to develop. The cost and complexity of compliance could also push smaller players out of the metals supply chain.
Human Rights Issues at Both Ends of Supply Chain
There could be positive consequences if responsible sourcing drives up the cost of these metals. Obsolete electronics are a huge and toxic part of the global waste stream. More expensive metals could make recycling of old devices more lucrative, which would seem to bring environmental benefits. But as noted in an August 2010 ESG Insight article, the scavenging of old electronics is a toxic and dangerous task that is often performed by children in the developing world. Any effort to improve the human conditions at the front of the electronics supply chain must address the rights of people at the other end, as well.