Elm to be Panelist at SEC Public Roundtable on Conflict Minerals Rule

We are pleased to announce that the U.S. Securities and Exchange Commission (SEC) has selected Lawrence Heim of Elm’s Atlanta office to sit on the expert panel for Panel 2 of their previously announced public roundtable on the proposed conflict minerals regulation on October 18.

Panel 2 will focus on matters the implementation of the rule and conducting related audits, while Panel 1 will review the scope and definitions of the law/rule, along with tracking the supply chain.

The agenda and panelists for the roundtable have been publicly released.

Guest Viewpoint: EICC-GeSI Conflict Minerals Workshop in Brussels

Elm welcomes Michele Bruelhart as a guest blogger.  Michele is the Global Traceability Manager with UL-STR in Burundi and attended the EICC-GeSI Workshop held in Brussels recently.  She provided Elm with her perspective on the meeting, and regional progress on conflict minerals programs/infrastructure.

 

The challenges surrounding supply chain traceability of so called “conflict minerals” continue to be discussed in numerous fora in Europe and the US. Starting with roundtable consultations organized by the World Gold Council, the EICC-GeSI Group and the London Bullion Market Association (LBMA) held their conferences last week in Brussels which will be followed by the launch of a Public-Private Alliance for Responsible Minerals Trade in October and lastly a meeting of the OECD hosted working group on the implementation of the Due Diligence Guidance in November.

Broadly speaking, participants of these meetings appear divided into two groups: those contributing to discussions on the 3Ts (tin, tantalum and tungsten) and those trying to address the issues around gold. For the former, the EICC-GeSI Workshop provided an overview on the latest progress (or lack thereof) since their previous workshop in June of this year. Some of the main points from Brussels are summarized below:

• The EICC-GeSI reporting template for the downstream supply chain is publicly available and has been piloted by a number of companies. While the tool itself was found to be helpful, it does not address the main challenge faced by end-user companies, which are (1) how to reduce the complexity and number of suppliers standing between the end product and the smelter in their supply chains and (2) how to get responses from supplier, investing a reasonable amount of time and resources.
• The hours required to obtain a completed reporting template from all suppliers seem disproportionate to the information sought. Furthermore, the data provided by suppliers is not validated or verified externally. Lastly, the tool merely allows companies to gather information “backwards” for a finished product, rather than “forwards” (i.e., trying to prevent conflict minerals from entering the supply chain).  By the time all the information is collected and compiled, the product will most likely have been sold already, whether smelters used for its production were “conflict-free” or not. Given these limitations, it is not clear if the template truly responds to the needs of companies that are required to report under Section 1502 of the Dodd Frank Act. [Ed. note – this process/timing gap may also create liabilities in the context of representations and warranties made about the nature or status of the material, which could be proven incorrect once all relevant information is available].

• Investing time and resources to gather information from suppliers regarding the smelters used in a company’s supply chain makes sense only if there is a sizeable list of conflict-free smelters that have been approved in the framework of the Conflict Free Smelter Program. So far, this list comprises six tantalum smelters. Assessment protocols for the other metals have been published this summer, though to date no smelters for tin and tungsten or refineries for gold have been approved as “conflict-free”. Despite the progress made in this program and the EICC-GeSI’s repeated assurances that it remains possible for smelters to source from the African Great Lakes region, the requirements defined for smelters to continue purchasing minerals from the Democratic Republic of Congo (DRC) or its neighbors provide a significant disincentive to do so. The assessment protocols list a number of conditions that must be fulfilled for minerals from the Great Lakes region. Among those figure full traceability for the shipment – something that has not been achieved yet for three of the DRC’s four affected provinces – and the implementation of the OECD Due Diligence Guidance. On the latter, it remains to be seen how this criteria should be implemented as the OECD is stressing that its Guidance should be understood as a process over time, whereas a mineral purchase is a punctual transaction. [Ed. note:  As Elm previously reported, OECD has softened its stance on its Guidance.  In addition, EICC CFS audits may not be completed in time for many companies to use them for purposes of fiscal year 2012 SEC compliance].

• In the region itself, progress has been quite significant. The DRC Government is about to make the implementation of the OECD Guidance a requirement for companies bearing administrative sanction, mine site inspections have taken place at over 30 mine sites in North Kivu and the Government expects to be ready to issue regional certificates for its minerals within the ICGLR framework by the end of 2011. ITRI’s tag-and-bag scheme is targeting 75% of the 3Ts from Katanga province to be tagged by the end of this year and the German federal institute BGR has validated 35 mines against its Certified Trading Chains Standard.

Nevertheless, some important issues were not addressed during the Brussels workshop:

• First and foremost, it remains unclear if the Congolese Government has the financial and human capacity to enforce the various rules and regulations that were passed over the last couple of months. In particular as the country is preparing for Presidential elections in November, no concrete plans for the enforcement of recently taken measures were presented, nor does the Government appear to take a clear leadership role in coordinating the various efforts on the ground.
• For the in-region tracing or certification schemes, the monitoring and evaluation process of participating companies is not fully transparent. In the case of the mine visits of the DRC Government, no information is provided on the standards applied to flag a specific mine green, orange or black or the qualifications of the mine inspectors. For BGR’s and ITRI’s certification and traceability schemes, the boundaries between baseline assessments, preparation of participating companies, third party verification and remediation are not clearly defined. The absence of clearly defined tasks may lead to potential conflicts of interest where verifiers could be consulting and auditing the same companies.
• The presentation of Gregory Mthembu-Salter of the United Nations Group of Experts (UN GoE) on the Democratic Republic of Congo painted a rather grim picture of the likelihood to see any of the above schemes being implemented in the Kivu provinces. The security situation in the Kivus renders the implementation of any traceability scheme difficult and the level of due diligence required from buyers in ensuring their purchases do not benefit armed groups appears to be prohibitively high.
• The highly unique aspects of the gold supply chain and its traceability remain unresolved.  There are growing doubts that a viable framework applicable to gold will be available in the near future.

Despite these activities along the entire mineral supply chain there remains much to be done to establish credible systems of assurance in the African Great Lakes region that satisfy the needs of end user companies obliged to report on the origin of their raw materials.

EHS Journal Article on Sustainability, Financial Valuation

Recently, Elm posted a piece discussing comments from Kevin Parker, the CEO of Deutsche Asset Management, an investment firm with three-fourths of US$1 trillion under management.

We expanded that original post for EHS Journal, who just published it.  The expanded version dives deeper into trends in the past decade supporting Parker’s assessment of why capital markets are bullish on carbon-intensive investment opportunities even in light of this era of sustainability.

View the article in its entirety here.

Demo Version of Conflict Minerals Audit, Program Development Tool Now Available

Elm has released a demonstration version of its pioneering Self-Implemented Conflict Minerals Audit Preparation© tool, or SICMAP℠.  The demo contains abridged content, but retains the functionality, pragmatic approach and simplicity of the full version.

“While we originally designed SICMAP℠ to assist companies in preparing for audits, we have seen an unexpected interest in use of the tool as a conflict minerals program development guide/framework”, said Lawrence Heim, Elm’s conflict minerals services leader.  ”The demo version was made available because of the increased demand and interest.”

To request a copy of the demo version, contact Lawrence Heim at lheim@elmgroup.com.

Is Demand for “Absolute Certainty” Fueling Failure of US Conflict Minerals Law, DRC?

Recent reports in the New York Times and Christian Science Monitor (CSM) about the impact of Section 1502 of the Dodd-Frank Act on the Democratic Republic of Congo (DRC) sparked both controversy and debate in the media and in on-line conversations.  The CSM article contains an interview with Eric Kajemba who, according to the CSM, is founder/director of Observatoire Gouvernance et Paix (OGP), an NGO based in Bukavu, and has worked in the minerals trade.  Mr. Kajemba provided insight into DRC’s mining sector in the twelve months since the law’s passage.  Among his more interesting quotes:

… It is true that there is no official embargo on the Congo today, and that the Dodd-Frank law did not call for such an embargo. But the truth is that as soon as the Congolese export ban was lifted, the Electronic Industry Citizenship Coalition (EICC) [an electronics industry body] in the United States imposed a de facto embargo. Traders here only had time to sell their stock and then everything stopped again! Now most of the minerals seem to leak out through smuggling.

… There are a lot of initiatives that have been proposed, but this has added to the confusion. We need one approach. The centres de négoce and tagging are not enough. Tagging is good – but you can end up tagging dirty minerals, as well! There is a whole bunch of work to do. Let’s not confine ourselves to tagging.

… ENOUGH [the US based activist organization most visible/vocal on conflict minerals issues] has hardened its tone. They only show the negative side of artisanal mining here. This one-sidedness of their advocacy has had negative side-effects. No, we know we can’t stop Dodd-Frank, but we need to be aware of these negative consequences – we are not very happy with Global Witness or ENOUGH, but we feel they are very influential, and we are ready to work with them.

Based on our experiences in conflict minerals auditing, we recognize these points, but from a different perspective:  Approaching compliance with the US conflict minerals law as a “cause” (demanding immediate resolution with absolute certainty) is perhaps the most direct reason for the de facto US embargo on DRC sourced minerals, and the breakdown of an economy supporting legitimate sources. 

Why?  The issue’s disturbing basis (systemic human rights atrocities), combined with media coverage and well managed NGO campaigns, drive emotionally-charged demands for zero tolerance and absolute certainty in traceability information and processes.  No such solution exists, and attempts to force-fit a handful of inadequately planned ideas are proving unsuccessful and problematic.  The easiest (and theoretically most certain) solution is for companies to simply stop buying any materials sourced from Central Africa, collapsing the sole legitimate economic support for those most needing it.  This result is a case study in perverse consequences.

Our long-standing position is that the implementation of Dodd-Frank’s conflict minerals mandate should be based on “reasonable assurance” rather than “absolute certainty” in expectations, management processes and auditing.   It is worth pointing out that the language of the law itself mirrors this, as it requires “efforts to determine the mine or location of origin with the greatest possible specificity.” 

Removing expectations of – and pressures related to – achieving perfection will allow pragmatic and compliant solutions to develop quickly, and reduce risks for companies seeking to support legitimate DRC sourced materials helping those in need.

An Inconvenient Reality For Environmental/Sustainability Professionals?

For years, those of us in the environmental/sustainability profession have sought credible ways and metrics for quantifying the economic value of our efforts, activities and programs.  A myriad of studies completed dating back to the late 1980s attempt to demonstrate “environmental value”.  Most of these studies have shown rather tenuous linkages or used meaningless metrics.

Interestingly, most of these studies link to equity markets – i.e., stock prices.  Maybe because stock prices grab headlines, are tied to compensation or are the target to which Boards and senior executive generally manage.

The problem is that environmental/sustainability matters don’t fit into this model, either because they tend not to be financially material, or they don’t develop economic certainty within the “current quarter” myopia of corporate management, financial markets and analysts.

A recent article on the topic was published in The International News.  The article includes an interview with Kevin Parker, CEO of Deutsche Asset Management (DeAM) on the subject of how capital markets currently view environmental/sustainability risks.  DeAM manages over US$775 billion in assets.

With simplicity, clarity and unquestionable credibility from the financial market viewpoint, Parker made key points in the article and interview:

• Bond markets are poised to punish polluting companies in the aftermath of the Macondo oil spill and Fukushima nuclear crisis.
• “The process of re-pricing carbon and environmental risk has begun, because these two events were catastrophic.”
• By contrast, shorter-term equity and commodity markets have continued to chase high-carbon opportunities, including voracious emerging market demand for coal.
• But investors in longer-term debt including bonds will increasingly avoid unsustainable companies … an inexorable trend that will push up their borrowing costs.
• “What this boils down to be risk in capital markets, and capital markets know how to price risk once they understand it.”

Pension investment managers realized this years ago since they emphasize stability and a long-term investment horizon.

But there seems to be far less recognition of this by environmental/sustainability practitioners, as the amount of studies, white papers and pseudo-financial metrics is mounting, with continued emphasis on the equities side of capital markets.  Perhaps the driving forces for this are general economic pressures facing companies are pushing staff to find ways to justify their existence and cost, consultants are trying to come up with that elusive short-term ROI metric for the cost of their services to clients and much of the HSE/sustainability media are vying for limited attention on the part of their readership.

Given Parker’s comments – and the lackluster historical success of valuation of environmental/sustainability matters in the context of stock prices – perhaps it is time to redirect our efforts at finding relevant and credible metrics.

In limited circumstances, financial value of environmental/sustainability initiatives can manifest in material and short-term impacts.  Those instances give practitioners hope of riding those coattails.  But generally, the reality is a little inconvenient.

US State Department Issues Conflict Minerals Traceability Statement

Last Friday, the US State Department issued its statement on conflict minerals supply chain traceability.  Section 1502 of the Dodd-Frank Act requires that the State Department – in parallel with the SEC – provide guidance on due diligence activities to companies.

The Department stated that

… it is critical that companies begin now to perform meaningful due diligence with respect to conflict minerals. To this end, companies should begin immediately to structure their supply chain relationships in a responsible and productive manner to encourage legitimate, conflict-free trade, including conflict-free minerals sourced from the DRC and the Great Lakes region. Doing so will facilitate useful disclosures under Section 1502, as well as effective responses to any discovery of benefit to armed groups.

The Department specifically endorses the guidance issued by the Organization for Economic Cooperation and Development (OECD) and encourages companies to draw upon this guidance as they establish their due diligence practices. We encourage companies, whether or not they are subject to the Section 1502 disclosure requirement, that are within the supply chain of these minerals to exercise due diligence based on the OECD guidance and framework as a means of responding to requests from subject suppliers and customers.

Companies should no longer be in a “wait and see” mode.  Basic planning, assessment and program development can – and should – begin now.

If nothing more, companies should evaluate whether the OECD Guidance is the appropriate reference point.  As we pointed out in an earlier post, that guidance contains a number of pitfalls and auditor impairments that may deter its use by many companies.

Voluntary Environmental Management Standard Turns Into Third Party Whistleblower

It is not uncommon for EHS auditors to be asked (or ask themselves) “If you find a noncompliance during your audit, do you report it to the regulators?”

The answer depends on the company and audit program, but a recent news item caught our attention due to a variation on the theme.

We have no information other than what is publicly available here, but it appears that an organization managing a voluntary electronic waste management certification program found alleged significant non-conformities at a specific company seeking certification.  As a result, the organization declined to issue its certification to that company.

So far, so good, but the story doesn’t end there…

In its declination letter to the company, the organization states:

Further, there is substantial reason to believe that such exports may violate Public Act 095-0959 (Electronic Products Recycling and Reuse Act, recycler requirements) of the State of Illinois, the Federal CRT Rule, (40 CFR Parts 9, 260, 261, 271; Cathode Ray Tubes; Final Rule) as well as the waste importation laws of Hong Kong/China. Further, while it is not our policy to disclose the results of certifying body audits, we can state that the audit only further substantiated all of our concerns.

In an apparent contradiction to the “policy” referred to in the above statement, the organization’s cc’d “Selected news media”, the Illinois State Environmental Protection Agency and the US Environmental Protection Agency Enforcement on its letter, which can be seen below the signature block.

It is certainly possible that the company themselves had made prior disclosure to the regulators on this issue.  But this event may cause companies pursuing voluntary programs/certifications to carefully consider how the company and auditor will manage regulatory non-compliances that are found or alleged in the course of related audit activities.

UPDATE:  Reports today indicate that the company is taking legal action against the certifying organization stating that the allegations on which the organization based its decision – as well as its disclosure to the press and regulators – are false.

Guest Perspective: Is the Dodd-Frank Act Conflict Minerals requirement the next Proposition 65?

Ed. note:  We are fortunate to count Mark Schaffer as an Elm Affiliate.  Mark is located in Austin, Texas and runs Schaffer Environmental, providing a range of supply chain, sustainability and product content consulting support to the computer, technology and electronics industries.  Mark submitted the following piece on conflict minerals from his perspective on other product content matters.

The Dodd-Frank Act requires companies regulated by the Securities and Exchange Commission (SEC) to report whether their products contain conflict minerals from the Democratic Republic of the Congo (DRC) and other nearby countries.  These conflict minerals are defined as cassiterite, columbite-tantalite, gold, wolframite and their derivatives (tin, tantalum and tungsten) – though, in the future, more minerals may be added to this list.

These materials are found in a variety of consumer products that we love to use everyday, from computers to cell phones, golf clubs to fishing weights.  So, to the purchaser of these consumer products, what is the real impact of whether the product contains one of these minerals sourced from the Congo?

Currently, the exact reporting requirements are still not established.  The law requires manufacturers sourcing “conflict minerals” to include information on their sourcing in their websites.  The SEC regulations, scheduled to be finalized in third or fourth quarter 2011, will clarify what disclosures will be required within the financial reports to SEC.  Further sourcing disclosure may even end up on the product or the product packaging.

Granted, business-to-business contracts, relationships and purchasing requirements are already being impacted by the supply chain traceability mandates – but what might this all mean to the consumer and the choices they make?

At best, the disclosures will be an awareness point for consumers, but will it truly affect their purchase of the product?  Unless there is a price differential between products, only the most conscientious consumers will be deterred from buying and using products containing DRC-sourced materials.

In addition, consumer confusion is likely to result where companies use/disclose “Non-conflict DRC materials”.  This is material that originates from the conflict areas (DRC and adjoining countries) but is obtained from a legitimate source verified as not funding or contributing to the region’s armed conflict and human right violations.

In a similar fashion, California Proposition 65 requires a notification of the presence of substances that have been determined to be cancer causing and/or damaging to the reproductive system by the State of California.  A warning is often seen printed on the packaging of products or on tags and labels of products indicating the presence of materials in the product that could cause cancer, birth defects or other reproductive harm.

Even this type of warning does not deter the consumer from purchasing the product.  It is likely that a conflict-warning label, if that became a requirement, would have similar negligible effect in product sales.  There will be even less of a measurable impact on sales/revenue if the warning is limited to disclosures within a corporate Form 10-K report.  Placement in a 10-K will raise visibility to investors in the company producing those products but unless there is a clear impact on the bottom-line profits or revenue, will that be enough incentive to change sourcing practices?

The strength of a “notification” regulation lies in a company’s desire to avoid “label shame.”  Manufacturers of products covered by Prop 65 have made changes to the materials they use such that their products no longer need the warning label.   So, even though not all consumers changed their purchasing habits due to the presence of those warnings, manufacturers worked (and still work) to replace those materials with safer alternatives.  The Dodd-Frank Act may ultimately have similar effect in transforming the material choices and sourcing.

At the same time, however, there is growing evidence of consumer “label fatigue,” indicating that consumers are paying less attention to these labels or feel they are not credible, especially where the labels – and their form/content – are not mandated by law.  This is perhaps most prevalent in “green” product labels and certifications.

Recent history tells us that the Dodd-Frank conflict minerals requirements may indeed promote change, though that change is slower than would occur from an outright restriction or ban on the use of those materials.  For example, the most recent impactful “banning” restriction, the EU Restriction on Hazardous Substances (RoHS) went into effect July 1, 2006 after many years of development.  Due to the demand by the electronics industry for parts that could meet the RoHS requirements by that date, the supply chain transformed rapidly using alternative materials and techniques.

 

 

Elm Launches Groundbreaking Low Cost Conflict Minerals Audit Preparation Tool

The Elm Consulting Group International LLC today announces a groundbreaking cost effective tool to support companies preparing for conflict minerals traceability audits or customer inquiries.

The delay in SEC’s final rule triggered many questions from companies about planning and pre-audit preparation.  This led us to a solution that is valuable in almost any foreseeable final regulation scope/content and companies planning responses to customer inquiries – yet significantly reduces costs during this period of uncertainty.

Elm’s Self-Implemented Conflict Minerals Audit Preparation^© (SICMAP℠) is conceptually similar to a self-audit checklist.  SICMAP℠ is a spreadsheet tool that maximizes the use of internal company staff for cost reduction and implementation flexibility to develop and review conflict minerals programs in advance of third party auditing.

SICMAP℠ focuses on basic program elements equally relevant to companies responding to customer inquiries/procurement requirements and those working to comply with the upcoming SEC regulations on conflict minerals.   Successive and more complex tasks – for both program development and audit preparation – are identified based on initial SICMAP℠ findings, lessons learned from working through the SICMAP℠ process, and the final regulatory requirements once they are known.  The final rule, when published, will clarify the level of detail for some of the efforts.

Screenshots (which can be enlarged by clicking on them) show some of the features and functionality in SICMAP℠ include:

• “At a glance” color-coding indicates progress/status of both program development and audit preparation
• Live links to reference materials on the internet
• Summaries of language from the U.S. legislation (which will not be changed by SEC’s final regulations)
• Step-by-step pragmatic guidance on specific program elements
• Highlights of emerging international initiatives in comparison/contrast to SEC audit standards

Sample Page Showing Detailed Guidance

Topics covered in an intuitive and pragmatic way include:

• Initial scoping
• Reasonable assurance and representative sampling concepts reflecting SEC auditor standards
• Information management systems
• Internal controls
• Supply chain mapping
• Communications planning and content
• Scrap materials – special definitions and challenges in traceability efforts
• Considerations in selecting an auditor and preparing for the site visit

Summary Tracking Page With Color Coding. This image shows covered topic tabs along the bottom.

The tool is based on Elm’s experience as one of four firms worldwide that have completed conflict minerals traceability independent audits. Elm’s tantalum traceability audits in 2010 resulted in the first ever “Conflict-Free Smelter” designation^*, covering sites in the US and Japan.

We continue to recommend that companies move forward with planning activities, but defer third party audits until planning is substantially complete and the SEC regulations are final.  As with almost any new management program, a formal third party audit should be the last step of the implementation process – not the first.

SICMAP℠ will be commercially available beginning June 6, but feel free to contact us beforehand with questions.

* Issued by the industry association sponsoring the audits.  The Conflict Free Smelter (CFS) program is emerging as the leading conflict minerals third party certification program for smelters by the electronics industry.