New Economic Analysis of Conflict Minerals Rule Implementation from Tulane University Law School’s Payson Center for International Development

A new study on the economic impact of SEC proposed conflict minerals rule was released earlier this week by Tulane University.  The study evaluated cost estimates from SEC , National Association of Manufacturers (NAM) and IPC and provides what they refer to as a “Third Economic Impact Model”.

The study is available free of charge here.

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.

Elm to Present in Conflict Minerals Webinar

Elm will be a featured presenter in a free webinar on Wednesday, October 12, 2011 10:00 AM – 11:00 AM CDT sponsored by MetalMiner and Aravo.

Lisa Reisman, Editor of MetalMiner, will provide opening remarks and then pass the program to Lawrence M. Heim, who leads the conflict minerals practice and is director with The Elm Consulting Group International LLC. Lawrence will provide background around the legislation and the current status of regulations and related initiatives, as well as key definitions and concepts. He will then move into discussing current challenges that leading organizations face and considerations they can take to successfully integrate the legislation into their sourcing practices.

Robert Shecterle of Aravo will make closing remarks before a 15-minute Q&A concludes the session.

Register for this free and informative session here.

New Conflict Minerals FAQ Available

We field many phone calls asking us about the US conflict mineral law and associated requirements.  As a result, we developed a Frequently Asked Questions (FAQ) document that provides concise information on the most common questions we receive.

We hope you find this document useful.  We welcome any comments or suggestions you may have on the document or its content.

Elm Conflict Minerals FAQ

Revision to SICMAP℠ Tool for Conflict Minerals, OECD Incorporates California Supply Chain Law

The Elm Consulting Group International LLC has released a new revision to the Self Implemented Conflict Minerals Audit Preparation Tool.  The update, Revision 1.33, incorporates

• Minor changes in response to feedback obtained from the late June EICC Extractives Supply Chain Workshop VI in Washington DC;
• Further clarifications on the OECD framework, its relationship to SICMAP℠  and SEC auditor standards; and
• Related elements of California Transparency in Supply Chains Act of 2010.

Lawrence M. Heim, CPEA, is leading the firm’s conflict minerals services and SICMAP℠ development:

In our discussions with various companies and workshop attendees, we obtained feedback on a few minor changes and clarifications to improve the tool.  In addition, we decided to incorporate the new California law as there are many similarities between those mandates and the conflict minerals requirements.

The video introduction and overview of SICMAP℠ can be viewed here.

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 Featured in iPhoneLife Magazine for iPad Use

The new issue of iPhoneLife magazine highlights Elm’s use of iPads for environmental, health and safety audits in a short feature.

Unfortunately, the article indicates we use them for energy audits, which is not the case.  We have contacted the editor to inform them of their error.

Interestingly enough, the current issue also reviews various notetaking apps for anyone interested in reading up on the subject.

Elm, Conflict Minerals Cited in Report to US Department of Labor on Ethical, Sustainable Agricultural Supply Chain Systems

A significant report was published today by the Payson Center for International Development and Technology Transfer at Tulane University for the US Department of Labor.  The report, titled Oversight of Public and Private Initiatives to Eliminate the Worst Forms of Child Labor in the Cocoa Sector in Côte d’Ivoire and Ghana, March 31, 2011, reviews the progress made under the industry’s voluntary International Cocoa Initiative (ICI) created in 2002 to identify, monitor and prevent child labor in the cocoa farms of Ghana and the Ivory Coast.

The study provides the following conclusions on the effectiveness and validity of the cocoa industry’s self regulation for supply chain traceability:

… we conclude that Industry’s “certification” model does not yet conform with ISO 65 standards of certification. Industry has only partly established bodies with the appropriate mandate, and has not finalized the required processes to develop a “credible” certification system.

… These mixed results seen over the past decade of Industry self-regulation leave unanswered the question of “is Industry able to self-regulate in the absence of enforceable legal repercussions.”

The authors looked to potential analogs or solutions, discussing the US Conflict Minerals Law enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  In doing so, the study included excerpts from Elm’s February 21, 2011 article on the Conflict Minerals Law published at MetalMiner.com, and continued:

… this type of regulation has the potential to tangibly address human rights concerns surrounding conflict minerals and invites the business community to become part of the solution. In light of the protracted human rights issues that also persist in the cocoa sectors of Côte d’Ivoire and Ghana, this type of approach may be considered appropriate for the cocoa/chocolate industry as well.

The study’s conclusions and recommendations stated:

… mandated disclosure [under the US Conflict Minerals Law], if applied to the cocoa industry, would have the potential to encourage more due diligence and transparent sourcing on the part of companies operating in the cocoa market … in light of the mixed results seen with industry self- regulation over the past decade a legal framework may be more effective in holding companies accountable to enforce the guidelines. [emphasis in original]

 

SEC Provides Preview of April 15 Final Rules on Conflict Minerals Supply Chain Traceability

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FOR AN UPDATE ON SEC’S DELAY OF THE FINAL RULE, CLICK HERE.

As veterans of regulatory research, we are accustomed to spending hours poring over a plethora of governmental regulations, background documents, guidance and other reports.  Our work with conflict minerals supply chain traceability and SEC’s regulations has been no different.  In addition to having completed such audits, we have read and re-read

• the proposed SEC regulation and its preamble;
• the OECD Due Diligence Guidance for Responsible Supply Chains of Materials from Conflict-Affected and High Risk Areas, and the Supplement on Tin, Tantalum and Tungsten;
• the ISO 19011 standard;
• comments submitted to the SEC on the proposed regulation (approximately 700 total comments were submitted, of which 433 were standard form letters.  Of the remaining 270, approximately 75% provide substantive content);
• hundreds of relevant media reports, legal advisories and NGO documents;
• various auditor standards under SEC, including Government Accounting Office Government Accounting Standards GAO-07-731G, AICPA Statements on Standards for Attestation Engagements (SSAEs); and
• industry commentary and alerts on the topic.

Yesterday, we completed an analysis of the 263-page report from the Boston Consulting Group (BCG) titled US Securities and Exchange Commission Organizational Study and ReformMarch 10, 2011 to see what insight might be hidden therein on the upcoming final conflict minerals regulations.

BCG’s report establishes the ultimate context for the other documents which, in turn, essentially provides a preview of the final rule.  Our opinion is that SEC will meet the statutory deadline of April 15 with a rule that will:

• clarify procedural aspects, such as applicable audit standards (i.e., GAO-07-731G, AICPA SSAE, etc), the need for annual audits and the question of “furnishing” versus “filing” the report;
• establish a materiality threshold for conflict minerals content in products;
• specifically exclude retailers and contract manufacturing arrangements under certain conditions;
• defer most substantive compliance requirements to allow further study; and
• defer the initial reporting compliance date.

By doing this, SEC can meet competing priorities with which it is currently struggling.  Such a rule would appease the regulated community and buy SEC time, while allowing SEC to claim victory in meeting the legal deadline.  During the deferral period, we expect SEC will implement its overarching organizational restructuring and internal risk assessment processes spelled out in the BCG report, then come to a final position on Section 1502(b).

What does this mean for companies impacted by the due diligence/audit requirements?

We have written and directly counseled clients and others on business risks associated with completing the audits in advance of the final SEC rules.  As we see it, the risks are somewhat different depending on your company:

• Companies directly regulated by SEC. Audits conducted “pre-rule” risk being non-compliant with the final SEC requirements.  Early adopters may be faced with paying for audits a second time to achieve compliance.  Reputational damage is possible where companies publicize or market the results of audits that are non-conforming to the final rule.  At an extreme, companies could face lawsuits over nonconforming audits in a manner similar to lawsuits filed for non-GAAP financial reporting or certain corporate social responsibility reports.
• Privately-held companies responding to customer demands. For these companies, the risk is not compliance oriented, but centers on unnecessary costs and reputational damage.  Where customers demand this information of suppliers, the demands must be met.  The question becomes is SEC compliance driving the customer’s request?  If so, (assuming our prediction is correct) the customer’s need may not be so urgent or burdensome as originally thought; and early adopter efforts on the supplier’s part may be overkill/overly expensive in light of a rule deferral period.  Legal action from customers who rely on the “pre-rule” audit information and reputational damage are both possible where companies publicize or market the results of audits that are non-conforming to the final rule.  Suppliers would be wise to work with customers to find an acceptable balance between the drivers, timing, scope and cost.

Companies want to be proactive and responsible corporate citizens.  But we live in a command-and-control legal setting – combined with third-party lawsuits and governmental performance metrics that incentivize fines, penalties/aggressive enforcement.  Early action in a time of regulatory uncertainty carries risk.  In US corporate sustainability activities, this is perhaps most vividly demonstrated by last year’s complete collapse of the voluntary US GHG emissions trading market - specifically established in advance of US legal requirements on GHGs to create “first mover advantage”.

Elm continues to recommend that companies move forward with implementation evaluation, scoping and planning activities, but wait for SEC’s rule to be finalized before conducting audits.