Corporate social responsibility (CSR) policies that promote good citizenship are being implemented or revised at a record pace. In response to concerns about labor exploitation in the developing world, many companies have joined the Ethical Trade Initiative (ETI), which has established corporate codes of practice implementing human rights, ethical labor practices and environmental protection standards. Many also have adopted the United Nations Global Compact “ten universally accepted principles in the areas of human rights, labor, environment and anti-corruption.”
High on the CSR priority list for SEC-listed companies that use conflict minerals “in the functionality of production” of a manufactured product is developing a compliance program that will meet the requirements of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Due from the SEC within the next few weeks, the final rule will have a direct impact on reporting requirements for about half of all publicly traded companies in the United States, mandating them to disclose in 10-K, 20-F, and 40-F filings whether they manufacture products containing conflict minerals (specified as gold, wolframite, casserite, columbite-tantalite and their derivative metals, which include tin, tungsten, and tantalum, that are mined in the DCR or its adjoining countries). These metals are used in a broad array of products, including electronics, jewelry, tools, engines, medical equipment, chemicals, packaging, etc. And although the regulation technically applies to public companies only, it will have a significant bearing on any company anywhere in the world, public or private that is within the public company’s supply chain.
Under the rule as proposed, among other requirements, the affected SEC-listed companies must conduct certain due diligence, as outlined below.
- Determine if conflict minerals/metals are used to make their products.
- Determine if the metals originated in the DRC or in neighboring countries. If they did not, a report must be issued on how the metals’ origins were determined.
- If the metals were from DRC or adjoining countries, if the source is unknown or if it is from scrap or recycled sources, a supply chain due diligence to determine the source(s) must be performed and the results provided in an independently audited report.
The rule is expected to require the above-noted first and second steps regardless of the metals’ origin. The third step, i.e., the disclosure of the products manufactured and facilities where DRC materials may have been used, etc. must be completed only if the DRC is identified as a source or if the source cannot be determined. If applicable, in addition to specific annual report disclosures and the inclusion of a conflict minerals report as an exhibit, the companies will have to indicate on their websites whether or not they use conflict minerals in their products or in those contracted to be manufactured on their behalf.
Of course, this Dodd-Frank provision is not the only regulatory effort that addresses the elimination of child and forced labor, slavery, and human trafficking within supply chains. Public pressures over these atrocities have led to related policymaking within U.S. local and state governments, and around the world. For example, in 2011, California enacted SB 861 which requires issuers that do business with the state to fulfill the public reporting obligations outlined in the upcoming SEC rules. Issuers that fail to meet these obligations will be prohibited from seeking procurement contracts with the state. In Maryland, a similar “conflict minerals” law under SB 551 will become effective October 1, 2012. Rhode Island and Massachusetts are considering parallel legislation.
Other U.S. efforts include California’s SB 657, known as the California Transparency in Supply Chains Act, which effective January 1, 2012, mandates retail sellers and manufacturers doing business in California with annual gross receipts exceeding $100 million to conspicuously and clearly disclose their efforts and policies for ensuring that their supply chains are free from human trafficking and slavery. On a municipal level, the City of Pittsburgh calls on companies from all sectors to favor in their electronics purchasing decisions products that have been verified as being free of conflict minerals. And among several major worldwide endeavors, is the European Commission’s support of the United Nations and Organization for Economic and Cooperation Development (OECD) due diligence guidelines and recommendations for responsible supply chain management.
Strong corporate responsibility policies are here to stay. A 2011 U.S. State Department press release urges companies to “…begin to exercise due diligence immediately in order to ensure a viable and conflict free supply chain…”