In February, Apple was the first company to disclose how many of its suppliers use “conflict minerals,” or tin, tungsten, tantalum, and gold that may be sourced from and contribute to armed conflict in the regions around the Democratic Republic of the Congo (DRC). Apple also reported how many smelters originally processed the minerals, indicating its ability to trace them in its supply chain. Apple, along with other companies, including HP, Dell, and Intel, have announced strict policies to eliminate minerals that are not certified as “conflict free” from their supply chains.
While arguments prevail about whether these efforts will help end the ongoing conflict in the DRC, they do mark progress. These companies are standing up against any contribution their products may make toward conflict and associated human rights abuses.
Businesses are making changes in part to prepare for imminent legislation. Sometime between August and December, the U.S. Securities and Exchange Commission (SEC) will issue regulations requiring public companies that use these four minerals to report on the minerals’ country of origin. If companies source minerals from the DRC or its neighbors, such as Rwanda, Burundi, and Angola, the SEC will require them to demonstrate “due diligence” on sourcing.
The SEC has not, however, defined what “due diligence” should entail, leaving many open questions:
- What does it mean for companies to manage their supply chain in a responsible manner?
- What will stakeholders expect regarding how companies track the minerals’ country of origin, the management systems they use, how they audit suppliers, and what kind of information companies that “smelt” or produce the minerals traded provide?
- What are the different responsibilities of companies at the end of the supply chain, such as brands and retailers, versus those that are closer to the ground?
Defining ‘Due Diligence’
In December 2010, the Organization for Economic Cooperation and Development (OECD) published guidance on what constitutes responsible management of minerals sourced from the areas around the DRC. The guidance—endorsed by multiple parties, including 42 OECD countries, the UN Security Council, and the U.S. State Department—is the most widely recognized standard for due diligence on conflict minerals.
Over the next year, the OECD will be conducting a pilot study to implement the guidelines with upstream companies (those from mine to smelter or refinery) and downstream companies (those from smelter or refinery to the brands or retailers). BSR will be supporting the OECD on the work with downstream companies. Eventually, the OECD will publish the lessons learned, but in the meantime, companies can follow the guidelines’ five-step framework for implementation:
- Establish strong management systems, including adopting and communicating to suppliers about supply chain policies on the minerals and providing mechanisms for due diligence, transparency, and grievances.
- Identify and assess risk through supply chain mapping that examines whether the company directly or indirectly supports armed groups in the region.
- Design and implement a strategy to respond to any identified risks.
- Conduct an independent audit of supply chain due diligence to ensure that identified risks are reduced.
- Report on supply chain due diligence.
The OECD guidance outlines specific recommendations for upstream and downstream companies, recognizing that some processes are very different for companies on the ground versus those at the end of the supply chain. For both types of companies, however, collective action is encouraged.
The most notable difference in upstream companies’ responsibilities is how they mitigate risks when their operations are in conflict areas. By establishing an on-the-ground team, companies can track specific information on the mine of origin, quantity of minerals purchased, date of purchase, methods of extraction, trading locations, intermediaries used to transport the minerals, and the actual transportation routes used. The traceability schemes under development in the region have adopted the OECD’s guidelines and will serve as a foundation for identifying conflict-free sources of minerals.
To do this work, the OECD recommends that companies work together and with local organizations to ensure the accuracy of their findings. The OECD also notes that doing this will be imperative for identifying reliable assessors and supporting community-driven monitoring.
For upstream companies, the OECD also recommends full transparency of payments, including government taxes, fees, and royalties; illegal taxation or extortion by security forces; and any payments that might have been used as bribes related to fraudulent claims over mineral origins.
For downstream companies, due diligence is mostly about ensuring the transparency of the supply chain down to the smelters or refiners. NGOs and socially responsible investors, in particular, have asked for full visibility of the mineral chain of custody. These and other stakeholders expect companies to implement traceability schemes and audit suppliers (as well as smelters or refiners), and they expect that companies will provide grievance mechanisms for any suspected violations.
While expectations are clear, mapping suppliers can be difficult for some companies, particularly large conglomerates. The OECD encourages companies to work together and share information about suppliers by using industry or collective processes such as the Electronic Industry Citizenship Coalition’s Conflict-Free Smelter Program. For these companies, consistent engagement with their suppliers is essential, particularly when it comes to communicating expectations on responsible supply chain management of the minerals, and what, if any, actions will be taken if suppliers do not cooperate.
Even the companies that helped develop the OECD guidance agree that implementing it is a challenge. On-the-ground traceability schemes are not yet fully in place, and auditors have yet to be trained and vetted. Nonetheless, it is important that companies take the initial steps toward responsible due diligence to meet the tight timeline that will come once the SEC publishes its final rules.
To help all companies learn from this pilot, BSR will be reporting regularly on the OECD pilot process. For questions about how to participate in the OECD pilot (if interested, please contact us by July 16), or how your company can begin a due diligence strategy on conflict minerals, contact Sasha Radovich or Marshall Chase.