Early adopters of the new SEC Rule on conflict mineral disclosure are tapping into promising IT platforms.
By Chris Bayer, Tulane University Law School’s Payson Center for International Development
At the one-year milestone of Dodd Frank Section 1502 [DFS1502], the Conflict Minerals Consortium hosted a Global Conflict Mineral symposium in August for stakeholders across the board to compare notes and chart their plans forward.
The unprecedented sunshine law, in which Congress levied a corporate disclosure law to address systemic human rights issues in a developing country, is a first.
Its premise – that, by requiring publicly traded American companies to disclose whether or not they use specific minerals (Tin, Tungsten, Tantalum and Gold = 3TG) in their products thus opening up procurement practices to public scrutiny, they would practice ethical procurement – is new and untested.
And the law couldn't be more far-reaching: tens of thousands of companies all along the global supply chain must now set up programs to track their minerals and other components that contain the specified minerals back to the smelter – and ultimately its very source. In short, this mandatory business-to-business transparency legislation is reverberating throughout global supply chains.
The Road to Compliance
The symposium's participants had a lot to discuss. Questions abound at this juncture, with a particular focus on the nuts and bolts of company-level conflict mineral program implementation. Are companies utilizing in-house resources or hiring external consultants? What IT platforms and data exchange standards are companies adopting in order to signal each other in the contract theory sense? To what extent is the symmetry of information between buyers and sellers of 3TG and its intermediate/final products, mandated by DFS1502, reforming the market?
The symposium presented the perfect opportunity to shed light on these questions and sharing the findings of a benchmark survey Tulane University conducted in July and August this year. While only indicative – not representative – the results show that significant resources are already being garnered to comply with the rule, with almost half of the companies turning to external help and a majority opting to build rather than buy systems. Early adopters are tapping into promising IT platforms.
A New Corporate Fitness Standard for Disclosure
By setting a new corporate fitness standard in the Unites States – the fittest is now the company that has enhanced command over its supply chain and can prove it with an audit – the law also seems to be triggering differentiation between companies in the up- and downstream marketplace, which very well could have ramifications on their commercial viability.
Although we anticipated that companies would also report positive externalities, few actually did. Instead, companies, at least for now, seem to be focusing on the devil-in-the-details of compliance.
While subsequent symposium discussion topics varied widely, one rather interesting preoccupation brought up the nature of incentives and disincentives of compliance. The emerging consensus was that while compliance would certainly be fueled by CSR, legal and PR motivations, remaining competitive in this rapidly evolving landscape of mineral-hungry industries would be an inbuilt, market-based driver.
With affected companies steeped in compliance, the Rule's one-year milestone is also an opportunity to take a bird's eye view of public policy and development. Even with responsible sourcing practices firmly in place, simply curtailing the money flow to armed groups can and will not single-handedly tip the scales on the region’s volatility. Apart from securing the most critically vulnerable areas with an "offensive" UN peacekeeping brigade and drones and efforts such as DFS1502 to curtail the liquidity of armed groups at the producing end of Congo’s conflict minerals supply chain, what ought to be done?
As history and the evidence demonstrate, peace and stability are strongly aligned with international trade integration, modeled inter alia by the European Union. Creation of trade superhighways in the form of Special Economic Zones backed by international support is a promising path to build on what has, in the Congo, become the largest UN peacekeeping effort in history.
In a country that harbors as much as $24 trillion worth of minerals according to one appraisal, a systematic, multi-pronged effort is needed to turn the resource course around. Without it, Dodd-Frank’s conflict minerals disclosure rules might very well prove to simply become a well-intentioned yet expensive exercise to allay our conscience that we aren’t continuing to fan the conflict fires in the Congo.
About the Author:
Chris Bayer is a doctoral candidate at Tulane University Law School’s Payson Center for International Development.