Co-written with Patricia Jurewicz, Director, Responsible Sourcing Network
DID YOU KNOW? The cell phone in your pocket or laptop you may be reading this on could contain minerals used to fund militia groups and war in the Democratic Republic of the Congo (DRC). The conflict is ongoing and only last week, American UN researcher Michael Sharp, his Swedish colleague, and their interpreter were all found murdered. This in the same central DRC region where 42 police officers were beheaded a few weeks ago.
One of the few glimmers of hope that the Congolese people have had in recent years has been the ‘Conflict Minerals Section 1502’ of the Dodd-Frank Act – passed in the U.S. in 2010 with the aim of reducing revenue flows to DRC militia groups. The law helps create demand by multinational corporations to only source certified “conflict-free” minerals, thereby driving momentum for mines in the DRC to de-militarize and cease funding to the militia groups fueling conflict.
Unfortunately however, a Congressional Hearing this week is part of a concerted attempt by current decision makers in Washington to dismantle 1502. Acting head of the Securities and Exchange Commission (SEC), Michael Piwowar has unilaterally called for a reconsideration of it (hundreds of comments were submitted), an amendment was passed in the House to defund the enforcement of 1502, and a draft Executive Order to suspend it for two years was leaked in February.
We believe many of the arguments cited for repealing and replacing Section 1502 are misinformed.
For example, one major argument for the repeal are the costs of implementation. However, Elm Sustainability recently reported that actual compliance costs of the Rule’s implementation have “dropped significantly” in large part due to innovations and efficient tools available to issuers and suppliers at no cost. Furthermore, an audit fund, supported by corporations, reduces some of the cost of audits to smelters by paying for 100% of first-time audits. In 2016, the Initial Audit Fund covered 37 initial audits, significantly reducing the barrier to entry of smelters undergoing the validation process. Indeed, the costs of implementation seem to be a small price to pay to protect companies and investors from the potential reputational, financial, and legal risks associated with being linked to egregious human rights abuses.
A second reason stated by Acting Chairman Piwowar for the potential repeal is that it is unclear if the 1502 rule has reduced the control of armed gangs or eased human suffering in the Congo. Again this is misinformed, as great strides have been achieved.
The most recent study conducted by the International Peace Information Service (IPIS) found that 79% of tin, tantalum, and tungsten miners surveyed now work in conflict-free mines; 204 mines have been officially certified as conflict-free; and 75% of smelters/refiners worldwide for the four conflict minerals have passed audits by the Conflict-Free Sourcing Initiative (CFSI) or associated programs. All of the momentum from the past six years will be lost if companies no longer feel the pressure to source responsibly because they don’t have to submit annual mandatory disclosures.
Investor and corporate support
On March 7, 129 investors and investor groups managing total assets close to $5 trillion, called upon the SEC and Congress to continue widespread and comprehensive implementation of Section 1502. Lead signatories included Boston Common Asset Management, Interfaith Center on Corporate Responsibility (ICCR), Mercy Investment Services, Inc., Responsible Sourcing Network (RSN), Trillium Asset Management, and US SIF: The Forum for Sustainable and Responsible Investment. Engaged with the implementation of the law since it was first passed in 2010, investors expressed their support in a statement to the SEC, specifically calling on the agency to pursue robust enforcement of the requirements to achieve maximum impact.
Given that companies and their global supply chains are under increasing scrutiny and regulation on conflict minerals from the DRC including the EU's Conflict Minerals Law, lead U.S. investors were joined by asset managers from around the world including APG Investment Management, Hermes EOS, Legal & General Investment Management, MN, NEI Investments, Robeco, Triodos Investment Management, and pension funds such as New York City Comptroller Scott M. Stringer, PGGM, and Sweden’s AP1, AP2, AP3 and AP4.
It is not only investors and human rights groups that support this legislation, many corporations do as well. The Washington Post printed the article in February entitled “Why Apple and Intel don’t want to see the conflict minerals rule rolled back” and Bloomberg BNA reported on additional companies’ support of 1502, including HP and AMD, regardless of a disclosure law. Numerous companies and corporate trade associations also submitted statements to the SEC supporting Section 1502 such as KEMET Electronics, Signet Jewelers, CFSI, and Information Technology Industry Council (ITI).
Enforce and replicate
The 1502 rule has been the driving force for the momentum and action by corporations to research their supply chains, be transparent about their actions, and be responsible to the communities that deserve to prosper from the electronics craze sweeping across the world. As a result, U.S. companies are being more effective in addressing material risk in their supply chains while contributing to responsible economic development in the DRC.
No single law can solve all the underlying problems that are causing conflict in the DRC region, but since 2010, this law has demonstrated success in diminishing revenue flows to militia groups. Section 1502 also exemplifies the need for and benefit of transparency within investment decisions. Not only does it support companies and investors by creating a level playing field to compare company actions, such as in RSN’s Mining the Disclosures reports, but it also helps minimize violence and despair.
Now is not the time to repeal and replace but to enforce and replicate 1502 to drive responsible manufacturing and empower developing economies.
The information in this document should not be considered a recommendation to buy or sell any security.