While it’s too soon to know exactly how companies will respond to the Securities and Exchange Commission’s (SEC) new conflict minerals reporting requirement, experts say this first year was an eye-opening lesson in just how challenging it is to track down quality data across a global supply chain.
“When you look at it from a process standpoint, it’s not a very complicated process,” said Karen Yeadon, Manager of Environment, Health and Safety with Emerson Process Management. “What is the most daunting about this is that it’s such a huge number of people with their hands in the pie.”
Created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC’s rule was intended to prevent the sales of tin, tantalum, tungsten and gold from being used to fund armed conflict in the Democratic Republic of Congo (DRC). Yet tracing conflict minerals from mine to manufacturer is unusually tricky, according to Michael Rohwer, Program Director at the Electronic Industry Citizenship Coalition (EICC).
“It’s not like any one smelter feeds [just] one supplier. So there’s a lot of understanding that’s been developed over the past year around how complex the supply chain really is,” he said.
For Ms. Yeadon, whose company makes devices that measure industrial processes, tracking down the source of the company’s materials involved submitting data requests to thousands of suppliers. The company has between 1200 and 1400 suppliers for the Emerson Process Management business unit alone, she said.
“We buy hundreds of thousands of electronic components…almost every component has a little finish on the little legs of the attachment points. Almost all of them are tin. They [the suppliers] have to figure out where all of their tin comes from,” she said.
If anyone understands the supplier side to this effort it’s Sam Waldo, Director of Environment, Health and Safety at Amphenol Corp.
As a publicly held manufacturer of components for consumer electronics, Amphenol is required to both issue its own report and to disclose source-specific information to each of its customers as well. But for a decentralized company with hundreds of suppliers, that’s not an easy task, Mr. Waldo says.
“From an end-product manufacturer, you could be talking about eight to ten layers of suppliers down below for one part,” he explained. “One of my operations has got eight million active part numbers.”
And not every supplier can verify the source of the material they sell.
“The supply base is still so big and so diffuse and in some cases suppliers are so small they don’t have the resources to find this information out,” Mr. Waldo said.
Another barrier for those seeking answers this year was the fact that many suppliers were not even aware that the rule affected them. Although the actual regulation only directly applies to publicly traded companies, a full disclosure requires the cooperation of business partners from across the globe, according to Kirsten Wallerstedt, Senior Regulatory Analyst with 3E Co.
“Until we explain it to them, they don’t realize that because they supply to a company that’s subject to the law their customer needs that information from them,” she said.
To close this awareness gap, many companies have turned to third-party service providers like 3E for assistance with supplier engagement, data collection and training.
“Finding out that we’re concerned about tin, tantalum, tungsten and gold because of the humanitarian background is usually a big surprise,” Ms. Wallerstedt said. “It helps them understand the nature of the information that they’re being asked to provide.”
Another part of the supplier education is setting the expectations that these requirements are not going away, according to Krystal Cameron, Regulatory Manager at Assent Compliance.
“Every year we’ll be asking the questions, so establishing a program to get better answers every year is going to [be necessary] to keep being a supplier because it’s essential to their customers, our clients, to continue business,” she said.
For this first year, most companies are expected to report their results as ‘undeterminable’, she says, but this grace period for suppliers may soon come to an end.
“You will always see companies, especially those who have the weight to do so, putting down the hammer in terms of timelines,” she said. “We may see later in this year, all of a sudden the policies changing, maybe being a little more heavy-handed.”
Supplier data alone, however, is not enough to offer full assurance that a product is conflict-free, Ms. Yeadon says. Her goal is to trace her materials back to the smelter-level, which introduces a host of questions about where the minerals came from in the first place.
“A lot of these mines are what they call ‘artisanal’,” she said. “They might be a family. They basically dig a hole in the ground and they go down six feet and it’s there. It’s very easy to extract these materials. That’s why this has become such a big issue.”
Once she locates the smelters for her materials, Ms. Yeadon said she’d like to find out whether the smelter has been certified as conflict-free. Offering this assurance is among the priorities for industry groups such as the EICC, which runs the Conflict Free Sourcing Initiative (CFSI) in collaboration with the Global e-Sustainability Initiative (GeSI).
“The smelter represents the real pinch point in this supply chain, where they have transparency and visibility down to the sources of origin of the materials all the way up to the final product,” Mr. Rohwer said. “If we can verify or validate that these smelters are sourcing conflict-free minerals, then we can feel confident, we have assurance that the end product is also conflict –free.”
The auditors for the CFSI examine a smelter’s policies and practices, and then review its records to determine the countries of origin for all of the lots it has received over the previous 12 months. For materials that come from either the DRC or countries that are known smuggling routes, the auditors review the source of origin documentation, including mine licenses, leases and permits. They also verify that there is step-by-step traceability for every time that material changed hands. Those who pass the audit are listed on the CFSI website, but Mr. Rohwer says that list is not as long as it could be.
“There aren’t a lot of smelters that are compliant with the protocol yet, so it’s difficult for an end user, particularly an end user of complex products, to be able to make that kind of request onto their supply chain,” he said. “Obviously the further you are away from the smelter-level of the supply chain the more difficult it is.”
Perhaps the most effective way to make progress on conflict minerals reporting, then, will be to encourage smelters to commit to a conflict-free protocol, Mr. Rohwer said.
“I think the big story going forward is going to be pushing smelters to the conflict-free smelter audit program because especially for issuers here in the States, [this is] the only way to meet your obligations, particularly around the reasonable country of origin inquiry,” he said. “Generally it’s just impossible for one company to have either the resources or the leverage to accomplish anything like this on their own.”