The Clock Has Started on Reporting Conflict Minerals

In 2006, Hollywood and Leonardo DiCaprio introduced the term “blood diamonds” into our pop lexicon. Less in the public eye but just as destructive to impoverished regions of Africa are mined metals such as tin and gold, two of the so-called conflict minerals currently under scrutiny by the US government.

The Dodd-Frank Wall Street Reform Act (section 1502) was enacted last August, and requires the approximately 6000 companies under SEC jurisdiction, and by implication, companies in their worldwide supply chains, to report their usage and sources of tin, tungsten, tantalum, and gold (referred to as 3TG) which is contained in, or used to manufacture, their products. These relatively rare metals and their derivatives are key ingredients in most modern electronics and consumer products.

As with most new regulations, the costs of compliance are anticipated to be very high.  With wide variances from industry to industry, national estimates are in the billions of dollars for the first year of compliance, with on-going annual compliance costs in the millions of dollars.

Companies are expected to first determine their exposure to the 3TG metals in their products and manufacturing processes – a complex roll-up of product Bills of Material.  This includes all parts and materials that are purchased from direct suppliers, and their suppliers, etc. If 3TG is present, companies must certify one of three specific material exemptions in order to comply.

  • Acquired outside the Democratic Republic of the Congo (DRC) and adjoining countries
  • Acquired from a certified Conflict Free Smelter (CFS)
  • Sourced from recycled or scrap materials

Of course, with many long and complex supply chains, it will be near impossible to determine the origin of many materials. So the regulation requires that companies document and independently audit their efforts at due-diligence to the greatest degree of specificity possible.

Manufacturers must begin reporting their compliance in calendar year 2013 to be made available in official company documents starting in May 2014. Disclosures must be included in already required SEC filings and company internet websites, and the underlying enforcement will be based on existing false or misleading statement regulations.

The publicly available reports themselves will contain extensive descriptions of compliance efforts, descriptions of products, facilities, processes, and suppliers – information that was often previously considered proprietary and will require much effort to compile.

As for risks of non-compliance, there will likely be the usual fines. But even more importantly and costly, no company wants to subject their brands to the wrath of vigilant NGOs and caring consumers. Even a fully audited but indeterminate, “we tried”, response will be viewed negatively and could result in significant lost sales for years to come.  Consequently, many companies will undertake costly re-designs and new sourcing agreements in order to limit their exposure.

Finally, don’t expect complying with Dodd-Frank to be a one-time nuisance. Environmental, health, and safety regulations are increasing and here to stay. They require a complete understanding of the materials used in products and manufacturing processes.

Leading companies are seeing sustainability and good citizenship as product and brand differentiators, adding value to their bottom line. Any product content reporting infrastructure that is built to track conflict minerals will very likely be leveraged for years to come.

Learn more about minimizing supply chain risk.

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Photo Credit: Responsible Sourcing Network on Flickr (CC BY-NC 2.0)

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