While some companies are struggling to get compliance with the Securities and Exchange Commission's “Conflict Minerals” Rule on track to meet the May 2014 deadline, others have been working on the problem for years and are way ahead of the curve.
Hewlett-Packard, for example, began work on tracing conflict minerals in the supply chain and disclosing the results in 2007, long before the SEC adopted a rule last August mandating new disclosures on the use of minerals mined in Africa. Despite progress and its role as an industry leader, Jay Celorie, who manages H-P's conflict minerals program as global program manager, says its work is still in the early and evolving stages. Those words won't come as a relief to companies just getting started on compliance with the rule.
The Conflict Minerals Rule, mandated by the Dodd-Frank Act, applies to the mining of tin, tungsten, tantalum, and gold in war-torn Central Africa, where the proceeds of such mining funds brutal militant groups. The rule requires companies to determine and disclose the source conflict minerals. If designated minerals do, or might, come from covered countries, additional due diligence into the source and chain of custody of those minerals is required, along with an audit of that assessment.
The value of the Congo's mineral wealth is estimated as high as $24 trillion and the SEC rule is estimated to directly apply to nearly 6,000 companies and hundreds of thousands of their suppliers. Critics have lamented that purging their supply chains of these substances, or even just tracking their origin, is a costly challenge, and business groups, including the U.S. Chamber of Commerce, have challenged the ruling in court.
While that challenge winds its way through the legal system, many companies are finding compliance with the rule to be tricky. “One of the challenges with this topic is that it is highly nuanced,” says Celorie. “It may seem reasonable on the surface, but it is really not that simple.”
H-P's early response to the issue came as non-governmental organizations and advocacy groups began to pressure the industries that rely on them to do a better job of tracking their use of the metals and sourcing them from other regions. It was at that time that H-P became an active participant in the Electronic Industry Citizen Coalition and Global e-Sustainability Initiative (GeSI), and formed its own extractives workgroup to compliment those initiatives.
The key question H-P faced, Celorie says: “How do we develop programs tools and methods to enable us to source responsibly?” The scope of such an effort was daunting. H-P has one of the industry's most extensive supply chains, comprising more than 1,000 production suppliers and tens of thousands of non-production suppliers, spanning more than 45 countries and territories. “The challenge is that these smelting facilities are fairly deep inside of our supply chains,” Celorie adds. “So it's not that we have lines of sight or direct influence over these facilities.”
Conflict-Free Smelters
“One of the challenges with this topic is that it is highly nuanced. It may seem reasonable on the surface, but it is really not that simple.”
—Jay Celorie,
Global Program Manager,
Hewlett-Packard
H-P started its review at the mine level, seeking to understand the chain of custody from the mining facilities to the smelters. Next, it developed a Conflict-Free Smelter (CFS) program, with an audit protocol that NGOs and stakeholders could agree to when evaluating claims that a smelter is sourcing conflict-free materials. A common data format was developed for exchanging information on what smelters are in H-P's supply chain.
Those steps have been a multi-year effort, Celorie says. Although much more work remains, the plan is coming to fruition. Last week, H-P published a list of the 195 smelters that have been identified as in use within its supply chain. While the smelters have not been certified as free of the use of conflict minerals, identifying the smelters in the supply chain is an important first step. In doing so, it is the first IT company to publish its supply chain smelter list and to obtain an independent review of the smelter identification process.
Advocacy groups that track the use of conflict minerals have applauded the move. “Publishing its list of smelters is another significant step in the right direction, because it puts pressure on smelters to be audited as conflict free,” says Sasha Lezhnev, senior policy analyst, the Enough Project. “Just a year ago, companies were afraid of publishing lists of smelters, but this added layer of transparency can help get our consumer products to be conflict free."
The next step is to certify as many of the smelters in use as free of conflict minerals. “We have 29 smelters on the CMS list and we really need to grow that to a larger number,” Celorie says. “We cannot do it alone and we need to work as an industry, and with other industries. It takes a while for others to get involved, understand what needs to be done, and what their role could be.”
Despite the SEC's new requirements and approaching deadlines, many companies, including those in the electronics industry, have indeed moved slowly on Conflict Minerals Rule compliance. In fact, more than one-third of electronics firms indicating they haven't even commenced compliance planning, according to a new survey from information and analytics provider IHS. Companies are “woefully unprepared for the new regulations,” it concluded.
CONFLICT-FREE SMELTER PROGRAM
The following is an overview of Conflict-Free Smelter Programs published by the Electronics Industry Citizenship Coalition (EICC).
Tracing materials back to their mine of origin is a complex but critical aspect of responsible sourcing in the electronics supply chain. The EICC and Global e-Sustainability Initiative (GeSI) are taking action to address responsible material sourcing through the development of the Conflict-Free Smelter (CFS) program.
The CFS is a voluntary program in which an independent third party evaluates a smelter's procurement activities and determines if the smelter demonstrated that all the materials they processed originated from conflict-free sources. The program aims to enable companies to source conflict-free minerals. Companies that want to source responsibly will be able to use the results of the audits for their own company's due diligence program.
CFS Scope
The CFS assessments cover smelters processing tin, tungsten, tantalum, and refiners processing gold (called smelters here forward). The assessments are conducted globally for any smelter who is processing the targeted minerals and wants to be identified as a conflict-free smelter. Key processors are located in China, Malaysia, Russia, United States, and Indonesia.
CFS Process
The CFS Program consists of two reviews that occur at a smelter's site:
Business Process Review
Evaluate company policies and or codes of conduct relating to conflict minerals
Material Analysis Review:
Conduct a complete chain of custody analysis to demonstrate that sources of all materials procured by the smelting company, appropriate to the audit period, are conflict-free
Evaluate whether source locations are consistent with known mining locations
Establish whether material identified as “recycled/scrap” meets the definition of recycled/scrap material
If, during the assessment, the smelter is able to demonstrate that they have sourced conflict-free, based on the sourcing location requirements of the CFS program, the third party assessment firm will recommend to the CFS Assessment Review Committee that the smelter be identified as being compliant. The CFS Committee reviews the assessment report, and if they agree that the Assessor's conclusions, they will recognize the smelter as being CFS-compliant.
If, during the assessment, the third party assessment firm finds non-compliances to the CFS protocol, the smelter will have three months to resolve the issues and undergo a reassessment.
CFS-Compliant Smelters
The EICC and GeSI publish lists of smelters, by metal, found to be compliant with the CFS protocol; the lists will be updated quarterly, or more frequently if appropriate. The EICC and GeSI will not publish information on smelters who are either not compliant with the CFS protocol or have not gone through a CFS assessment. Inquiries as to a smelter's CFS status should be made directly with the smelter in question. Registration is required to access the CFS smelter list.
Determination of whether and/or how to use all or any portion of the list is to be made in a company's sole and absolute discretion. Use of the list is voluntary; the EICC and GeSI do not require members or their supply chains to purchase from the compliant smelter list.
Source: Electronics Industry Citizenship Coalition.
The poll, conducted earlier this month with 134 electronics industry managers, found that more than 35 percent have made no plans on how to conform to the rules; just 7.5 percent said that they were “well-prepared” for compliance.
Wielding Influence
“It's going to take time,” Celorie says of industry efforts. “The key is really growing a larger number of smelters that are choosing to become CFS compliant and then driving our suppliers to using those smelters.”
His advice for those who have lagged in their efforts is to partner with efforts like the Extractives Workgroup (which charges a $5,000 membership fee), and take advantage of the many consultants and seminars, many of which are available for free advice.
H-P takes a supplier-level approach to conflict minerals. Companies like AMD and Intel have been supportive partners, but not all suppliers have the willingness, or capability to trace the materials they use. The company takes different strategies when wielding its influence. For smaller organizations, from which it doesn't purchase as much, the focus is on education. “You need to train on what you are asking of them, and you need to allow them the time to come up to speed and respond,” Celorie says.
With larger suppliers, there is more of a strategic relationship. “We are buying a higher volume of material, and we have much more influence,” he says. “They are more sophisticated and can afford to devote more resources. We are asking them to propagate what we are asking of them throughout their supply chain, and we are seeing some success.”
H-P is also a supporter of a “closed-pipe” approach to sourcing, as championed by Motorola's Solutions for Hope project and the Conflict Free Tin Initiative. These efforts seek to limit the number of participants between the smelter and mine and control leakage. Mining companies are encouraged to invest in local development, such as health clinics and clean drinking water.
“These closed pipes aren't easy things to do,” Celorie says. “They are very challenging. You need adequate infrastructure and roads to get to an export point. Then, you need a mining company that is willing to pay for the minerals, at the mine, on a daily basis and then transport and package them and sell them to a conflict-free smelter. It takes a lot to make them work, which is why we only have a few examples.”
Celorie recalls a recent trip to the Congo that re-energized him to do what he can to solve the conflict-minerals problem. “As our helicopter landed, we had about 400 women and children come out to greet us, waving and smiling,” he says. “They know that we and other companies are trying to make a difference in their lives.”
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