The EU is tightening checks on materials sourced from high-risk regions, but the US could be going the other way. So what, asks Ramona Dzinkowski, should companies do?
This article was first published in the May 2017 international edition of Accounting and Business magazine.
This month the European Commission is set to pass a new regulation on conflict minerals, requiring smelters, refiners and direct importers of raw tin, tungsten, tantalum, gold and their ores to do due-diligence checks on their suppliers. It also requires big manufacturers to disclose how they plan to monitor their sources of supply to ensure compliance.
The controversial regulation aims to stop the financing of armed groups and human rights abuses through trade in minerals from conflict areas. It will apply to all high-risk areas in the world, including the Democratic Republic of the Congo and the Great Lakes region of Africa.
Last year I reported on the anticipated financial impact on EU companies, and discussed the American experience with conflict minerals reporting. Much has happened in US policy since then. The Dodd-Frank Act has been “reopened” – the Wall Street reform legislation contains a requirement for due diligence on materials from conflict zones – and the question of whether US companies must continue to file conflict minerals reports with the Securities and Exchange Commission (SEC) is on the table. (By 25 October 2016, 1,220 US issuers had filed a conflict mineral disclosure statement.)
These developments have left many companies wondering what to do next in an uncertain environment. First, how will US companies respond if the Trump administration directs the SEC to waive the requirements of the conflict minerals rule for two years (with a view to its eventual – expected – repeal)? And will that cause the European Parliament to rethink its approach?
Second, will US companies simply stop what they are currently doing, even though they have implemented all the systems and processes needed to file such reports and investors may have come to expect a certain level of disclosure?
Research by public accounting and consulting firm Crowe Horwarth has thrown up some surprising and counter-intuitive responses from international experts in this area. The experts argue that conflict minerals regulation, despite what’s happening in the US, is not going away as an issue any time soon. Public pressure will continue and, in the absence of a ruling, demand that companies be transparent may actually intensify.
They also believe that even if the US conflict minerals rule is not repealed, the SEC will issue more interpretive guidance on disclosure and likely provide more clarity on what triggers due diligence.
Ultimately, it is predicted that existing standards of disclosure, procurement and supply-chain management will improve in response to public and investor scrutiny and heightened NGO activity. Companies will probably continue some form of core compliance to mitigate supply-chain risk.
Third, the experts say reporting will continue on company websites or in corporate sustainability reports, although more tailored approaches can be expected. And even without a rule or minimum reporting requirement, they argue, work on conflict mineral disclosure and minimising supply-chain risk may actually increase in response to stakeholder pressure. Businesses are likely to combine their enquiries on conflict minerals with other enquiries that they make of their suppliers.
Finally, we can expect a general trend within companies to:
- understand a lot more about business partners
- evaluate what types of risks they’re exposed to across the supply chain
- demand increased information from suppliers on policies and procedures.
Ramona Dzinkowski is a Canadian economist and editor-in-chief of the Sustainable Accounting Review