by Cydney Posner
The Conflict-Free Sourcing Initiative has posted an updated 2015 version of its practical guidance white paper on conflict minerals specifically for downstream companies, called “Five Practical Steps to Support SEC Conflict Minerals Disclosure.” CFSI’s Practical Steps is designed to provide more flexible guidance to downstream companies in satisfying their SEC compliance and reporting requirements as well as to reinforce the concept that addressing conflict minerals is a continual process, not a one-time-only determination. With the caveat that the Practical Steps has not been blessed by the SEC, I think it’s a great resource for conflict minerals reporting.
As you probably know, in fulfilling the due diligence requirements of the SEC’s conflict minerals rules, companies are, in effect, required to follow the due diligence framework in the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. However, the OECD Guidance was not necessarily developed with downstream companies in mind, especially those downstream companies that are several layers removed from the actual source of the minerals, nor is it readily apparent how its five steps correlate with SEC’s three-step requirements. (That’s in the running for understatement of the year.) What’s most helpful about Practical Steps is that it attempts to correlate the OECD Guidance with the SEC requirements and to distinguish the types of activities that only upstream companies can perform under the OECD Guidance framework from those that are feasible for downstream companies. For example, with regard to Step 2 of the OECD Guidance, “Explore Risks in the Supply Chain,” Practical Steps clarifies the differences between risk identification and management activities for upstream versus downstream actors:
“The focus of risk management within the OECD Guidance is the identification of ‘red flag’ triggers that are exclusively upstream of the SOR [smelter or refiner]. Therefore, risk identification and risk management for a downstream actor is relevant when an SOR has been identified by a credible third party to source minerals that directly or indirectly supported armed groups. The risk management action by the downstream actor involves influencing the multi-tiered supply chain to cause the SOR to become validated as conflict-free (such as by the Conflict-Free Smelter Program of the Conflict-Free Sourcing Initiative) or, failing that, to switch to a different smelter. Depending upon the number of supplier tiers by which a company is removed from the smelter, it may be expected that it could take months or years to [effect] change. In many cases, the nature of the company’s commercial relationships may not allow it individually to influence the SOR’s conduct. Instead, a single downstream company may choose to leverage the accumulated responses of many Downstream Companies in order to assert sufficient pressure on the SOR to adjust its practices.”
There are not many changes from the practical guidance white paper published by CFSI in 2013. In some cases, there are additional examples provided. For instance, the discussion of a company’s conflict minerals policy suggests, as other possible elements of the policy, an intent to support conflict-free sourcing and use of a company’s ethics hotline as a mechanism to report complaints (thus supporting the practice adopted by a number of companies last year). Practical Steps also now provides that, in assessing risk related to the supply chain, in addition to comparing the names of the 3TG processing facilities identified in supplier representations to independently verified lists (e.g., the CFSI Conflict-Free Smelter Program list), downstream companies can also reasonably take into consideration self-declarations from direct communication with an SOR or its website and news articles, investment reports and industry association information that may indicate where the SOR sources.
Another change reflected in the 2015 Practical Steps is the inclusion of a discussion of when companies can properly describe products as “DRC conflict free” and “not DRC conflict free” from the perspective of implementation of the OECD Guidance. The discussion in Practical Steps is excerpted from a 2011 comment letter on the proposed SEC rules signed by participants in the ICGLR-OECD-UN GoE multi-stakeholder forum for conflict-free mineral supply chains. (Some of the discussion in the comment letter was refined in a subsequent ICGLR-OECD-UN GoE “Note of Clarification.”) Notably, the definitions used in Practical Steps are not entirely consistent with the Exchange Act, the definitions in the SEC rules or the guidance in the SEC adopting release. If these definitions are relied upon by companies in crafting their disclosures, it’s not clear whether the SEC would be willing to accommodate these definitions, even where conflict-free status is disclosed voluntarily, since it appears that it won’t be required this year. (See this post.)