A ruling from the US SEC promises greater traceability and accountability on conflict minerals

It’s not often that investors write to thank their regulator. But that’s exactly what a group of 82 US investor organisations did recently. Prompting the open letter was the Securities and Exchange Commission’s decision to up the ante on conflict minerals in the Democratic Republic of Congo.

The SEC’s decision is laid out in a 356-page ruling on the “conflict minerals” provision of the Dodd-Frank Act. The essence of the so-called section 1502 ruling is straightforward. Over the next four years, companies that use minerals in their products will have to exercise due diligence on where these minerals came from. The results will then have to be submitted to the SEC in an annual filing.

Responsible investors are especially enthusiastic. Susan Baker, manager for social and environmental advocacy at Trillium Asset Management, calls the ruling a “monumental step”. It is the first time a US regulator has obliged companies to disclosure chain of custody management relating to a social or environmental issue, she points out. It also puts companies “on notice” to open up dialogue with their suppliers, she adds.

A win-win?

To be clear: investors, not companies, are the intended beneficiaries of the move. That makes sense. The SEC exists to protect investor interests and ensure clarity of decision-making in the financial markets. Conflict minerals represent a risk to their investments, the logic goes. Getting companies to report will, theoretically, reduce supply-side risks. So everyone is a winner, right?

More or less. The ruling could have been tighter, some investors say. Timing is one big issue. Large companies won’t have to report for another two years, with smaller firms having a further two-year grace period. That could encourage corporations to coast, investor groups say.

There are wording issues too. The term “contracting to manufacturer” is especially contentious. If a company is deemed to have influence over the design of a product, then it is required to report. If it doesn’t, the requirement is lifted. But how is “influence” defined? If a retailer buys a product off the shelf, but then puts its brand label on it, does that count? It’s a potential loophole that investors would like to see clarified.

Human rights groups have some more serious grumbles. Their chief gripe is the omission of the mining industry from the audit process. The reasoning here is the artisanal nature of most mining in the Congo.

Campaign group Global Witness finds the exemption “misguided” given the “critical position” of mining companies at the top of the supply chain. Enforcement represents another concern. The SEC ruling requires third-party auditing of all disclosed data, but its capacity to subsequently analyse this data is limited.

Much of the job of sifting through the filings, and holding companies to account will therefore fall to civil society, argues Patricia Jurewicz, director of the Responsible Sourcing Network. Another provision on which campaigners lobbied hard is the need for a firm’s chief executive or chief operating officer to sign off on the SEC filing. They didn’t get their wish.

New York is a long way from eastern Congo. Yet this ruling promises to close the gap between the two. Companies don’t take filing to the SEC lightly. That means mineral suppliers should soon be facing tough questions. If the system works, it shouldn’t be long before mine owners are having to answer those same questions too.