Last Friday, the U.S. Securities and Exchange Commission announced that it is scaling back the more costly parts of its conflict minerals rule. As indicated in Section 1502 of the Dodd-Frank Act, companies are required to disclose whether their products contain tin, tungsten, tantalum and gold (3TG) sourced from the eastern regions of the Democratic Republic of Congo, where large shares of mining profits go to various armed rebel groups.
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In theory, the conflict minerals rule was supposed to cut off funding to these armed groups that coerce civilians, including children, to work in the mines by threatening them with violence and rape. In practice, the rule’s consequences have been murkier. In a paper published last month in the Journal of the Association of Environmental and Resource Economists, the University of Wisconsin’s Dominic P. Parker and Vivid Economics’ Bryan Vadheim used geo-referenced data to find that the legislation “increased looting of civilians and shifted militia battles toward unregulated gold mining territories.”
It is likely that civilian miners, not the so-called warlords, bore the brunt of the conflict minerals law. As many companies found it challenging-to-impossible to trace the origins of all of the minerals in their supply chains, they stopped buying minerals from DRC altogether. With the livelihoods of between 8 million to 10 million people dependent on mining, the ruling led former miners to return to subsistence farming or to join militias.
A More Complex View
Just a day before the SEC announcement was made, Verisk Maplecroft released research on the political, social and environmental risks associated with 3TG minerals mined from outside the DRC. Rebel groups are also in control of mines in Colombia, where it was found in 2013 that illegal gold production was five times as lucrative as cocaine production. A similar situation exists for tin sourced from the Man Maw mine in Myanmar. The tin is exported to China, eventually winding up in the supply chains of companies using Chinese suppliers.
Verisk Maplecroft assigned one of four risk categories (extreme risk, high risk, medium risk and low risk) to each commodity. Tin was identified as having the highest risk of human rights violations, compared with other 3TG minerals. Among the eight biggest tin-producing countries (China, Indonesia, Myanmar, Brazil, Bolivia, Peru, DRC and Rwanda), three — Bolivia, Indonesia and Myanmar — are at “extreme risk” for child labor. Child labor also plays a major role in the production of tantalum, with tantalum-producing countries Burundi, Mozambique and Rwanda found to be at “extreme risk” for child labor.
Furthermore, illegal mines, which are usually irresponsibly managed, are closely linked to water pollution. DRC aside, China, Peru, Russia and South Africa are also at “extreme” or “high risk” for environmental problems linked to gold mines. Also at “high risk” are seven of the eight largest tin-producing countries.
Thoughts on SEC’s Announcement
Rolling back the conflict minerals law has support from across the political spectrum. Political views aside, it is safe to say that the original rule had its flaws.
“We shouldn't be surprised to see a rollback of a portion of the conflict minerals rule under this administration,” said Azul Partners Inc. CEO Lisa Reisman, who has written extensively on conflict minerals for MetalMiner. “Some have argued that the rules have been effective in slowing dollar flows to armed groups within the DRC. Others say the rules have been ineffective, with plenty of loopholes that still allow the relative [free] flow of these materials.”
“Cheaters are always going to cheat, rule or no rule,” Reisman continued, pointing out that the rule’s loopholes were easily exploited. “The rule itself has certainly made the whole notion of ‘sourcing conflict free’ more of a standard best practice corporate social responsibility (CSR) protocol than if the rule never went into effect. At the end of the day, consumers will reward companies likely honoring a strong commitment to CSR initiatives including conflict-free sourcing. We don't see this rule roll-back as an invitation to re-engage with DRC sources. The scrap loophole, however, remains an area in which companies who wish to cheat can still do so.”
Spend Matters Chief Research Officer Pierre Mitchell noted that regulations can lead to innovation. “In healthcare, the Affordable Care Act has spawned a huge set of improvement efforts from payers and providers alike that I know of first hand,” Mitchell said. “In the case of conflict minerals, the regulations may indeed have helped accelerate trends like conflict free smelter certifications like the Conflict-Free Sourcing Initiative (CFSI) or similar standards in other industries. Regulations are a pain, but, hey, I'll pay a little more per megawatt hour to breathe clean U.S. air versus toxic China air any day!”
As Verisk Maplecroft Director of Commodities Research Stefan Sabo-Walsh pointed out, a number of major technology companies have stated publicly that they support the conflict minerals law and will continue to audit their supply chains for these minerals.
Perhaps what is needed is a more comprehensive, modified version of the 2010 law. “The new EU regulation on conflict minerals is due to come into force in 2021,” Sabo-Walsh said. “[This] broadens out the geographic scope of mandatory due diligence to be performed by importers and relevant smelters and refiners by focusing on ‘conflict-affected and high-risk areas’ rather than the Dodd-Frank Act’s narrower focus on the [African] Great Lakes Region.”