It’s been more than one year since the conflict minerals rule, Section 1502 of the 2010 Dodd-Frank Act, was adopted. With just six months left for the first compliance reporting deadline, I’m prompted to ask: How are companies doing?
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According to a survey conducted in June and July 2013, by ThriveOnRisk and ComplianceOnline, and sponsored by MetricStream, 42 percent of organizations have initiated supplier surveys, and 15 percent have already received supplier inputs. Clearly, companies are actively moving toward completing their reasonable country of origin inquiries (RCOIs). So, what’s next?
Due diligence—the most challenging step yet
If, after conducting an RCOI, a company determines that conflict minerals in its products have originated from the Democratic Republic of Congo (DRC) and surrounding regions (“covered countries”), then the company is required to initiate due diligence on the source and chain of custody of its conflict minerals.
According to the Organization for Economic Cooperation and Development (OECD), due diligence in the mineral supply chain is “an ongoing, proactive, and reactive process through which companies can ensure that they respect human rights, and do not contribute to conflict.”
Although most companies may not be deliberately or directly contributing to the DRC conflict, they are still responsible for the problem if they are purchasing goods from suppliers who, in turn, use minerals that are not conflict-free. This is why due diligence is so critical. It not only prompts companies to map out their product and supply chains and assess their conflict minerals-related risks, it also helps to identify suppliers using DRC-sourced minerals, and establish measures to counter the risks at hand.
No doubt about it, conflict-minerals compliance due diligence is no easy feat. The biggest challenge lies in navigating vast, global, and complex supply chains that involve multiple entities—starting from minerals extraction, to transport, handling, processing, smelting, refining, and manufacturing, and continuing all the way through to the point of sale.
Companies are asking, just how far upstream in the supply chain do we need to go to perform our due diligence? What is the most cost-effective way to manage this whole process? How much effort is required, and how much effort is too much?
To help answer these questions, here are five best practices on conflict minerals due diligence based on my interactions with various companies and industry thought leaders.
1. Be proactive, be smart
Whether companies are at the initial stage of planning their due diligence strategies, or at the final stage of renegotiating contracts with high-risk suppliers, it’s clear that due diligence takes time. The more proactive companies are, the faster they will become conflict-free.
However, speed isn’t everything. In fact, it’s not advisable to be hasty because becoming conflict-free with an inflexible and unsustainable due-diligence program can be risky, too. Compliance with the conflict minerals rule is not a one-time initiative, but an ongoing effort. Even if a company is required to file a “DRC conflict undeterminable” report for some suppliers or product families, it’s OK, as long as the company uses the “grace period” of the next 2–4 years to plan a due diligence approach that is methodical, effective, sustainable, and agile.
2. Put the right building blocks in place
Before initiating a conflict minerals due diligence program, companies must be clear about what they are setting out to do. Establishing clear goals and objectives up front will help define the conflict minerals policies and procedures that form the bedrock of their due diligence program. Similarly, appointing managers will help ensure that due diligence efforts are well-coordinated, and that budgets and resources are optimally utilized.
Other initial activities to consider include deciding which product lines and suppliers to target, charting out an annual or monthly plan for due diligence tasks, and training key stakeholders on the conflict minerals rule and compliance requirements. It is also essential to form an effective cross-functional, conflict minerals team comprised of key stakeholders from the supply chain and procurement department, legal counsel, compliance department, finance department, internal auditors, corporate social responsibility team, and external auditors.
Companies that put these building blocks in place will be well positioned to not only strengthen their conflict minerals program, but also to manage their supplier relationships effectively in the years to come.
3. Maximize the efficiency of due diligence through a risk-based approach
Randomly picking a product line or supplier, and then conducting due diligence is neither pragmatic nor advisable. There are just too many suppliers and products. It is important to adopt a risk-based approach that involves first identifying high-risk suppliers (e.g., those located in emerging economies with limited regulation of minerals), as well as high-risk products (e.g., goods containing a high percentage of tungsten). Based on these risk data, companies can efficiently prioritize their due diligence efforts, resources, and budgets.
The OECD has laid out a helpful five-step framework for risk-based due diligence in the mineral supply chain:
1. Establish strong company management systems.
2. Identify and assess risk in the supply chain.
3. Design and implement a strategy to respond to the identified risks.
4. Carry out independent third-party audits of supply chain due diligence at identified points in the supply chain.
5. Report on supply chain due diligence.
4. Identify industry associations and other sources that can help simplify due diligence
Many industry associations are laying the groundwork to help companies circumvent the challenges and complexities of establishing a conflict minerals program. The OCED’s five-step framework mentioned above is particularly helpful.
Additionally, the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI) have set up the Conflict-Free Sourcing Initiative (CFSI) to provide information on conflict-free smelters, tools to gather sourcing information, and forums for exchanging best practices. Companies across industries can refer to the CFSI smelter list to guide their sourcing activities, rather than trying to independently audit their supplier smelters.
It is also advisable that companies attend conflict minerals-related seminars and events. Joining peers and industry thought leaders in conversation and debate can provide companies with new perspectives and approaches that can strengthen their due diligence. The key is to remember that each company is different when it comes to size, supply chain, conflict minerals risks, and other factors. So, any frameworks, guidelines, and best practices must be assessed and leveraged in the context of each company’s specific requirements.
5. Leverage other organizational audits to build your due diligence program
The process of complying with the conflict minerals rule is similar to that of complying with environmental regulations such as the Registration, Evaluation, Authorization, and Restriction of Chemical Substances (REACH) and the Restriction of Hazardous Substances (RoHS). Both REACH and RoHS mandate the tracing and analysis of product components and raw materials through the supply chain.
To comply with these regulations, most companies conduct environment, health, and safety (EHS) audits. These audits can serve as a good starting point to identify high-risk suppliers, and prioritize conflict minerals due-diligence efforts using this information.
It would be wise for companies to integrate their EHS audits and questionnaires with conflict minerals compliance activities. Doing so can help to avoid duplicating efforts between the two activities, and to improve the overall visibility into the supply chain.
Finding the right technology solution for due diligence
Technology plays an important role in strengthening, simplifying, and automating conflict minerals management. That being said, a quick-fix technology solution lacks the flexibility and scalability required to build a sustainable conflict minerals program. Companies should adopt a long-term compliance perspective, and implement a technology solution that can sustain their conflict minerals program today and into the future.
This sentiment is echoed in the ThriveOnRisk and ComplianceOnline survey, where the majority of respondents (60%) felt that an extensible platform-based solution is the ideal solution to successfully manage their conflict minerals compliance program. A platform-based solution is a modular application that can be deployed on a scalable platform, either in-house or over the cloud. Such a solution provides a single, centralized point of reference for companies to easily manage and track all their conflict minerals processes and data. It also facilitates collaboration and coordination of compliance activities across organizational departments, as well as across the supply chain. If the solution is extensible, it can help manage various other processes such as supplier governance, regulatory compliance, product safety and quality, and EHS.
Platform-based solutions can also be leveraged to produce red-flag reports, which help companies proactively identify and address discrepancies between raw materials and finished products/suppliers, nonresponsive vendors, inconsistencies between identified smelters and metals, and other such areas of concern. These red-flag reports can be configured and continuously adapted to manage current and ongoing concerns of companies. Additionally, they can also be used to better manage risk associated with planning and scoping due diligence and conflict minerals report audits.
The other advantage of a platform-based solution is that it facilitates the exchange of supplier data with other companies to coordinate due diligence efforts. But this needs to be planned and executed well, understanding that each company’s supply chain and product lines are different.
Conclusion
There are many practical challenges associated with conflict minerals due diligence. Fortunately, several industry associations and authorities are working to help companies optimize and simplify their due diligence efforts. The best practices and information provided by these associations are valuable, and can help companies lay a foundation for building and sustaining a manageable and adaptable conflict minerals program. Furthermore, adopting a platform-based solution can provide the long-term approach needed to help companies understand, and take responsibility for, their supply chains, and over time help sharpen their focus not just on compliance, but also on responsible sourcing. All of this will make a real difference when it comes to the long-term success of an organization.
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