Amnesty International and Global Witness have posted a paper, “Digging for Transparency,” evaluating the performance by 100 public companies in their inaugural season of conflict minerals reporting. The overall reaction: major disappointment.

Below are the key findings as identified by the two NGOs:

• “Seventy-nine percent of the company reports we analyzed did not meet the minimum requirements of the U.S. conflict minerals legislation.   The remaining twenty-one percent of companies did so in their first year of reporting, showing that it can be done.

• Only fifteen percent of companies reported that they had contacted, or attempted to contact the facilities that process the minerals in their products (smelters or refiners).

• Most companies limited their due diligence efforts to their direct suppliers.Forty-one percent of companies failed to show that they had a policy to identify risks in their supply chain. Fewer than half of companies said that they report risk to senior management.

• No companies in our sample disclosed an example of a risk in their supply chain. This is despite some companies disclosing to the SEC that gold from North Korea may have entered their supply chain, which is a possible violation of U.S. law. Many others stated that they could not rule out the minerals they were sourcing were benefitting armed groups.”

[Sidebar:  The NGOs seem to be using their own particular interpretation of “minimum requirements.”  For example, it is not at all clear from the OECD Guidance that downstream companies are required to contact smelters or refiners (SORs) directly. As indicated in the 2015 White Paper from the Conflict Free Sourcing Initiative (an initiative of the EICC-GeSI), “Five Practical Steps to Support SEC Conflict Minerals Disclosure,” the risk assessment responsibility lies “with SORs and upstream companies. Downstream Companies mitigate risk through working with their direct suppliers individually or collectively to identify SORs and encourage those SORs to become independently audited.” (See this post.)]

For their study, the NGOs developed 12 criteria to assess the quality of the companies’ due diligence efforts and reporting. Criteria one to seven were drawn from the SEC rule and eight to twelve from the OECD guidance.  The percentages added below reflect the NGOs’ assessment of the percentage of companies complying (as reported elsewhere in the paper):

1. “determine whether its products fall under the scope of the law (i.e. any of the four minerals covered by Section 1502 are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by the company) [93%];

2. complete a reasonably designed, good-faith country of origin inquiry and describe this in its filing to the SEC [98%];

3. submit a Conflict Minerals Report [100%];

4. make the Conflict Minerals Report publicly available on the company’s own website and provide a link to the website [99%];

5. carry out and describe due diligence measures taken on the source and chain of custody of the four minerals, including metal processors as well as direct suppliers [80%];

6. describe the facilities – metal processors – used to process the four minerals (in products that are not DRC conflict free), if known [46%];

7. describe information about the country of origin of the four minerals used in its products (in products that are not DRC conflict free), if known [61%];

8. demonstrate that they have adopted and committed to a conflict minerals policy [82%];

9. create an internal management system, usually a conflict minerals team, and describe this in its report [72%];

10. develop a risk identification and assessment process and describe its efforts to identify risk in its supply chain in its report [59%];

11. develop a strategy to respond to identified risks and describe this in its report [59%]; and

12. engage with metal processors in its supply chain, directly or through a recognized industry scheme, and describe this in its report [80%].”

To enhance supplier engagement, the paper suggests, companies should go beyond a basic supplier survey to promote responsible sourcing practices by, for example, providing  educational  materials about the conflict minerals rules and the OECD guidance, and developing training and capacity-building opportunities. Inclusion of conflict minerals provisions in supplier agreements can also be a “useful way for downstream companies to exert leverage over suppliers and prompt more responsible sourcing behavior.” However, only 28% of companies studied  included provisions in their agreements requiring suppliers to comply with supply chain information requests or suppliers’ compliance with that company’s Conflict Minerals Policy. The NGOs also recommended that companies should take care not to cause suppliers to disengage from high-risk areas, but rather encourage suppliers to source responsibly in the region.  Companies were also encouraged to detail how they adhered to the OECD framework, on a step-by-step basis.

The NGOs recommend that companies provide information about the number of suppliers surveyed, even though it is not a technical requirement. However, less than half the companies analyzed provided information about the number of suppliers surveyed. Of those that did, 15% surveyed more than 1,000 suppliers, and 49% surveyed less than 250. The NGOs report that, on average, companies received responses from only 69% of suppliers surveyed. The NGOs expressed concern “that so many suppliers failed to respond to inquiries,” and urged companies to “do more to increase response rates and tackle the opacity of their supply chains.” Only 45% of companies had an explicit policy to address suppliers that submit inadequate survey responses.

While 59% of companies in the sample reported having a risk management plan, the NGOs were not satisfied with the extent of the description of the strategies employed to respond to identified risks.  In their view, too few companies said that they report risk to senior management. Interestingly, in terms of risk management, the NGOs recommended that companies “pursue risk mitigation efforts before resorting to disengagement and termination.” Instead, most companies “stated that their policy was to terminate a relationship, or simply disengage with suppliers that do not comply with their conflict minerals policy or supplier code of conduct….It is best practice, if suppliers have identified risk further up their supply chain, for reporting companies to monitor the degree to which their suppliers implement risk mitigation measures and include this information in their annual filings under Section 1502.”

Finally, the NGOs were unhappy with the quality of the reporting. Only 24% of companies provided as list of the SORs, while 73% failed to provide a list or description, and a third of those failed to state that they had not been able to identify their SORs. Only one company provided specific information about a mine or origin (although that may be because the rules require only that you describe the steps taken to identify the mine or location of origin) and only 16% disclosed the names of one or more countries of origin.

In conclusion, the NGOs analysis “highlights how much work companies need to do to really understand and better manage their supply chains. Many company reports in our sample leave important questions about their supply chain checks unanswered. They do not provide interested investors and consumers with sufficient information to make informed investment or purchasing decisions, and fall short of convincing the general public that the company has sought to address – or even looked for – adverse impacts along their supply chains.”

The NGOs specific “recommendations” for companies are as follows:

• “Submit meaningful and detailed information about their supply chain due diligence and clearly demonstrate compliance with each of the five steps of the OECD guidance in subsequent Conflict Minerals Reports. They should specifically:

• Improve the response rate from suppliers by, amongst other things, adopting a policy to follow up with uncooperative suppliers, providing training material on conflict minerals and where appropriate amending contracts.

• Directly engage with smelters and refiners identified in their supply chain to learn more about the minerals’ chain of custody and seek evidence of the due diligence they have undertaken.

• Provide specific examples of supply chain risks they have identified in future Conflict Minerals Reports.

• Ensure that they effectively assess supply chain risks by developing robust risk mitigation and management processes, and describing and demonstrating the implementation of those processes in their Conflict Minerals Reports.

• Undertake an independent private sector audit of their due diligence measures, regardless of the conflict status of their products.”

[Soapbox: Few would deny that the levels of violence in the DRC have created a humanitarian emergency. And certainly few would question the assertion that more work remains to fully satisfy the conflict minerals rules and its underlying goals. Still, whether the NGOs’ sample data — or their characterization of it — accurately reflects the quality of reporting is far from clear. Compliance with the conflict minerals rules has been very challenging, even for large companies acting collectively, and the frustration of trying and failing to obtain the necessary supply chain information was widely experienced.  Most companies are still at the early stages of a steep learning curve regarding the relatively novel types of inquiries required under the rules. Reading this paper, one might infer that these two NGOs expected to find “problem solved” after the first year of reporting.   As described in this post, the U.S. Dept. of Commerce has acknowledged that, in some cases, “it is very difficult to trace exactly where these small amounts of materials are smelted.”  As a result, even Commerce, with all its resources, was unable to “indicate whether a specific facility processes minerals that are used to finance conflict in the Democratic Republic of the Congo or an adjoining country. We do not have the ability to distinguish such facilities.”

[View source.]