Unpacking Section 1502 of Dodd-Frank

Transcription

1 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December Regulating Conflict Minerals: Unpacking Section 1502 of Dodd-Frank Matthew Barg & Rohan Padhye December 2012 Photo source: Mark Craemer An August 2012 Securities and Exchange Commission (SEC) ruling will require approximately 6,000 U.S. and foreign firms across a wide variety of sectors to investigate and disclose the origins of any conflict minerals sourced. Preparedness for regulatory compliance varies widely among companies and sectors, with major IT companies taking the lead, while automobile and medical device manufacturers, among others, lag behind. An appended table highlights the degree of preparedness among each of the major sectors impacted, identifying industry leaders and best practices. Although the SEC ruling only directly applies to U.S.-listed companies, the requirements will affect companies globally throughout their value chains. Further, there is potential that Europe and other jurisdictions will follow the SEC s lead and establish their own rules. The SEC s regulations provide opportunities for investors to engage with companies to both ensure regulatory compliance and promote best practices, overcoming some glaring regulatory omissions. Passed in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is the first major piece of legislation to address sourcing of conflict minerals. Although the Act s primary aim was to introduce a new regulatory framework to the financial services industry, Section 1502 included a provision requiring the SEC to issue disclosure and audit requirements for publicly traded companies that manufacture or contract to manufacture products containing conflict minerals. After two years of negotiations with relevant stakeholders and multiple delays, in August 2012, the SEC released its final ruling on Section Under these rules, companies listed in the U.S. must disclose whether tantalum, tin, tungsten, and gold mined in the Democratic Republic of Congo or an adjoining country ( covered countries ) are necessary to the functionality or production of the products they manufacture. The SEC estimates that 6,000 U.S. and foreign companies will be covered to some extent under these rules, spanning a variety of industries. 1 This report examines the major provisions of the SEC s final ruling identifying risks and opportunities posed to investors, and analyzing which sectors are best prepared to meet Section 1502 s requirements. Companies in the information technology (IT), 2 telecommunication services, automobiles and auto components, medical devices and equipment, aerospace and defence, electrical equipment, consumer durables, and conglomerates sectors each have relatively high exposure to this legislation and will need

2 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December to carefully assess their exposure to emerging regulatory requirements. Most of these sectors have been off the radar for shareholders, among other key stakeholders. Among these sectors, IT is best positioned for compliance, as many companies in this industry have begun to take the appropriate due diligence measures to certify the origin of conflict minerals in their supply chains. Relative to IT, other sectors implicated are poorly prepared to comply with the SEC s new rules; with few exceptions, most companies in these sectors have failed to disclose any engagement activities with suppliers to address the conflict minerals issue. Minerals used to finance the ongoing conflict in the Congo are mined in North and South Kivu. Once mined, there is a risk that these minerals may be smuggled into transit countries, thereby misrepresenting their point of origin. Subsequently, these minerals are exported to smelters, many of which are located in East Asia. The SEC s disclosure and reporting requirements concern minerals that originate in the DRC or any adjoining country. These countries include Angola, Burundi, Central African Republic, the Republic of Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia. Background, Scope, and Provisions of the Legislation Tin, tantalum, tungsten, and gold play a critical role in manufacturing essential components of cell phones, computers, and virtually all other consumer electronic devices, along with auto components, medical devices and equipment, and jewellery. Given their importance as product inputs, demand for cheaper supplies of tin, tungsten, tantalum, and gold has increased, and minerals mined in conflictaffected areas of the Democratic Republic of Congo (DRC) have emerged as a cost efficient source dating back to the 1990s. Much of the Eastern DRC s mineral endowment is controlled by armed groups that have unlawfully taken control of mines and trade routes to support violent regional conflict and human rights abuses. Armed

3 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December groups actions to control mining activities have led to the widespread use of child and slave labour and the illegal seizure and eviction of local villages. These groups systematically use sexual violence against thousands of women and girls as a weapon to generate fear and consolidate control over their territories. The conflict minerals issue not only poses significant reputational risk to companies, it has elicited considerable interest from regulators, not only in the U.S. but elsewhere, including the European Union, Canada, and Australia. While conflict minerals gained a high level of visibility with the release of the final rule on Section 1502 of Dodd-Frank, the issue has been the focus of attention for responsible investors for a number of years. To date, corporate response to the issue has been varied, ranging from the leadership role taken by forward-looking companies to those that have procrastinated in the absence of clear regulatory incentives. Figure 1. Section 1502 Reporting Requirements

4 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December The intent of Section 1502 is to encourage transparency on the presence and origin of conflict minerals in value chains. It does not actually require that companies exclude minerals from conflict-affected sources. Rather, the expectation is that unveiling the origin of the minerals will ultimately lead to restricted access to funds for armed groups in the region as companies take further steps to mitigate reputational risk by procuring minerals from credible conflict-free sources. Companies are now required to determine their exposure to conflict minerals and to file a report with the SEC, which must also be disclosed publicly on the company s website. The final rule for Section 1502 applies to any company that files reports with the SEC under the Exchange Act and that manufacture or contract to manufacture products for which conflict minerals are necessary to the functionality or production of that product. This includes companies headquartered outside of the U.S. but listed on U.S. security exchanges. There is no de minimis amount permitted; therefore, all companies using conflict minerals are required to abide by the regulation. The final rule did not define specific penalties for non-compliance. Once companies have determined whether they are included under the manufacture/contract to manufacture provision, they must then ascertain the origin of conflict minerals sourced. To date, the tracing and tracking of conflict minerals has constituted a major challenge to companies. In a 2010 report, Complicity in the Congo, Sustainalytics details the complexities encountered in the supply chain, such as the importance of chain of custody, smelter oversight, and security on the ground. 3 In order to determine whether conflict minerals have originated from the covered countries, a reasonable country of origin inquiry is required where a company determines that it has a reporting obligation. The results of this process are filed in a specialized disclosure (SD) form and where there is reason to believe that the conflict minerals may have originated from one of the covered countries, a conflict minerals report is required as well. Details of these reporting requirements are included in Figure 1. Potential shortcomings: Disclosure of the reasonable country of origin inquiry results is mandated; however, the means of conducting the inquiry are not prescribed. The SEC requires that the inquiry be reasonably designed and conducted in good faith ; otherwise stated, companies must not ignore any red flags or potential concerns in making their determination. Due to the lack of mandated standards for the inquiry, coupled with the fact that Section 1502 does not require 100 per cent of a company s suppliers to confirm conflict minerals sources, issuers will need to exercise an appropriate amount of due diligence to ensure they do not overlook suppliers sourcing from a covered country. Reporting will be required starting May 31, 2014 for the calendar year beginning January 1, There is a further provision for companies to be given two to four years, depending on their size, to report on minerals deemed to be undeterminable. This provision temporarily allows companies to declare that they do not know where conflict minerals originate while they conduct due diligence. These provisions were against the recommendation of engaged responsible investors that were hoping for immediate reporting requirements and no grace period for companies. Given that the Act was passed in July 2010, companies have already had time to prepare for reporting requirements. The lack of a firm definition around contract to manufacture requires some attention. The final rule stipulates that this includes significant influence over the manufacturing and design process as determined by the company itself. Nevertheless, the SEC did outline three circumstances that exempt companies that do not exercise a degree of influence over the manufacturing of the

5 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December product from having to comply with the rule. These circumstances are defined as instances where contracted activities are not directly related to manufacturing the product; examples include training or technical support, branding of third-party manufactured products or aftermarket service, maintenance, or repairs to a product manufactured by a third party. Such provisions will significantly reduce the amount of products on which some companies must report, exempting some retailers entirely. As the SEC did not provide a definition of the necessary to the functionality or production provision, there is concern that its ambiguity might provide a loophole for decorative or other aspects of a product. For example, a tin button that is used as decoration on a shirt as opposed to a fastener to keep the shirt closed is not necessary to the function of the product, and, as such, may not be covered by the SEC s reporting requirements. However, gold in a necklace used as decoration would be considered necessary to the function of the product as the purpose of the necklace itself is for decoration. It is unclear whether a company that makes soup has a responsibility to report on the tin cans it purchases from another company. To advocates, however, the absence of functionality should not shield a company from determining the source of the raw material. Best Practices in Managing Risks Involving Conflict Minerals In order to become compliant with Section 1502, companies that are exposed to conflict minerals are expected to have assumed due diligence in their sourcing of conflict minerals, either directly or within their supply chains. Leading companies have taken clear and public actions to address conflict minerals, including developing a policy commitment to eliminate conflict minerals from products and supply chains as well as due diligence and risk management processes to identify, assess and respond to risk of exposure to conflict minerals. Other best practices include transparency and engagement Photo source: Mark Craemer

6 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December with stakeholders, including civil society, industry peers, responsible investors, and policy makers (see Table 1). Forward-looking companies are already implementing such leading practices in accordance with guidance from the OECD, 4 as recommended (yet not mandated) in the final rule on Section Table 1 Criteria POLICY: Commitment to eliminate conflict minerals from products and supply chain DUE DILIGENCE AND RISK MANAGEMENT: Supply chain risk assessments to identify and assess risk of exposure to conflict minerals and implementation of a strategy to respond to risks TRANSPARENCY: Reporting on supply chain due diligence activities relevant to conflict minerals Best practice Formal, publicly disclosed, and applicable company-wide; Commitment to supply chain due diligence; Commitment to stay in the region and avoid a de facto ban on minerals from the region. OECD Due Diligence Guidance; Mapping of smelters; Reasonable country of origin inquiry; Use of third-party audits to verify information and supplier assertions; Supplier engagement; Assessment of due diligence practice of suppliers and partners; Engagement with multi-stakeholder groups, including the EICC, GeSI, PPA, Solutions for Hope; Utilization of the Conflict-Free Smelter Program. Disclosure of: Exposure to conflict minerals originating from the DRC; Smelters in the supply chain; Audit findings; Remediation efforts or capacity building. There has been considerable progress in the past two years in determining the traceability of conflict minerals through multi-stakeholder initiatives including the following: The Electronic Industry Citizenship Coalition (EICC) and the Global e-sustainability Initiative (GeSI) are working to create and support credible conflict mineral certification schemes. The groups have partnered on an Extractives Workgroup and have been engaged with other key stakeholders, including investors and policy makers. An important result of the EICC-GeSI activities is the Conflict- Free Smelter (CFS) program, which provides a third-party evaluation of smelters procurement and processing of conflict minerals. The Public-Private Alliance for Responsible Minerals Trade (PPA) is another multi-stakeholder group that formed following the establishment of the Dodd-Frank Act. Its members include representatives from industry, government and civil society, and the group is committed to facilitating fully traced and validated mineral supply chain routes that enable legitimate business throughout the value chain. This includes efforts to harmonize complementary traceability schemes, certification mechanisms, and other verification initiatives.

7 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December The Solutions for Hope Project is focused on establishing a source of conflict-free tantalum in the DRC, thereby supporting positive economic activity in the country and working against the risk of a de facto ban on minerals from the region. It was initiated by Motorola Solutions, but now includes other IT companies, smelters, and mining companies. As of May 2012, it had begun shipments of ore that were certified as conflict-free and processed in a smelter from the CFS program. The program s mines are located in Katanga province in the eastern DRC, which is more secure and less exposed to conflict. The Automotive Industry Action Group (AIAG) is an industry group working to eliminate the use of conflict minerals from the automotive supply chain. It released the ipoint Conflict Minerals Platform data management tool to assist manufacturers purchasing products containing minerals sourced from conflict regions of the DRC. Although many opportunities exist for companies to begin addressing their exposure to conflict minerals, performance is markedly varied between sectors. Companies in the information technology (IT) industry group have been under the most pressure from stakeholders to eliminate the use of conflict minerals from their supply chain. While most companies ahead of the regulatory curve fall within this industry group, a significant percentage of the sector remains unprepared for compliance. Moreover, while several of the world s largest telecommunication service providers and auto manufacturers have also begun to address this issue, both industries due diligence activities have not been as robust as those of the IT sector. Transparency outside of the IT and telecommunications sectors remains weak. The following table provides an overview of the degree of preparedness observed in three sectors exposed to conflict minerals and related reporting requirements. A more comprehensive table with additional sectors is available in the appendix. Photo source: Mark Craemer

8 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December Table 2 Preparedness and Progress Telecommunication Services Leading telecommunications firms are engaged in multi-stakeholder initiatives addressing the issue of conflict minerals. AT&T, Sprint, Verizon, Vodafone, Deutsche Telekom, Telefonica, and Telecom Italia are all members of GeSI. AT&T, Sprint, Verizon, and Telefonica are all members of the PPA. Most telecommunications firms tracked by Sustainalytics have done little to address the conflicts minerals issue beyond disclosing their participation in multi-stakeholder initiatives. Few companies have engaged in due diligence activities, such as conducting supply chain risk assessments, or soliciting third-party audits of smelters. Vodafone is a leader among its peers. In March 2012, the company launched a supplier due diligence program applicable to all suppliers of Vodafone branded devices. This due diligence program utilizes the tools developed by GeSI/EICC to ensure that companies are working with manufacturers using conflict-free smelters. Technology Hardware & Equipment Ahead of the curve in terms of preparedness relative to other sectors, tech hardware leaders have adopted best practices including policy development, stakeholder engagement, and supply chain due diligence i.e., smelter visits. Participation in multi-stakeholder groups, such as the EICC, has been a key channel for technology hardware companies to address conflict minerals and prepare for reporting requirements. Apple stands out for identifying the number of smelters in its supply chain and its commitment to using conflict-free smelters HP explicitly supports trade within the region, working against the risk of a de facto ban on exports from the DRC. HP, Nokia, Alcatel-Lucent, Research in Motion, Foxconn, Flextronics, and Kemet are participating in OECD due diligence pilot project. Automobiles and Auto Components Ford Motor Company stands out as an industry leader as a participant in both the PPA and the AIAG. Ford is also participating in the OECD due diligence pilot project. Along with Ford, the Chrysler Group LLC and Robert Bosch LLC cochair the AIAG s conflict minerals workgroup. General Motors, Delphi Corporation, Federal-Mogul Corporation, Honda of America, and Nissan of North America are all AIAG participants. The majority of companies in this sector have failed to provide information on specific supply chain due diligence measures implemented to eliminate the use of conflict minerals.

9 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December Implications for Responsible Investors Though they are a welcome commitment to addressing the conflict minerals issue, the final rules on Section 1502 do not manage all risks to which companies and investors face exposure. Nevertheless, they provide responsible investors with an opportunity to engage with companies and to drive best practices across multiple industries, several of which have been off the public radar. Companies in Europe, Asia, and elsewhere that are not required to report to the SEC are also implicated by the requirements of this ruling through their business relationships with companies that have reporting obligations. Further, many of the normative issues that have driven action on conflict minerals are not confined to the U.S. As such, global companies that are not addressing these risks may be positioned as human rights laggards. The discussion points below provide guidance to responsible investors in assessing their exposure to conflict minerals related risks. Strategic considerations: Has the company engaged with its industry peers and other key stakeholders to address their shared exposure to conflict minerals and collaborate on solutions? - As indicated in the sector preparedness table (see Appendix), companies addressing the conflict minerals issue have leveraged various multi-stakeholder initiatives. Responsible investors should encourage unprepared companies to participate in initiatives such as the EICC and GeSI as they increase their supply chain engagement and conflict minerals reporting activities. The EICC and GeSI have collaborated to develop mineral verification tools such as the Conflict-Free Smelter Program, and have publicly stated that all companies and sectors are welcome to participate in its joint initiatives. Within what timeframe is the company aiming to comply with Section 1502? Will it be leveraging the undetermined provision to delay compliance? - Companies that take advantage of the undetermined provision of the SEC s final rule face a greater risk of reputational damage than those companies who comply by May 2014, particularly amongst stakeholders seeking credible commitments to human rights. As such, investors should push companies for early determination of country of origin and reporting. Is the company exercising considerable due diligence over the sourcing and supply of conflict minerals within its sphere of influence? - Given the ambiguity regarding what constitutes significant influence over the manufacturing and design process, investors should encourage companies that are not directly involved in the manufacturing process to determine whether they fall under the umbrella of the SEC s ruling. In light of this ambiguity, there is an onus on investors to ensure that companies are not deliberately avoiding regulatory responsibilities in an effort to reduce the cost of compliance. - Although a majority of retailers may be exempt from the reporting requirements of Dodd- Frank, the conflict minerals issue poses risks to the brand value of large retail firms such as Wal-Mart, Target, and Best Buy that sell goods containing conflict minerals. To mitigate their exposure to this issue, responsible investors should pressure such retail firms to leverage their significant influence over suppliers to ensure that they are credibly reporting on their efforts to eliminate the use of conflict minerals. Though not under regulatory requirements, these

10 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December companies should be encouraged to demonstrate best-practice by conducting due diligence on a voluntary basis. Will the company s approach to managing conflict minerals consider the risks associated with a de facto ban on DRC minerals? - Many corporate consultancies and companies have interpreted the SEC s ruling as a blanket ban on the use of all conflict minerals from this region, as opposed to a ban on minerals which perpetuate the conflict in the Eastern DRC. A de facto ban on DRC minerals would negatively impact those in the DRC economy that have minimal access to alternative livelihoods, such as artisanal miners, families and communities. Given the amount of public and regulatory attention to the conflict minerals issue, companies are seeking new sources of minerals from non-conflict regions such as Indonesia, where minerals are inexpensive and do not yet generate as much negative publicity. However, their extraction may be contributing to similar human rights violations elsewhere. Where does the company stand on legal challenges to Section 1502? - On October 22, 2012, the U.S. Chamber of Commerce and the National Association of Manufacturers filed a lawsuit against the SEC requesting that [Section 1502] be modified or set aside in whole or in part. If these arguments are upheld in court, the provisions of the SEC s final ruling could be stayed until the appeals process is completed, which could take several years. The lawsuit may expose Chamber and National Association of Manufacturers members to reputational risks through association and implicit endorsement of the legal action. Global Witness, a London-based civil society group, has already called for companies to quit the Chamber. Several chamber members have publicly expressed their opposition to the lawsuit, including Microsoft, Motorola Solutions, and General Electric. Operational considerations: What measures has the company taken to prepare for regulatory compliance? - The SEC expects that the implementation of its final rules will cost companies between USD 3 billion and USD 4 billion between 2012 and 2014, and between USD 200 million and USD 600 million annually after These costs were determined based on the assumption that most companies have not yet implemented an appropriate due diligence verification program. Has the company introduced a rigorous methodology to determine the origin of conflict minerals? - The ambiguity of the reasonable design and good faith requirements in the reasonable country of origin inquiry and the allowance that not all suppliers need to have responded to mineral verification requests introduce the possibility that minerals from conflict zones might still make it through the supply chain and ultimately into consumer products. To ensure that the inquiry is as rigorous as possible, investors should encourage companies to investigate any red flags or other concerns when making their conflict-free determination, so as to mitigate risks to brand reputation or unanticipated compliance costs. Does the company s due diligence process incorporate existing best practices? - The SEC s ruling provides a framework for greater supply chain transparency, but it does not prescribe best practices for eliminating the use of conflict minerals. The OECD due diligence

11 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December guidance is the most comprehensive and credible guidance available. GE, Phillips, and Boeing, among others, are participants in the OECD s due diligence pilot program. Investors should continue to drive adoption of this best practice standard to mitigate a company s exposure to risks in its supply chain. Have companies assessed their exposure to potential regulatory changes in other jurisdictions in which they operate? - Compliance with 1502 will better position companies headquartered outside of the U.S. to meet emerging regulatory changes elsewhere. Moreover, there is a possibility that other jurisdictions could introduce similar or more stringent regulations. In 2010, the European Parliament issued a resolution directing the European Commission (EC) to craft legislation that mirrors the provisions of Dodd-Frank. 5 As well, in 2011, the European Parliament issued a resolution condemning mass rape in South Kivu, DRC and reiterated its call for the EC to issue a conflict minerals regulation. 6 As of November 2012, the status of these regulatory developments was unclear. However, in January 2012, the EC issued a trade and development communication that included a commitment to advocate greater use of the OECD due diligence standards by multinational enterprises. 7 In Canada during 2010, Bill C-571 the trade in Conflict Minerals Act was tabled in Parliament. 8 However, the Canadian legislation was not supported by the government and did not become law. As of November 2012, no further legislative proposals regarding conflict minerals were pending. The Australian Government published due diligence guidelines in line with similar UN recommendations, but has not disclosed any regulatory developments to date. 9 - The responsible investment community played a key role in successfully promoting policy changes by the SEC. Such engagement opportunities could be replicated with other governments where rules are not yet enacted, such as in Europe and Canada.

12 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December Appendix Exposure to Conflict Minerals Leaders 10 Preparedness and Progress Telecommunication Services Dependent on mobile phones and network equipment, typically purchased from original equipment manufacturers (OEM) and sold under both the carrier and manufacturer s brand. Although not directly involved in the manufacturing process, many telecom companies could meet the SEC s definition of contract to manufacture as they are involved in the design of mobile phones. Vodafone (LSE:VOD) Leading telecommunications firms are engaged in multi-stakeholder initiatives addressing the issue of conflict minerals. AT&T, Sprint, Verizon, Vodafone, Deutsche Telekom, Telefonica, and Telecom Italia are all members of GeSI. AT&T, Sprint, Verizon, and Telefonica are all members of the PPA. Yet most telecommunications firms tracked by Sustainalytics have done little to address the conflicts minerals issue beyond disclosing their participation in multi-stakeholder initiatives. Few companies have engaged in due diligence activities, such as conducting supply chain risk assessments, or soliciting third-party audits of smelters. Vodafone is a leader among its peers. In March 2012, the company launched a supplier due diligence program applicable to all suppliers of Vodafone-branded devices. This due diligence program utilizes the tools developed by GeSI/EICC to ensure that companies are working with manufacturers using conflict-free smelters. Technology Hardware & Equipment IT equipment is dependent on all four conflict minerals, making tech hardware highly exposed to their use. This includes as a conductive material in capacitors, components, and wiring, and as solder for electrical circuits. As such, conflict minerals are present in essentially all products manufactured by the sector, including mobile phones, network equipment, and computers. Hewlett-Packard (NYSE:HPQ), Nokia (HLSE:NOK1V), Dell (NasdaqGS:DELL), Apple (NasdaqGS:AAPL) Ahead of the curve in terms of preparedness relative to other sectors, tech hardware leaders have adopted best practices including policy development, stakeholder engagement, and supply chain due diligence i.e., smelter visits. Participation in multi-stakeholder groups, such as the EICC, has been a key channel for technology hardware companies to address conflict minerals and prepare for reporting requirements. Apple stands out for its commitment to using Conflict-Free Smelter Program smelters. HP explicitly supports trade within the region, working against the risk of a de facto ban on exports from the DRC. HP, Nokia, Alcatel-Lucent, Research in Motion, Foxconn, Flextronics, and Kemet are participating in the OECD due diligence pilot project.

13 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December Exposure to Conflict Minerals Leaders 10 Preparedness and Progress Software & Services Exposure to conflict minerals in the software and services sector will not affect companies equally and not all will be obligated under Section The majority of companies in the sector are exposed primarily through procurement of ICT equipment. However, some of the largest companies, such as Microsoft, Motorola Mobility (Google), International Business Machines (IBM), Oracle, and Nintendo have hardware manufacturing operations or contract to manufacture activities. Microsoft (NasdaqGS:MSFT), Motorola Mobility (Google) (NasdaqGS:GOOG) Several of those companies that are clearly implicated (e.g., Microsoft, Motorola Mobility, IBM, and Oracle) have made public policy statements and begun supply chain due diligence via multi-stakeholder initiatives, such as the EICC-GeSI Extractives Workgroup. Since before its acquisition by Google, Motorola Mobility, a hardware company, was participating in the Solutions for Hope project focused on establishing a conflict-free source of tantalum from the DRC. Motorola Mobility publicly declared that in 2012 it would assess its products and map its suppliers to establish where conflict minerals are used and the company s exposure to the DRC. Microsoft has committed to implement the OECD due diligence guidance and has participated in the PPA. IBM has begun tracking the issue, disclosing a statement on conflict minerals and becoming a member of the EICC. The company has committed to initiating due diligence in Oracle is participating in the OECD due diligence pilot project. Though one of the more highly-exposed companies in the sector, Nintendo does not make a statement on conflict minerals. Semiconductors & Semiconductor Equipment The sector is especially exposed via the use of tantalum in capacitors, but as with technology hardware, conflict minerals are used pervasively as conductive material in capacitors, components, and wiring, and as solder for electrical circuits. As well, use of these minerals is necessary for semiconductor manufacturing equipment. Intel (NasdaqGS:INTC), Advanced Micro Devices (AMD) (NYSE:AMD) Ahead of the curve in terms of preparedness relative to other sectors, semiconductor leaders have adopted best practices including policy development, stakeholder engagement, and supply chain due diligence i.e., smelter visits. Intel is the first company in any sector to publicly articulate a conflict-free target. In 2012, the company aims to establish verification that tantalum for its microprocessors is conflict-free, and in 2013 is to manufacture the world s first verified, conflict-free microprocessor. AMD engaged with NGOs, responsible investors, and industry peers to advocate for a strong final rule on Section It is also a PPA member and is mapping smelters in its supply chain. AMD, Freescale, and Texax Instruments are participating in the OECD due diligence pilot project. Most other companies tracked do not disclose more information than a policy statement.

14 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December Exposure to Conflict Minerals Leaders 10 Preparedness and Progress Automobiles and Auto Components Conflict minerals are essential to the production of engine components, and vehicle navigation and entertainment systems. In particular, conflict minerals are used to develop key components of engine batteries, as well as automobile headlights. Ford Motor Company (NYSE:F), Chrysler LLC 11 Ford Motor Company stands out as an industry leader as a participant in both the PPA and the AIAG. Ford is also participating in the OECD due diligence pilot project. Along with Ford, the Chrysler Group LLC and Robert Bosch LLC co-chair the AIAG s conflict minerals workgroup. General Motors, Delphi Corporation, Federal- Mogul Corporation, Honda of America, and Nissan of North America are all AIAG participants. The majority of companies in this sector have failed to provide information on specific supply chain due diligence measures implemented to eliminate the use of conflict minerals. Medical Devices and Healthcare Equipment Surgical and dental equipment, prosthetics, pacemakers, hearing aids, X-Ray and MRI machines are all known to contain conflict minerals. Medtronic (NYSE:MDT) response is lagging; sustainability leaders have yet to provide any significant reporting on conflict minerals. Medtronic is one of the few companies to disclose any statement on conflict minerals. In its 2012 sustainability report it states that it is in the process of determining whether its supply chain is exposed to conflict minerals. Industry association AdvaMed has expressed concerns about the conflict minerals provision of Dodd-Frank. In November 2011, it issued a letter to the SEC expressing concerns about the financial costs of compliance. AdvaMed has yet to release a response to the SEC s final ruling. Aerospace & Defence All conflict minerals can be found in a range of sector products, including jet engines, satellites, munitions and rockets, and guidance and navigation systems. This includes as materials in electrical components and systems, alloys in components subjected to high temperatures, missile parts, solar radiation protection, and wiring and fasteners. United Technologies Corporation (UTC) (NYSE:UTX), Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), BAE Systems (LSE:BA.) response is lagging in terms of both transparency and preparedness. Boeing, Lockheed Martin, UTC, and Northrop Grumman, are participating in the OECD due diligence pilot project; yet none have reported on steps taken to implement this guidance. UTC has made compliance with Section 1502 an explicit requirement in its procurement guidelines, though there is no further reporting on due diligence management systems. Beyond BAE Systems, which states that it has conflict minerals clauses that can be used in its procurement contracts, other leading ESG reporters have not made relevant disclosures relating to conflict minerals.

15 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December Exposure to Conflict Minerals Leaders 10 Preparedness and Progress Electrical Equipment The sector supplies an extensive range of products to a wide array of industries, including heavy electrical equipment, electrical components and equipment, and industrial machinery. Conflict minerals are used in the manufacture of or are necessary to the functionality of many of these products. This includes as materials in electrical components and systems, alloys in machinery, and wiring and fasteners. Mitsubishi Electric Corporation (TSE:6503), Nidec Corp. (TSE:6594), Rockwell Automation Inc. (NYSE:ROK), Legrand S.A. (ENXTPA:LR) response is lagging in terms of both transparency and preparedness. Mitsubishi Electric commits to responsible mineral procurement, but discloses no further information on due diligence. Rockwell Automation only provides a general statement that it is working to address conflict minerals in its supply chain. Legrand s conflict minerals policy appears to be limited to its North American subsidiary, Legrand North America. The Babcock & Wilcox Company included a statement in its November 2012 quarterly report that it was trying to determine whether Section 1502 applied to its business. Consumer Durables Conflict minerals are essential to the production of all consumer electronics including mobile phones, laptop computers, mp3 players, and tablet computers. Sony (SNE:NYSE), Panasonic (ADR: NYSE), LG Electronics(LSE: LGLD) reporting on this issue has been limited; however, some companies have begun addressing this issue. LG Electronics is a participant in the EICC and has issued simple contracts with its major suppliers to avoid minerals that are illegally sourced. In its Global Procurement Policy a provision requires suppliers to verify the source of minerals, though guidance on verification schemes is lacking. Sony is a participant in EICC, and has begun tracing certain product categories using the EICC/GeSI reporting template. Panasonic is also a participant in the OECD pilot program. Industrial Conglomerates Conglomerates manufacture a variety of goods consumer electronics, turbines, automobile and airplane engines, and medical devices and equipment the contain conflict minerals. Exposure to conflict minerals in the supply chain varies according to business segment. General Electric Company (NYSE:GE), Royal Phillips Electronics (NYSE:PHG) Overall industry response to this issue has been weak; however, sector leaders have started to take action on this issue. General Electric (GE) has acknowledged the prevalence of conflict minerals in its supply chain and is a participant in the PPA. Phillips and has begun utilizing the Conflict Minerals Reporting tool developed by GeSI to identify smelters processing metals in their supply chain. It has also begun encouraging suppliers to utilize smelters included on the Conflict Free Smelters Program (CFS) list. GE, Philips, and Siemens are all participating in the OECD due diligence pilot project.

16 Regulating Conflict Minerals: Unpacking Section 1502 of Dodd Frank December Endnotes 1 Of note is the exclusion of mining companies due to the SEC s decision to focus on manufacture or contract to manufacture activities. It was considered that, where needed, mining companies would be contacted for information by the covered companies. 2 Sustainalytics considers information technology to include companies in the technology hardware and equipment, software and services, and semiconductors and semiconductor equipment sectors. 3 Sabour, Azadeh, Complicity in the Congo: Investor Risk in the Minerals Supply Chain. Sustainalytics (August 2010): (accessed November 29, 2012). 4 OECD, OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High- Risk Areas. OECD Publishing (2011): (accessed November 29, 2012). 5 European Parliament, The future of the EU-Africa strategic partnership following the 3rd EU-Africa Summit. European Parliament (2010): DOC+XML+V0//EN&language=EN (accessed November 28, 2012). 6 European Parliament, Democratic Republic of Congo and the mass rapes in the province of South Kivu. European Parliament (2011): (accessed November 28, 2012). 7 European Commission, Trade, Growth and Development: Tailoring trade and investment policy for those countries most in need. Publications Office of the European Union (2012): docs/2012/january/tradoc_ en.pdf (accessed November 28, 2012). 8 LEGISinfo, Private Member s Bill C-571 (40-3). Government of Canada. BillDetails.aspx?Language=E&Mode=1&Bill=C571&Parl=40&Ses=3 (accessed November 28, 2012). 9 Department of Foreign Affairs and Trade, Due Diligence Guidelines for the Responsible Supply Chain of Minerals from Red Flag Locations to Mitigate the Risk of Providing Direct or Indirect Support for Conflict in the Eastern Part of the Democratic Republic of the Congo. Australian Government: sanctions/drc-due-dilligence-guidelines.html (accessed November 28, 2012). 10 Assessment is conducted on a best-of-sector basis and is therefore relative. Inclusion as a sector leader does not necessarily indicate that the named companies have implemented best-practice due diligence guidelines. 11 Chrysler is owned by private equity firm, Cerberus Capital Management and is not publicly listed.

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