Elm OECD Cycle 2 Client Alertelmsustainability.com/wp-content/uploads/2014/07/Elm-OECD-Cycle-2... · Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas

THE ELM CONSULTING GROUP INTERNATIONAL LLC United States - Mexico - Brazil - Argentina - Columbia - Peru - Indonesia - New Zealand - China

Client Alert:

OECD Cycle 2 Interim Progress Report on Conflict Minerals Due Diligence Guidance

The interim progress report on the second cycle of the Pilot Program of the implementation of the Organisation for Economic Cooperation and Development’s (OECD) Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas and its Supplement on Tin, Tantalum, and Tungsten has been released, covering the period January to May 2012. Called “Cycle 2,” the report gathers “greater detail about current approaches and tools, the challenges [the participants] have faced, and experiences they have had while developing systems and processes for the implementation of the five-step OECD framework”. As in the first project segment, the Cycle 2 reports are bifurcated into upstream (from the mine to the smelter) and downstream (from the smelter to the final product)1. Similar to our previous Client Alert, this Alert covers only the Cycle 2 report for downstream companies, highlighting limited key information from that report and providing commentary from ELM’s own experiences. The quotes and facts below, other than those presented in ELM’s Perspective, are attributed to/originate from that report. We recommend that both reports be downloaded and independently reviewed in their entirety. Pilot Study Participants Thirty companies and three industry associations are participating in the downstream pilot. Of these, 28 companies (mostly large multinational corporations) and all three industry associations submitted responses to the Cycle 2 questionnaire. [Page 6] Findings Generally, the Cycle 2 report concludes that substantive progress has been made in some areas of implementation of the OECD Due Diligence Framework, but not in others. At the same time, “many of the same challenges reported in the Cycle 1 baseline report remain, specifically around aligning with Annex II of the Guidance, obtaining and validating information from suppliers, and identifying smelters.” [Page 45] An overview of the key detailed findings begins on the following page.

Client Alert: OECD Pilot Study Cycle 2 (June 2012) THE ELM CONSULTING GROUP INTERNATIONAL LLC

©Copyright 2012, THE ELM CONSULTING GROUP INTERNATIONAL LLC. Information contained herein is not exhaustive and is provided solely for informational or educational purposes. Reliance on the information solely contained herein is not intended or recommended. This document shall not be construed as providing legal, technical or management advice. Appropriate legal, accounting and technical subject matter advice should be obtained for any specific matters. Elm is not responsible for the information quoted or referenced herein.

• Most of the pilot participants are large multinational corporations, and 23 out of the 30 identified company participants (77%) are in the electronics sector. [Page 6] The seven non-electronics firms consisted of three from the aerospace industry, two from diversified heavy industry, one automotive and one metal processor/parts manufacturer.

• There has been a “marked increase in policy adoption… as well as an increase in the breadth

of coverage”. [Page 7] While the participants generally align their policies with Annex II of the OECD Guidance, only one “consumer-facing company incorporates language from Annex II… to prohibit human rights abuses and any direct or indirect support to non-state armed groups or security forces at the mine site.” [Page 10]

• Many companies are waiting on SEC’s final regulations before implementing various program

elements, and a key theme throughout the report is that of companies “grappling with uncertainty around the final implementation of the SEC rules”. [Page 12] Some companies “are focusing on the elements of the OECD Guidance that are in line with Section 1502 while they are delaying activities related to those elements that the final rule will further clarify.” [Page 33]

• Challenges continue with smelter identification/engagement due to a lack of direct business

relationships with smelters and suppliers beyond Tier I and validity of smelter information. [Page 22 - 24] As an example, EICC & GeSI indicated “smelter lists that companies have been able to collect represent approximately a 30:1 ratio of invalid names to valid smelters”. [Page 40] In addition, the report states “few companies reported that they have been able to identify all of the smelters used in their supply chain.” [Page 23] It was also noted that while one company has identified its smelters and country of origin information “it has been unsuccessful in obtaining information about the transit and transportation routes.” [Page 27]

• The EICC/GeSI Reporting Template and Dashboard are cited as the most commonly used

data collection tool (30% of participants, with another 37% using it in combination with their own mechanism) [Page 7], but participants continue to note its “limited compatibility with internal systems and requirements and/or low ease of use.” [Page 12] Participants also reported that the template does not allow for part-level data collection (although a future revision will add that feature). [Page 14]

• Another consistent theme is that of protecting confidentiality of information and supplier

relationships. On-going efforts to address this include incorporating confidentiality clauses in contracts, developing non-disclosure agreements (NDAs) and using data collection tools that do not require listing all suppliers. [Page 8, 26] However, developing NDAs is considered time consuming and contract modifications must be made over time when existing contracts come up for renewal, “consequently, it may take a company three to seven years to include such clauses in all of its contracts”. [Page 26]

• There continues to be a gap in understanding and awareness of conflict minerals requirements

- as well as considerable non-responsiveness - in many supply chain layers. This is most evident in small companies, privately-held and non-US companies not subject to the SEC requirements. [Pages 21-23]. It also appears that non-OECD countries with “significant stakes in these minerals, such as China and Russia” have not engaged in developing - or responding to - conflict minerals programs. [Page 46]



• Significant manual effort is needed to review and validate incoming responses to conflict mineral information requests. This involves “checking the credibility and completeness of the smelter information received from suppliers … consistency checks against the CFS list, applying industry and technical knowledge, and using common sense to validate responses”. At the same time, some companies stated they perform no validation checks. [Pages 22-23]

• Concerns about anti-trust issues are preventing industry-wide cooperation and information

sharing. [Page 24]

• On the topic of the relationship between Dodd-Frank, OECD and CFS, the report offered no new insight, simply deferring to the Estelle Levin report2 which was quoted in part as follows:

There are some elements under development that prevent the CFS from being fully conformant with the performance levels set by the OECD DDG at this point in time. This relates to the publication of the auditors’ credentials and what will count as an acceptable OECD DDG conformance audit for the purposes of smelter eligibility for a CFS audit. There is still a lot of ambiguity on these points, and greater definition is needed. [Page 33]

• The Conflict Free Smelter (CFS) audit program is cited as the most common tool for carrying out smelter audits. However, the report pointed out “critical obstacles for utilizing the CFS as the primary tool for verifying smelters” [Pages 31-32], including:

o Only tantalum smelters have been certified (however, subsequent to the Cycle 2 data collection, at least one tin smelter has achieved CFS status).

o The program does not publish a list of all smelters, nor does it list which smelters are in-process or have not passed. EICC/GeSI cited anti-trust concerns for this.

o There are only three CFS auditors and a lack of clarity exists on the auditor selection criteria/process. “Increased transparency into the CFS program’s auditor qualifications and selection is necessary and may enable more trust by stakeholders”. The report noted that “EICC & GeSI have publicly published information on the CFS website about how auditors are selected”3.

The report communicates what participants seem to view as a lagging uptake of the CFS, stating that smelters “do not have enough customers requesting that they join the CFS”. [Page 31] The report recommends that “more customers that use the metals need to demand that their smelters are audited, for example, through the CFS” and “OECD member countries need to encourage smelters to be evaluated and consider organising a face-to–face meeting between smelters and OECD, African and key partner countries.” [Page 46] Finally, in contrast to previously publicized information, implementation guidance and cost estimates for conflict minerals program development, REACH and RoHS were brought up by only a single participant in the Cycle 2 report. That participant stated they are leveraging their internal REACH system to integrate with the EICC/GeSI Reporting Template. [p. 13] This possibly indicates that the overlap between REACH/RoHS and conflict minerals programs is not as direct/valuable as initially thought and that comparisons of conflict minerals programs and REACH/RoHS may not prove to be particularly instructive.



ELM’S Perspective Many of the facts and comments presented in the Cycle 2 report for downstream companies are consistent with our experiences and we find little that is surprising. Based on our active client work, many public presentations and on-going conversations with a multitude of companies across industry sectors, our opinion is that the new report reflects an expected evolution of any new management system. In addition, the report is consistent with the predictions we made in April 20124. One matter we continue to believe is not adequately recognized or addressed is the importance of the quality of auditors and need for oversight/accreditation, as well as what constitutes an “audit” versus other types of less formalized reconnaissance, investigations and assessments (although that point may be more relevant in the upstream context5).

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Our knowledge of conflict minerals and global health, safety, environmental and sustainability (HSES) management makes ELM uniquely qualified in conflict minerals program development and support. ELM was the only HSES consultancy selected by the US Securities and Exchange Commission as an expert panelist in the Conflict Minerals Roundtable convened to assist the Commission in developing its final regulation. We are also the creator of the Conflict Minerals Self Diagnostic© (CMSD℠) tool, an interactive roadmap to developing and reviewing conflict minerals programs. For additional information, contact Lawrence Heim, CPEA at 678-200-5220 or email at [email protected]. We also invite you to visit our blog at http://elmgroup.com/

Founded in 2001, THE ELM CONSULTING GROUP INTERNATIONAL LLC is a specialty health, safety, environmental and sustainability management firm with 14 offices in the United States, Mexico, Brazil, Argentina, Columbia, Peru, New

Zealand, Indonesia, China and a network of over 100 hand-selected affiliates in 25 other countries.

_______________ Footnotes: 1. Both of these documents can be downloaded free of charge from the OECD website at http://www.oecd.org/document/35/0,3746,en_2649_33765_49992739_1_1_1_1,00.html 2. Conformance & Compatibility Analysis: CFS, iTSCi and the OECD Due Diligence Guidance, November 28, 2011, http://www.conflictfreesmelter.org/documents/ConformanceandCompatibilityAnalysis20111128FINAL.pdf 3. As of June 13, 2012, ELM was unable to locate the information on the CFS or EICC websites and the EICC Voluntary Audit Program (VAP) does not mention, refer or apply specifically to conflict minerals or the CFS. 4. OECD Downstream Pilot Program Second Report Predictions, http://elmgroup.com/2012/04/17/1205/ 5. For example, see Solutions for Hope Illustrates Audit Risk, http://elmgroup.com/2012/04/09/solutions-for-hope-illustrates-audit-risk/

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