7 Key Takeaways from the RY2015 Conflict Minerals SEC Filings

Companies can utilize Conflict Minerals Reporting as an opportunity to thoroughly investigate their supply chains, create value-sharing and mitigate risk by getting to know their suppliers throughout the supply chain.
Jul 27, 2016 3:00 PM ET

Last week, Source Intelligence released “Conflict Minerals Reporting. A Deeper Look into RY2015 SEC Filings.” The report provides an in-depth analysis of benchmarking data from over 1200 Conflict Minerals Reports submitted by public companies, in accordance with Dodd Frank Act Section 1502. Complementary to the report, Source Intelligence also released an on-demand webinar going over key insights and findings from the RY 2015 SEC Filings, featuring resident Chief Scientific Officer Jennifer Kraus, and Michael Littenberg, leading supply chain compliance lawyer, Partner at Ropes & Gray. To watch, click here.

The process of analyzing data of the reporting year 2015 SEC filings has provided Source Intelligence to identify key trends and insights over time. The following are 7 main takeaways from the 2015 reporting year that managers can utilize to implement effective changes in time for the following year’s reporting requirements.

1. Lengthier Conflict Minerals Reports are signaling increased transparency efforts.
Between RY 2014 and RY 2015, the maximum Conflict Minerals Report page length almost doubled, from 47 to 79 pages. The average page length increased from just over 6 pages to 11 pages. Although this data point may seem insignificant, this is a key indicator revealing companies’ efforts to improve transparency along their supply chains. Companies reported details on how conflict minerals policies were implemented, improvement areas noted, and action plans on how to incorporate changes in the future. With companies learning over time, lengthier reports signal increased awareness of the importance of supply chain transparency, as well as company efforts to achieve transparency.

2. More companies are effectively utilizing the OECD due diligence framework.
The U.S. Securities Exchange Commission (SEC) issued the Conflict Minerals Final Rule in 2012, and the ruling requires companies to utilize a nationally or internationally recognized due diligence framework. Currently, the Organization for Economic Co-operation and Development (OECD) is the only approved and recognized provider, which comprises of a 5-step framework. The 5 steps are as follows: (1) Establish strong company management systems; (2) Identify and assess risk in the supply chain; (3) Design and implement a strategy to respond to identified risks; (4) Carry out independent third-party audit of supply chain due diligence; (5) Report annually on supply chain due diligence. The framework was broken down in such a way in order to assist companies in identifying and managing risks up and down supply chains, pertaining to minerals from conflict areas. This reporting year, 80% of companies specified use of the OECD framework, and also provided more detail on operations on how to meet the defined steps of due diligence. This was a vast increase from companies who reported utilizing the framework in RY 2014, at just 50%. In addition, 70% of filers also included their entity’s conflict mineral policy in their reports, in addition to describing planned future actions for improving supply chain transparency and due diligence. This demonstrated that utilizing the OECD framework in depth has allowed companies to thoroughly appraise their supply chain investigation processes, and help them realize where improvement can be made.

3. Smelter information increased, but is still an area for improvement.
In the 2015 reporting year, 40% of companies that filed a conflict minerals report included information on smelters utilized in their supply chains. This is an increase from 32% in reporting year 2014, and from 18% in 2013. There is a noticeable trend of companies taking strides to identify and report smelters upstream in their supply chain. However, roughly 33% of companies provided lists of smelters utilized along the supply chain in detail, including descriptions such as smelter names, location, OECD risk level, and conflict-free certifications. The other percentage of companies listed smelters by name, or by count. Identifying smelters in the supply chain can be extremely challenging for companies, as they are furthest upstream from the entity. In order to identify smelters in their supply chains, companies need full cooperation from suppliers across tiers. The 33% of companies who were able to provide a complete, detailed listing of smelters signal that they succeeded in gaining the utmost cooperation and disclosure from suppliers. Such an achievement comes as a great benefit to both enterprise-level and supplier-size companies, creating shared value and ability to better identify potential risks along the supply chain. However, the majority of companies were unable to provide detailed smelter information, highlighting an area that needs improvement.

4. More independent audits were utilized to validate information.
The SEC requires filers to state a determination on whether conflict minerals in their supply chain are sourced from the conflicted Democratic Republic of the Congo (DRC), or other covered countries.  Examples of determination declarations are “DRC Conflict-Free” or “DRC Determination Undeterminable.” This reporting year, the percentage of companies declaring as DRC Determination “Undeterminable” increased from 9% to 29% and No DRC Sourcing decreased from 19% down to 7%. Similar to the previous point on smelters, these trends underline how companies face a great challenge in truly knowing their supply chain all the way upstream. The original Conflict Minerals determination option “not been found to be DRC Conflict Free” was ruled as a violation of the First Amendment. If a filing company voluntarily specifies the determination “DRC conflict free,” they are required to have an Independent Private Sector Audit (IPSA) performed, in accordance with Generally Accepted Government Auditing Standards (GAGAS). This reporting year, 11 companies elected voluntary disclosure of “DRC conflict free,” but only 9 IPSAs were performed. This is an identified area for improvement. However, 19 total IPSAs were performed in reporting year 2015, indicating that 10 companies specifying determinations other than “DRC conflict free” voluntarily performed IPSAs even though they were not required. Overall, IPSAs performed tripled year on year, demonstrating that companies are more frequently choosing to closely investigate their supply chains in an effort to improve transparency.

5. Use of third-party service providers increased, helping companies connect more with their suppliers.
This reporting year 749 companies, or 62%, specified the use of a third-party service provider to design and implement due diligence and compliance methods on behalf of the companies. More and more companies are utilizing third-party service provider because investigating the supply chain and aggregating data can be a daunting and time-consuming task. Third-party providers can collect and verify valuable data from suppliers, cross-reference and verify data, and assist with the due diligence reporting process.

6. Getting to know your supply chain leads to value-sharing and risk mitigation.
The points above demonstrate how the SEC Dodd Frank Act Section 1502 (Conflict Minerals Rule) serves as a beneficial opportunity for companies. The Ruling require companies to investigate their supply chains more deeply and thoroughly than ever before. The hurdle of identifying smelters and refiners requires companies to gain full communication and cooperation from their suppliers all the way upstream. This process becomes a beneficial tool for companies by encouraging value-sharing with their suppliers, and by identifying and mitigating potential risk. Uncovering the supply chain can provide company decision-makers the opportunity to evaluate their operations, and identify ways to prevent risks, as supply chains become more and more intertwined in a globalized economy.

7. Sustainability has become a priority for shareholders and investors.
According to a Harvard Business Review article, sustainability is the fastest-growing cause for shareholders. In a concept termed “investor activism,” can improve a company’s sustainability and performance if the activism is done well. More than half of shareholder proposals were found to file immaterial agendas, signaling that investors are motivated by topics other than short-term profit. In addition, when the immaterial proposal is on an ESG (Environment, Social, Governance) issue, performance of the company on that particular was found to improve, reflecting an effect on corporate management. Also according to the article, the improvement came from managers utilizing resources to improve on matters such as energy efficiency, water consumption and product safety.

A recent study also found that 90% of executive-level investors will evaluate companies’ sustainability efforts before making any investment decisions. A company’s effectiveness on implementing and carrying out ESG efforts signal to investors that the company is thinking seriously about long-term growth. They also see a strong link between sustainability and financial performance. Among investors that were interviewed, the top reasons for placing value on corporate sustainability performance were: increased potential for long-term value creation, improved revenue potential, and demonstration of operational efficiency.

Source Intelligence’s ““Conflict Minerals Reporting. A Deeper Look into RY2015 SEC Filings” provides an in-depth analysis of how companies are fulfilling their Conflict Minerals Reporting requirements, and how methods are changing and improving over time. To download the full report, click here. To watch our on-demand webinar on key trends and highlights with additional insights from experts, click here.