Investors urge court to uphold SEC conflict-minerals rule

Today, misleading arguments and a “can’t do” attitude threaten the U.S. Securities and Exchange Commission’s 1502 rule on conflict-minerals disclosure, as a panel of three federal appellate judges prepares its response to a lawsuit levied by powerful business interests.  Striking the rule would create troubling uncertainties for the future of countless SEC disclosure requirements that are essential to investor confidence.

The trade in tin, tungsten, tantalum, and gold continues to fund the Democratic Republic of the Congo’s brutal war, which has stretched more than 15 years and claimed millions of lives.  U.S. companies purchase these conflict minerals, effectively putting cash into the pockets of warlords, and use the metals to manufacture our cell phones, microchips, and jewelry.  

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Under an SEC disclosure rule, known simply as 1502 – short-hand for the Dodd-Frank Act provision authorizing the SEC to require disclosure in this area – companies must report whether conflict minerals originating in the DRC exist in their supply chains.  If these minerals are present in a particular company’s supply chain, then the company must report on its due diligence efforts to identify the minerals’ source and chain of custody.  The rule enables conscious, sustainable investment and consumption and has catalyzed action to create conflict-free mining in the Congo.  The rule also enables companies to improve their understanding of supply chains and to manage risks more effectively.  

During oral arguments in January, industry lawyers claimed that the rule overburdens companies, ignoring the apparent will and ability of many companies to comply with the rule.  Companies want to do the right thing in the DRC, and 1502 tells them how.  Major companies, including AMD, Ford, General Electric, Hewlett-Packard, and Intel, have shown leadership in conflict mineral due diligence and reporting.  A few weeks ago, Intel CEO Brian Krzanich unveiled his company’s ground-breaking plans to certify all 2014 microprocessors as conflict-free.  These corporate responses show that companies understand the benefits of supply chain due diligence – both in terms of the potential positive human impact, and in terms of the bottom-line impact of effective risk mitigation.  These issues are of fundamental importance to companies and investors alike. 

Sustainable investors, individuals and institutions managing at least $3.74 trillion in U.S. assets, are increasingly focused on human rights risks across global supply chains.  Given the direct link between the mineral trade, itself fueled by forced labor, and the DRC’s armed conflict, investors need companies to disclose due diligence efforts to eliminate conflict minerals from supply chains.  Due diligence disclosures enhance investor confidence and decision-making by shedding light on how companies manage two material risks:  First,  brand value in a marketplace where consumers are conscious of the origins and ethical impacts of their purchases, and, second,  a company’s capacity to manage complex global supply chains.  If a company is unwilling or unable to identify material origins, then is it maximizing efficiencies?  If a company is not mitigating supply chain risks, then is it mismanaging other material risks? 

Investors also have a fundamental interest in ensuring that the SEC’s disclosure authority survives beyond the pending judicial ruling.  One of the SEC’s essential functions – to compel material corporate disclosures – derives from the idea that corporate disclosures are necessary to protect investors.  If the Court of Appeals is worried by SEC rules that regulate corporate speech, then numerous other routine disclosure requirements, including rules on product labeling and corporate losses, may come into question.  Like other SEC reporting requirements, the 1502 disclosures are factual statements, not political ones, as has been argued – A company states fact when it describes its due diligence efforts to determine the presence of Congolese minerals in its supply chain.  Companies also state fact by disclosing, per other SEC requirements, potentially stigmatizing information, such as pending litigation in which they are involved.  Disclosure rules do not aim to stigmatize companies, but rather intend to provide critical, material information to investors. 

With its forthcoming ruling, the Court of Appeals must protect investors and allow the SEC to carry out its mandate.  Let us not believe that multinational corporations lack the sophistication and willingness to track supply chains and identify source origins.  As industry leaders demonstrate, companies are not only able to mobilize effective due diligence, but they are willing to do so – Because it’s the right thing to do and it can be done, and because it’s good for business and for investors. 

Freeman is senior vice president, Sustainability Research and Policy, at Calvert Investments and a former deputy assistant secretary for Democracy, Human Rights, and Labor at the U.S. Department of State.