The EU Conflict Minerals Regulation and the Labyrinth of Brexit

The initial provisions of Regulation (EU) 2017/821 of the European Parliament and of the Council laying down supply chain due diligence obligations for Union importers of tin, tantalum and tungsten, their ores, and gold originating from conflict-affected and high-risk areas (the “EU Conflict Minerals Regulation”) took effect in 2017. Then, on January 1, 2021, the rest of the provisions of the EU Conflict Minerals Regulation (as amended) came into full effect requiring supply chain due diligence and, in certain cases, third-party audits and consultations. The supply chain due diligence required by the Regulation is based on the due diligence framework set out in the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.

This publication addresses the impact of Brexit on the effectiveness of the EU Conflict Minerals Regulation on importers into England, Scotland, Wales, and Northern Ireland.

Recent Climate and ESG Disclosure Activity — What does it mean for the SEC’s Conflict Minerals Rule?

In its first two months, the Biden Administration has given significant attention to climate-related and environmental, social, and governance (ESG) disclosure issues.

  • February 1, 2021 — The SEC announced the appointment of Satyam Khanna as the Senior Policy Advisor for Climate and ESG.  He is to oversee the SEC’s efforts relating to climate risk and other ESG developments.
  • February 24, 2021 — Allison Herren Lee, the Acting Chair of the SEC’s Division of Corporation Finance, announced that the SEC would enhance its focus on climate-related disclosure in public company filings.  In that announcement, Acting Chair Lee noted the relevance of climate-related issues to investors.
  • February 26, 2021 — The SEC posted an Investor Bulletin on Environmental, Social and Governance Funds (ESG).  The Bulletin observed the differing criteria that ESG Funds use in their investment strategies, and it highlighted that investors need to understand ESG Funds’ investment goals.
  • March 4, 2021 — The SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement.  The Task Force is to proactively identify potential ESG-related misconduct and disclosure violations.
  • March 10, 2021 — The US Department of Labor (DOL) announced that it would not enforce Trump-era DOL rule amendments that require ERISA plan fiduciaries to select investments based solely on “pecuniary factors.”
  • March 11, 2021 — In a speech, John Coates, the Acting Director of the SEC’s Division of Corporation Finance, advocated for the creation of an effective ESG disclosure system that is “adaptive and innovative” and noted that ESG factors are increasingly relevant to investment and voting decisions.
  • March 15, 2021 — Acting Chair Lee announced that the SEC staff would be evaluating climate change-related disclosure rules and asked for public input on such disclosure.
  • March 22, 2021 — The SEC launched a new page on its website to host information on the various agency actions relating to climate and ESG investing.

Of course, these actions are just the start.  Much of the Biden Administration’s focus is likely to be on climate-risk.  Some investment advisers and asset managers are advocating for guidance and specific disclosure standards on climate-related matters.  Environmental and governance disclosures have been included in public reporting for some time, but more specific disclosure requirements in those areas may come as well.

And, what about the “S” in ESG?   In addition to traditional “social” issues, over the last few years there has been increasing attention on supply chain issues, including forced labor, child labor, human trafficking, and sourcing of minerals.  Disclosure about the sourcing and chain of custody of certain minerals is mandated by the SEC’s Conflict Minerals Rule.

The Conflict Minerals Rule was challenged in court, and in 2015 the DC court of appeals invalidated the portion of the Conflict Minerals Rule that required companies to state whether any of their products “have not been found to be ‘DRC conflict free.’”   The SEC was to take additional action in furtherance of the court’s decision.  However, no new guidance was provided until April 2017, when the SEC staff under the Trump Administration indicated that it would not recommend enforcement action against a company that was required to file a conflict minerals report with its Form SD but failed to do so.   That guidance remains in place today.  The Biden Administration’s early actions relating to ESG disclosure could be a preview of possible changes relating to the SEC’s Conflict Minerals Rule.

What might occur?  First, as it is required to do, the SEC may review the Conflict Minerals Rule and revise it to address the court’s decision that certain disclosures required by the rule violate registrants’ free speech rights.  But, it could implement an even broader overhaul of the rule, including increased disclosure obligations. Second, the SEC could provide new enforcement guidance to replace the guidance provided in April 2017.  Third, the SEC could change its expectations and enforcement policy related to independent private sector audits (IPSAs), perhaps by increasing the circumstances under which an IPSA must be provided or expanding the scope of an IPSA.  Fourth, Congress could revise Section 1502 of Dodd-Frank (which is the basis for the SEC’s Conflict Minerals Rule) by adding to the minerals covered by or expanding the geographic scope of the Conflict Minerals Rule.  Of course, those changes would not apply to the Form SD filings due in May 2021.  But, some of those actions could change the disclosure and IPSA obligations relating to calendar year 2021.

The bottom line?  SEC registrants should stay tuned because, in light of the early ESG disclosure activity by the Biden Administration, changes to the SEC’s conflict minerals disclosure requirements and the enforcement of those requirements seem likely.

EU Conflict Minerals Regulation — OECD Guidance Workshops

Now that the EU Conflict Minerals Regulation (EU Regulation) is in full effect, EU importers of tin, tantalum, tungsten, and gold and derivative products need to determine whether they are covered by the EU Regulation.  Those EU importers that are covered by the EU Regulation are required to implement a supply chain due diligence process based on the Organisation for Economic Co-operation and Development’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD Guidance).

So, what does the OECD Guidance require?  What should EU importers do to get started?  One way to get started is to listen to our series of short workshops that cover each of Steps 1 through 4 of the OECD Guidance.  The workshops are hosted by Dynda Thomas (Squire Patton Boggs Cleveland) and Bernard Maier (Squire Patton Boggs London). “EU Conflict Minerals Workshop: Due Diligence and OECD Guidance.”

Sessions
Thursday 4 February 2021 OECD Step 1 – Strong Company Management Systems
Thursday 11 February 2021 OECD Step 2 – Identify and Assess Risks
Thursday 18 February 2021 OECD Step 3 – Address and Mitigate Risks
Thursday 25 February 2021 OECD Step 4 – Independent Third-party Audits

For more information about the firm’s Conflict Minerals resources, please visit our Conflict Minerals webpage or sign up to receive regular updates and articles on recent developments through our Conflict Minerals blog.

OECD Due Diligence Guidance — Workshops

If you are an EU importer of tin, tantalum, tungsten or gold (3TG) covered by the EU Conflict Minerals Regulation, as of 1 January your due diligence process must comply with the OECD Due Diligence Guidance. Non-compliance may have serious legal and reputational consequences.

You may have listened to webinars and read white papers on conflict minerals due diligence and compliance. But, if you haven’t done so already, now you actually have to get down to business and develop your own due diligence program. Conflict minerals due diligence is more than mere supplier engagement.  So, are you sure that you are working on all the recommended steps?

Join Dynda Thomas and Bernhard Maier for a four-part series of 30-minute workshops zeroing in on Steps 1 – 4 of the OECD Due Diligence Guidance and the specific actions that are included in the OECD’s recommendations. You can join us for any one or all of the sessions.  The workshop will share some valuable insights from due diligence procedures implemented by US companies to comply with the US Conflict Minerals Rule.

Agenda (all sessions start at 1 p.m. GMT)

  • Thursday 4 February 2021: OECD Step 1 – Strong Company Management Systems
  • Thursday 11 February 2021: OECD Step 2 – Identify and Assess Risks
  • Thursday 18 February 2021: OECD Step 3 – Address and Mitigate Risks
  • Thursday 25 February 2021: OECD Step 4 – Independent Third-party Audits

Register for the 4 part workshop

Note: the opinions expressed are those of the author and do not necessarily reflect the views of the Firm, its clients, or any of its or their respective affiliates.  This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Department of Labor’s “Do-Good” Investing Rule — Biden Administration Review

In yesterday’s post, we said we expected that the Biden Administration would re-focus attention on the US conflict minerals rule.  In a similar vein, by the end of Inauguration Day, the Biden Administration indicated that it wants a review of recent amendments to a Labor Department rule that require that ERISA plan fiduciaries put financial considerations above all other considerations when making investment decisions. 

Amendments to the Labor Department’s “do-good investing rule” took effect on January 12, 2021.  Those amendments require that ERISA plan fiduciaries select investments based solely on financial considerations.  Notably, the amended rule does recognize that some environmental, social and governance (ESG) factors can be relevant to the analysis of economic value and allows non-pecuniary considerations under certain circumstances.  The investing rule applies to private-sector employee benefit plans.  Under the rule in effect before January 12, 2021, when competing investment options served a plan’s financial interests equally well, fiduciaries could choose to make investment decisions to advance ESG goals.  The differences between the prior rule and the amended rule may seem to be only at the edges.  But, the effect of the amendments is significant.  It seems likely that a reversal will come from the Biden Administration, and that reversal will probably go further than the prior rule in promoting the consideration of ESG factors when making investment decisions.   

The question of investment decision factors has been the subject of disagreement for many years, and it has been the subject of more pointed conversation during the last few years.  The back-and-forth with this rule represents the clash of interests between plan fiduciaries who want to pursue ESG objectives, plan fiduciaries who want certainty and are concerned about liability, investors who want to promote ESG goals, and parties who say it is difficult to analyze and compare the plethora of ESG characteristics of companies.

Conflict minerals and other responsible sourcing concerns are among the ESG factors getting increased attention.  So, we will continue to watch these developments to alert companies about the importance and expanding relevance of their conflict minerals disclosures. 

New Day for the US Conflict Minerals Rule

It’s Inauguration Day in the US, and it’s likely to be a new day for the US conflict minerals rule.  Where have we been and where are we going?

2012 – 2016

Pursuant to Section 1502 of the Dodd-Frank Act of 2010, the SEC issued its conflict minerals rule in 2012, requiring reporting companies to report on their use and sourcing of tin, tantalum, tungsten and gold (3TG).  In 2014, SEC reporting companies began reporting on their “reasonable country of origin inquiry” and their due diligence measures by filing their first Form SDs.  A handful of companies also provided independent private-sector audits (IPSAs) as contemplated by the rule.  The rule itself included no specific required form of disclosure.  So, the initial filings on Form SD varied a bit.  But, because industry groups and lawyers had suggested approaches to the reporting before the first due date, the filings did show significant commonalities. Within two years, reporting companies had largely settled on standard formatting for their disclosures on Form SD and for their conflict minerals reports.

A due diligence inquiry template created by the Conflict-Free Sourcing Initiative (now known as the Responsible Minerals Initiative or RMI) has probably been the single most important compliance tool available to companies.  The conflict minerals reporting template (CMRT) is available to all at no cost.  Almost all companies across all industries in all countries now use it to engage with suppliers and gather conflict minerals supply chain information.  (The CMRT has been modified to be responsive to the additional geographic scope of the EU conflict minerals regulation.)

During this early period, certain industry groups challenged the US conflict minerals rule in US courts.  The result of that challenge was the US court of appeals’ conclusion that portions of the US conflict minerals rule violated reporting companies’ free speech rights.

2017

The Trump Administration signaled that rules like the US conflict minerals rule might be  eliminated.  Members of Congress introduced legislation that would have repealed Section 1502 of Dodd-Frank, which was the legislative basis for the US conflict minerals rule.  No such legislation was passed.  In April, as required by the decision of the US court of appeals, the US district court entered a final judgment invalidating the portion of the rule that required companies to state whether any of their products “have not been found to be ‘DRC conflict free.’”  The district court remanded the matter back to the SEC to take additional action in furtherance of the court’s decision.  The SEC Division of Corporation Finance issued a statement that it would not recommend enforcement action if a company were to file only a Form SD describing its reasonable country of origin inquiry and whether any of its conflict minerals originate (or may originate) from a covered country.   The SEC indicated that this position was subject to further action.

2018 – 2020

The SEC did not issue any re-formulation of the US conflict minerals rule. Most companies continued their due diligence measures and disclosures without much change.  Less than a handful each year provided an IPSA.  NGOs that score conflict minerals disclosures concluded that the due diligence and reporting were now less rigorous.  There are many possible reasons for the types of filings made and the disclosures included in them.  But, the most likely is that companies continued the procedures they already had in place and did not make significant changes to their disclosures because there was no new guidance or interpretation by the SEC.    Importantly, the focus of most industries and reporting companies since 2014 has been on smelters and refiners of 3TG (SORs) — encouraging SORs to participate in and comply with recognized due diligence assessment standards.

2021

It is expected that the Biden Administration’s SEC will renew focus on the US conflict minerals rule and other responsible sourcing measures.  The SEC could provide additional guidance and re-formulation of the US conflict minerals rule to address the courts’ decisions.  Such a re-formulation could result in a significant overhaul of the rule.  Congress could also weigh in with new legislation.

With a renewed focus on strengthening the US conflict minerals rule (along with the implementation of the EU conflict minerals regulation which came into full effect on January 1), there is likely to be significant activity in 2021 relating to 3TG due diligence and reporting.

Countdown to EU Conflict Minerals Regulation (7 Months)

In less than 7 months, the EU conflict minerals regulation will take full effect, and importers into the European Union of certain threshold amounts of tin, tantalum, tungsten and gold (3TG) and of metals containing 3TG will be subject to it.  As of today, despite Brexit, importers into the UK will be subject to it as well. Those Union importers should be taking action now to supplement their compliance programs to address the due diligence, risk mitigation and audit requirements of the EU regulation.  In anticipation of those requirements, some importers may consider replacing certain of their direct and indirect suppliers.  And, such changes take time.  

The EU conflict minerals regulation is expected to cover over 1,000 Union importers and will indirectly impact tens of thousands of economic actors in the European Union – many more than are covered by the US conflict minerals rule. The EU regulation covers more forms of minerals and metals and has a much broader geographic focus than the US rule. Further, Union importers will be required to obtain third-party audits and undertake consultations with stakeholders if they reach certain conclusions about the direct and indirect suppliers in their supply chains.

EU Conflict Minerals Regulation — Adding to Your Compliance Program outlines the types of initial steps a Union importer can take to develop (or expand) its conflict minerals compliance program to address the requirements of the EU regulation.

COVID-19 and Conflict Minerals

We have been following this year’s conflict minerals filings to determine whether reporting companies have highlighted any impact of the COVID-19 shut-downs on their conflict minerals due diligence measures or results.

Based on our review of the 320 filings through May 27, 2020, 14 conflict minerals reports included references to “COVID-19,” “coronavirus” and/or the “pandemic. Four more reports mentioned “COVID-19” or “coronavirus” in their forward looking statements disclaimers. One report included a reference to the COVID-19 pandemic in the attached independent private sector audit letter. Of the 14 references included in the conflict minerals reports, 11 said that COVID-19 negatively impacted suppliers’ response rates or responsiveness, two indicated that their due diligence steps taken were limited by impacts of the COVID-19 pandemic on their businesses, and one explained that some Responsible Minerals Initiative audits of smelters and refiners were restricted by the COVID-19 outbreak. All of these references were included in the conflict minerals reports, and none were included in the Form SDs themselves.

Whether stated in the filings or not, the disclosures included in the conflict minerals reports for calendar year 2019 will, of course, be viewed against the backdrop of the COVID-19 pandemic and its effects on business and operations during the first five months of 2020.

COVID-19 in Conflict Minerals Reports — Update

As we discussed in a previous post, early in 2019, some companies were expressing concern that, because of the impacts of the shut-downs associated with COVID-19, certain of their suppliers might not be able to provide responses to their conflict minerals inquiries in a timely manner.  They worried that their conflict minerals disclosures for calendar year 2019 could be less robust as a result.

As of May 13, 2020, based on our review, none of the Form SDs filed had referred to “COVID-19,” “coronavirus” or the “pandemic. Now, through the end of May 21, 2020, with 10 days left in the filing season for calendar year 2019, based on our review, five companies mentioned “COVID-19,” coronavirus” or the “pandemic” when explaining suppliers’ responses.

It is possible that the COVID-19 shut-down has impacted the quality and number of supplier responses to conflict minerals inquiries for other companies that have not included discussion that in their filings.

Impact of COVID-19 Shut Downs on Conflict Minerals Reporting

You will recall that on March 25, 2020, to address certain challenges created by COVID-19, the Securities and Exchange Commission (SEC) issued the Order that extended the filing periods for certain public company reporting obligations under the Securities Exchange Act.  The relief granted by the Order applied to specific Securities Exchange Act reporting requirements.  However, Section 13(p) of the Securities Exchange Act, which requires the filing of conflict minerals disclosures on Form SD, was not covered by the Order. In response to an inquiry we made to SEC staff, we were told that the SEC was considering whether to provide that same extension for the Form SD filings.

As the COVID-19 business shut-downs continued in earnest, some companies were expressing concern that certain of their suppliers might not be able to provide responses to their conflict minerals inquiries in a timely manner.  They worried that their disclosures could be less robust as a result, and they hoped that they would have more time to complete their filings.  But, no extension of the conflict minerals filing deadline has been given.

It is now May 13, and we are in the midst of  the SEC conflict minerals filing season.  Based on our review of the filings, none of the Form SDs filed to date for calendar year 2019 refer to “COVID-19,” “coronavirus” or the “pandemic.”  It is possible that the COVID-19 shut-down has impacted the quality and number of supplier responses to conflict minerals inquiries.  But so far, companies have not mentioned that impact in their filings.

 

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