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August 24, 2012
SEC Issues Rules on Conflict Minerals and Payments to Governments
    by Robert Kropp

Responses by sustainable investors and other stakeholders to payments to governments in resource-rich countries is generally positive, but concerns are voiced over provisions in the conflict minerals regulation. Second of a two-part series.

More than two years after passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC) on Wednesday finally adopted rules mandating disclosure by companies on two issues of critical importance for global social justice.

Disclosing Payments by Issuers Engaged in Resource Extraction requires companies in the oil and gas and mining sectors that are engaged in resource extraction in resource-rich countries to disclose their payments to governments. Any payment that that equals or exceeds $100,000 during a single fiscal year must be reported on a new SEC form, Form SD.

In a press conference held shortly after the SEC announced its decision, Ian Gary, senior policy manager for extractive industries at Oxfam America, said, "It appears from the description that was given this morning in the SEC meeting that the Commission has largely fulfilled Congressional intent and statutory language and has not caved to industry lobbying to water down implementation of this landmark provision."

Gary of Oxfam recently returned from Ghana, and, in a second press conference held yesterday, he said that oil revenues there have had little impact on most of the citizens of the impoverished nation. "The information that is going to be disclosed by this Dodd-Frank requirement will be extremely important," he said. "It will help empower local communities and districts to track the money and make sure it is going to help in education, rather than into the pockets of local elites."

And in a statement released yesterday, Calvert Investments applauded the SEC's new requirements on resource payment reporting.

"Meeting the world's resource needs means taking material risks that until now have been unaccounted for in oil, gas and mining company disclosures," Bennett Freeman, Senior Vice President of Sustainability Research and Policy of Calvert, said. "The resource payment disclosures required by Section 1504 are essential to investors' consideration of the growing social, regulatory and taxation risks faced by oil, gas and mining companies as they venture further into countries with poor governance, weak rule of law, and high levels of corruption."

The second regulation issued by the SEC on Wednesday, Disclosing the Use of Conflict Minerals, was greeted with a decidedly mixed response by sustainable investors and other stakeholders.

The regulation requires US corporations to disclose whether their products contain conflict minerals, including tantalum, tin, gold, and tungsten, which have been smuggled out of the Democratic Republic of the Congo (DRC). Armed groups use payments for them to fund a conflict which has resulted in the loss of more than five million lives.

Even in advance of the regulation, many electronics corporations have taken significant steps to ensure that conflict minerals are not entering their supply chains, according to the Enough Project.

A coalition of sustainable investors have commended the SEC for implementing the rule, which "requires issuers traded on US stock exchanges to take steps to accurately determine the origin of their conflict minerals, conduct supply chain due diligence that must conform to a nationally or internationally recognized due diligence framework, such as OECD, and to commission an independent third party audit of their due diligence."

Lauren Compere, Managing Director at Boston Common Asset Management, said, "Investors will benefit from this rule, since it promotes transparency at all levels of a company's operations. We see mandatory reporting to the SEC on raw material sourcing as a much needed step for highlighting risks in the most vulnerable area of a company's supply chain."

However, the rule as issued by the SEC gives "companies two or four years (depending on size) to uncover where all of their 'indeterminate' minerals come from," the coalition of investors stated, which "is too long, especially when coupled with no requirement of an audit during this time. In addition, investors were disappointed mining companies are excluded from the reporting requirements."

As a result of the loophole, "Investors will have to press companies over the next four years for continuous and rapid improvement in addressing these human rights risks," Susan Baker of Trillium Asset Management said.

Other stakeholders were more emphatic in their criticism of the rule as adopted.

Describing the loophole as "extremely disappointing," the human rights organization Global Witness stated, "The minerals trade is fueling violent conflict and human rights abuses in eastern DRC and delays in implementing the law postpone the moment at which companies take responsibility for the impact of their purchases, jeopardizing efforts to stop minerals funding conflict and seriously undermining the aim of the law."

However, while noting that the conflict minerals resolution "includes provisions that are weaker than we would have liked," Lisa Woll of US SIF: The Forum for Sustainable and Responsible Investment stated, "The issuance of these rules represents an important step forward in providing greater clarity on material environmental, social and corporate governance disclosure to millions of investors. We ask companies to implement these rules."

Both regulations require corporate disclosure via the new Form SD, and Woll said that the information would be more readily available to investors if it were included in annual reports instead.


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