OECD Downstream Pilot Program Second Report Predictions

Based on our ongoing dialogs with clients and other companies, and our attendance at last week’s EICC-GeSI Conflict Minerals Workshop in Philadelphia, we have a few predictions about the upcoming second report on OECD’s downstream pilot program on the implementation of their due diligence guidance.  The report was originally scheduled for release last month, but is not yet available and we don’t know when it will be published (although we would expect in advance of the next meeting the first week of May).

As our client base consists more of heavy industry, hard metals and non-electronics consumer products, some of our predictions stand in contrast to “conventional wisdom.”

  1. Especially for US companies subject to DF1502, there is an increasing recognition that the makeup of the downstream pilot participants is heavily skewed toward the electronics industry, and the results of the pilot are therefore not representative of heavy manufacturing or other non-electronics sectors.  At the same time, we expect an increased awareness of conflict minerals (CM) issues in pilot participants which means a related increase in uptake of basic program elements such as company policies on conflict minerals.
  2. Many companies (arguably most companies (a) outside the electronics industry and (b) not participating in the Pilot Program) are still awaiting the final SEC regulations before moving forward on CM program development/implementation.
  3. There continue to be significant questions about how to engage/influence smelters in situations where business relationships do not directly include the smelters.
  4. Confidentiality remains a major concern with no clear solution.
  5. Adoption of the EICC-GeSI Common Reporting template continues to be held back due to its stand alone, non-integrated nature as a simple spreadsheet.  This is especially the case for companies with very large/ complex supply chains, although technological solutions are being developed to bridge this gap.
  6. Validation of information from suppliers is a complex exercise with no simple answer.
  7. Communications with suppliers and customers are not just “one and done” – different types of communications are being used depending on the requests, and sometimes multiple/labor-intensive follow-ups are required.
  8. The tension between CFS, OECD and the anticipated SEC requirements is growing, especially related to the definitions of  “conflict free” and the applicability of audits under Step 4 of the OECD, CFS and the Conflict Minerals Report.
  9. There is increasing uncertainty as to how upstream verifications are conducted within smelter (or other downstream) audits.
  10. Some companies in the supply chain – especially those not under SEC jurisdiction and not in the electronics industry – are not required to address CM and are not integrating CM requirements in their procurement.  Concern is growing that CM program costs are creating financial disadvantage in the short term and may continue to do so until CM matters are fully embedded throughout all supply chain actors across all sectors and geographies.
  11. The CFS program is viewed as having major shortcomings, such as:
  • Only 11 smelters have been approved since the program’s inception 2 years ago.
  • The tin, tungsten and gold sectors have not been supportive of the program.
  • Only three audit firms are approved by EICC to conduct all CFS audits.
  • There is no transparency or published standards for CFS auditor qualifications or selection criteria.  Other industries are seeking “approval” of auditors they have already screened for their purposes (ie., LBMA gold).
  • The CFS program only publishes “approved” smelters, and does not provide an indication of specific smelters that are in corrective action mode, or that do not pass.
  • The CFS program does not allow for risk mitigation under OECD.  Passing a CFS audit requires 100% conflict free materials at the time of the audit as well as verification that smelter purchasing processes ensure that only 100%  conflict free materials continue to be purchased.

12.  Finally, there continues to be an emphasis on third party auditors providing critical information verification and program credibility in the myriad national and industrial traceability frameworks, process stages and reporting steps.  However, there is almost universal lack of recognition about the importance of the quality of auditors or need for oversight/accreditation.  Even further, questions are already arising as to what constitutes an “audit” versus other types of less formalized reconnaissance, investigations and assessments.

 

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