Q&A with Bob Walker, Vice President, ESG Services & Ethical Funds, NEI Investments, Michelle de Cordova, Director, Corporate Engagement & Public Policy, NEI Investments, Genevieve St. Denis, ESG Analyst, NEI Investments and Iain Marlow for The Globe & Mail
Iain Marlow: The issue of conflict minerals is hugely complicated, spanning from secretive supply chain practices of massive technology companies to the non-transparent political situations of resource-rich African states, such as the Democratic Republic of Congo. Why should ordinary consumers care about conflict minerals themselves, when they are only part of a complex problem?
Bob: The conflict minerals problem is certainly complex. If solutions are going to be found, all the stakeholders need to play a part – including companies, investors and consumers. Consumers ultimately create the demand for these minerals, and brand reputation is an important asset for a company. Consumers have a lot of power to create change. People are willing to donate money to alleviate poverty in Africa, so why wouldn't they be interested in playing a part as consumers in encouraging companies to contribute to positive change in the DRC region?
Iain: Obviously, in cases such as BP's spill in the Gulf of Mexico and News Corp.'s hacking scandal in the U.K., questionable or risky business practices can result in horrendous results for investors. But Apple's stock price hasn't dipped as a result of labour practices at Foxconn in China, for example, and Research In Motion's and Nokia's stock price problems have little to do with ethics. Why should investors, in particular, pay attention to conflict minerals?
Michelle: We see conflict minerals posing a potential risk to the value of companies in several ways. There's the reputational risk to consumer brand companies that can't explain what they are doing to eliminate serious human rights abuses in their supply chain. There's also an operational risk in relying on a supply chain within an unstable region – a risk to basic security of supply.
Bob: Environmental and social risks tend to be long-term risks. Share price might not be affected in the short term – but we don't want companies to wait until after the share price is affected before taking action to mitigate risks. I hope that most institutional investors would also agree that they have a basic responsibility to respect human rights. This is both a value question and a values question.
Iain: After harsh labour conditions in Apple's Southern China plants were revealed by journalists, the company authorized third-party labour investigators to look into the process. Which technology companies have the best disclosure policies and supply chain management checks for conflict minerals?
Genevieve: Until systems are set up to track the minerals from the mine to the smelter or refinery, it's going to be challenging for downstream companies to operate robust supply chain management. Many of the initiatives are industry-wide or group initiatives, like the EICC-GeSI Conflict Free Smelter program and the International Tin Research Institute (ITRI) tracking system. It makes a lot of sense to tackle these issues through joint initiatives. When it comes to examples at the company level, I'd highlight Intel for the quality of disclosure on its supply chain, and on initiatives it's taking part in. Here in Canada, Research in Motion is also doing a pretty good job.
Michelle: One encouraging aspect of this story is the way stakeholders from civil society and the private sector have shown willingness to talk and work together. There are an incredible number of conflict minerals-related initiatives in play right now, covering different industries and different levels of the supply chain.
Iain: Research In Motion seems to have been allowing third-party audits of its supply for some time, how does the Waterloo, Ont.-based global tech giant do on conflict minerals in your estimation?
Michelle: This is something we've been discussing in our engagement with RIM for about two years now. The company seems committed to improving in this area and to being one of the leaders rather than a laggard.
Genevieve: RIM is working on supply chain issues in general, and the conflict minerals issue specifically, from different angles. It has disclosed supply chain and minerals policies, it's taking part in electronics industry initiatives on conflict minerals, it's disclosing on its efforts in reporting. The people we talk to seem really engaged on conflict minerals – but it's difficult not to be when you start looking into this issue. There is so much more to it than audits and paper certificates.
Iain: Efforts to halt the flow of conflict minerals into global consumers' gadgets depend highly on domestic laws. In the U.S., there is the Dodd-Frank clause on disclosure of supply chain sources enforced via the Securities and Exchange Commission (SEC). In Canada, NDP MP (and current NDP party leadership hopeful) Paul Dewar has tried introducing legislation, but the situation is complicated by our lack of a national securities regulator. How does the Canadian situation differ, and what are people looking at to regulate truly global companies?
Michelle: The Dodd-Frank Act Section 1502 has really focused attention on the conflict minerals issue, but I think the drafting was too prescriptive. It's also clearly been a huge technical challenge for the SEC to implement – of course SEC staffers aren't recruited based on their knowledge of supply chain management issues. We have a big opportunity here in Canada to learn from the process surrounding Section 1502. The record of letters received by the SEC over the past two years makes for fascinating reading – it's an amazing policy resource. But it seems as if the discussion about what an effective and workable piece of legislation on this issue should look like happened after Dodd-Frank was passed, not before. We should definitely have that discussion in Canada before making policy here. We're all still learning about effective management of the conflict minerals problem, so this might be a case for principles-based policy-making, rather than making very specific rules immediately. The purpose of regulation should be to create positive change in the DRC region, end abuses and mitigate risk to investors – in a way that minimizes the administrative burden for companies.
Genevieve: It should generate information people are really going to use. For example, as an analyst there's no way I can use a lot of detailed product-level information. That's too granular. What I can use is aggregated data that reveals the extent of a company's exposure to conflict minerals risk – the amount of conflict-free material in the company's total supply, whether or not key product lines are conflict-free, and so on. I can also use strategic information on what the company is doing to mitigate risk by managing the supply chain – for example, supplier codes, due diligence processes and audit results.
Bob: In terms of regulating the trade globally, it's obvious that Canada and other countries are waiting to see what emerges from SEC. I don't think the absence of a single securities regulator is necessarily a barrier to action in Canada. Based on previous experience, SEC action on an issue is one of the factors that can stimulate action by the Canadian securities regulators – especially where major Canadian issuers that trade on U.S. exchanges are going to be impacted anyway, as is expected with the SEC conflict minerals rules. Private members bills are laudable, but I'd really like to see a government-sponsored bill on this issue. We're also seeing global associations like the Responsible Jewellery Council and the World Gold Council working on conflict-free schemes that would be applicable to all members, regardless of where they are based, and which would cover all conflict regions, not just central Africa.
Iain: The efforts to eradicate the use of conflict minerals have at times caused economic catastrophe in the exact areas they're trying to help. What should, or shouldn't, be done as investors seek ethical stamps for the latest technology, and what has been learned from the Kimberly Process for Blood Diamonds?
Genevieve: You're talking here about the unintended consequences of the Dodd-Frank process – a de facto boycott on sourcing from the region. We don't think it's responsible for investors – or anyone else – to demand that companies stop sourcing from the region entirely. The conditions may be bad, but people depend on the minerals trade for their livelihoods. What we have been doing is asking companies to demonstrate their awareness of the issue, to do their supply chain due diligence based on the established international guidelines from the OECD, to participate in initiatives to clean up and certify the minerals supply chain, to participate in activities to improve the humanitarian situation on the ground so that people have alternatives, to participate constructively in efforts to regulate the problem and to disclose to their shareholders about all of this.
Michelle: Basically we've been engaging companies about being engaged: it's about taking the conflict out of the minerals trade, not taking the Congo out. Trying to source minerals responsibly from the DRC region should be a badge of honour, not a badge of shame. Boycotting is problematic because apart from the immediate impacts to people on the ground, it could derail important initiatives under development all the way upstream and downstream the supply chain – for example, the work to set up a regional minerals certification system. You can't pilot initiatives to clean up a supply chain if that supply chain is not operating. On the topic of certification, I think one important learning point from the Kimberley Process is the importance of a credible monitoring system to back up the scheme.
Bob: This is certainly a case where divestment and boycott strategies could do more harm than good.
In general, I'd say that nowadays divestment is not a very effective tool for responsible investors and companies: if you pull out, there's someone waiting to take your place that cares a lot less about the social and environmental issues. The focus now is on how responsible companies can be engaged in high-risk areas as part of the solution to the underlying problems.