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Guest Perspective: Is the Dodd-Frank Act Conflict Minerals requirement the next Proposition 65?

Ed. note:  We are fortunate to count Mark Schaffer as an Elm Affiliate.  Mark is located in Austin, Texas and runs Schaffer Environmental, providing a range of supply chain, sustainability and product content consulting support to the computer, technology and electronics industries.  Mark submitted the following piece on conflict minerals from his perspective on other product content matters.

The Dodd-Frank Act requires companies regulated by the Securities and Exchange Commission (SEC) to report whether their products contain conflict minerals from the Democratic Republic of the Congo (DRC) and other nearby countries.  These conflict minerals are defined as cassiterite, columbite-tantalite, gold, wolframite and their derivatives (tin, tantalum and tungsten) – though, in the future, more minerals may be added to this list.

These materials are found in a variety of consumer products that we love to use everyday, from computers to cell phones, golf clubs to fishing weights.  So, to the purchaser of these consumer products, what is the real impact of whether the product contains one of these minerals sourced from the Congo?

Currently, the exact reporting requirements are still not established.  The law requires manufacturers sourcing “conflict minerals” to include information on their sourcing in their websites.  The SEC regulations, scheduled to be finalized in third or fourth quarter 2011, will clarify what disclosures will be required within the financial reports to SEC.  Further sourcing disclosure may even end up on the product or the product packaging.

Granted, business-to-business contracts, relationships and purchasing requirements are already being impacted by the supply chain traceability mandates – but what might this all mean to the consumer and the choices they make?

At best, the disclosures will be an awareness point for consumers, but will it truly affect their purchase of the product?  Unless there is a price differential between products, only the most conscientious consumers will be deterred from buying and using products containing DRC-sourced materials.

In addition, consumer confusion is likely to result where companies use/disclose “Non-conflict DRC materials”.  This is material that originates from the conflict areas (DRC and adjoining countries) but is obtained from a legitimate source verified as not funding or contributing to the region’s armed conflict and human right violations.

In a similar fashion, California Proposition 65 requires a notification of the presence of substances that have been determined to be cancer causing and/or damaging to the reproductive system by the State of California.  A warning is often seen printed on the packaging of products or on tags and labels of products indicating the presence of materials in the product that could cause cancer, birth defects or other reproductive harm.

Even this type of warning does not deter the consumer from purchasing the product.  It is likely that a conflict-warning label, if that became a requirement, would have similar negligible effect in product sales.  There will be even less of a measurable impact on sales/revenue if the warning is limited to disclosures within a corporate Form 10-K report.  Placement in a 10-K will raise visibility to investors in the company producing those products but unless there is a clear impact on the bottom-line profits or revenue, will that be enough incentive to change sourcing practices?

The strength of a “notification” regulation lies in a company’s desire to avoid “label shame.”  Manufacturers of products covered by Prop 65 have made changes to the materials they use such that their products no longer need the warning label.   So, even though not all consumers changed their purchasing habits due to the presence of those warnings, manufacturers worked (and still work) to replace those materials with safer alternatives.  The Dodd-Frank Act may ultimately have similar effect in transforming the material choices and sourcing.

At the same time, however, there is growing evidence of consumer “label fatigue,” indicating that consumers are paying less attention to these labels or feel they are not credible, especially where the labels – and their form/content – are not mandated by law.  This is perhaps most prevalent in “green” product labels and certifications.

Recent history tells us that the Dodd-Frank conflict minerals requirements may indeed promote change, though that change is slower than would occur from an outright restriction or ban on the use of those materials.  For example, the most recent impactful “banning” restriction, the EU Restriction on Hazardous Substances (RoHS) went into effect July 1, 2006 after many years of development.  Due to the demand by the electronics industry for parts that could meet the RoHS requirements by that date, the supply chain transformed rapidly using alternative materials and techniques.