Tag Archives: Responsible Sourcing Network

Ahead of Public Release, Elm Previews Full Data from Bayer/Assent Report on RY2014 Conflict Minerals Filings, Key Trends Emerge

The recent report Dodd-Frank Section 1502 – RY2014 Filing Evaluation authored by Dr. Chris Bayer and sponsored by Assent Compliance, has received a great deal of attention since its publication this past July. The report reviews the SEC conflict minerals filings for all issuers that filed reports by the regulatory deadline of June 1, 2015 covering the calendar year 2014. Summaries of key data collected are provided in the report, along with “scores” of 25 issuers. The “Top 100” scores were released on October 6, and the complete data set covering all 1,267 issuers is to be released to the public around November 2.

Elm was on the Advisory Committee of the study and as such, provided input into the data-gathering tool and scoring criteria, but we had no involvement in the data collection, interpretation or evaluation as Dr. Bayer undertook the study to be wholly independent. Although the Advisory Committee had a say on the instrument, Dr. Bayer had the final word. Also, he is the primary author with ultimate responsibility for the survey implementation, data evaluation and results. He, along with Assent, allowed us to review the full data ahead of the public release date and publish our thoughts. We greatly appreciate the opportunity to have the sneak peek.

Jonathan Hughes of Assent set the stage for the study: “The idea behind the study came from questions and comments we heard from customers and at conferences. Companies want to make sure that their program is in line with others in their industry and other issuers in general. This study provides a common benchmark that companies can use to measure their program against their peers. While it is not perfect and based only on publicly available data, it is currently the best source of benchmarking available to issuers.”

The report and the data/scoring released thus far have generated controversy, which will no doubt increase when the full data set is publicly available. As with any scoring methodology, some do well and others not so well. We make no comment on the validity of the study or scoring criteria, although many others are likely to do so. Differences and divergent opinions are bound to crop up.  Dr. Bayer and his team of researchers interpreted the SEC Rule based on their view of the legislative intent.  While their interpretations were widely shared in many instances, it is evident that there is room for other interpretations and opinions. Also, with 1,267 disclosures evaluated and over 85,000 individual data points collected, errors in the data may exist. Dr. Bayer and his team are setting up a mechanism to address requests for corrections from issuers who believe such errors have been made. We took the numbers at face value and our following thoughts are based on that.

We appreciate Dr. Bayer’s independent perspective on the SEC’s disclosure requirements and his interpretations thereof. At the same time, we disagree with the scoring approach to one criterion. This is not a bad thing – it illustrates the ambiguity facing issuers in writing their disclosures. Where others disagree with interpretations taken in the scoring, we hope they take the same view.

Question 5 of the compliance scoring for SD+CMR filers asks if the issuer’s description of their due diligence framework explicitly lists all five steps of the OECD Due Diligence Guide. Points were awarded where the answer is “yes”, with no points given for a ”no”. Merely referencing the OECD Framework was considered a “no”. As a result, 431 issuers received no points (42.7% of CMR filers), 578 were awarded points (57.2% of CMR filers) and 257 were considered N/A as SD only filers. We disagree that the SEC disclosure instructions mandate the explicit call-out of all five OECD steps. In our opinion it is acceptable to make a direct reference to the OECD Guidance without regurgitating it; we (and other notable experts) find no language in the rule specifically mandating detail.

Results of Question 2 were informative. Question 2 asked if the issuer separated RCOI activities from the description of due diligence measures. Issuers that do not separate the two will likely to pay unnecessarily high IPSA costs when the IPSA is required. Of the 1,010 CMR filers, 245 (24%) conflated RCOI and due diligence descriptions, and therefore face paying an IPSA auditor more than they should.

In looking at the results from SIC groupings, there were a few notable things. Within some SIC codes, significant variability exists in issuer reliance on their RCOI to make their final conclusion about sourcing and the need for due diligence. There can, of course, be meaningful differences in circumstances between companies, even those in the same SIC code. Additionally, SIC codes are not always completely accurate representations of a company’s products or business – SIC codes are self-determined and there is no regulatory oversight.  So while these numbers are interesting, they don’t tell the whole story. Even so, the following stood out as rather lopsided.Slide1Also, for SIC 2820 (plastics manufacturing), six of the ten filers in this SIC code submitted a CMR, possibly indicating less than universal acceptance (or perhaps knowledge) of the metal compound interpretation embodied in the Keller & Heckman letter on SEC’s website. On the other hand, those six issuers may manufacture other products that are within scope of the disclosure.

Finally, for those fourteen issuers in the difficult position of being distributors or wholesalers of electrical apparatus, electronic components or hardware, every one filed a CMR. Distributors typically do not contract to manufacture products – they are a sales channel for “generic” products – and rely on that position when responding to customer requests for conflict minerals data. The prevalence of CMR filings appears to be a juxtaposition to how they respond to customers.

A total of 136 companies scored 70 or below, which could be considered an “F”. Twelve are household brand names and the average market value of the 136 is $6.6B, so there are a number of sizable companies in this list. Looking at a these scores in terms of a few selected SIC codes:

  • 10 in 2834 (pharmaceutical preparations) – the SIC code with the most scores below 70.
  • 3 in 3670 (electronic components)
  • 7 in 3674 (semiconductor)
  • 6 in 3841 (surgical & medical equipment)
  • 5 in retail

Finally, we were interested in the differential between compliance scores and “good practice” scores. The good practice scoring criteria are those used by Responsible Sourcing Network (RSN) in their Mining the Disclosures report.  It is worth noting that RSN has stated that their scoring methodology is different from that used by Dr. Bayer, although for purposes of Dr. Bayer’s report – as well as this article – we don’t see this point as critical.

For this article, we decided that a score differential* of less than 50 (the halfway point of the category score) reflected above average uptake of the good practice indicators in comparison to the company’s compliance efforts. Conversely, a score differential of 50 or more reflected a focus on compliance over good practices. The breakdown of the 1,267 filers (RSN and Dr. Bayer scored both SD-only filers and SD+CMR filers) is in the table below.


Surprisingly, of the 314 issuers with a 100 compliance score, 60% (189) also had a score differential greater than or equal to 50, indicating lower uptake of good practices than anticipated. We expected greater parity in those with a perfect compliance score. There was a single instance where the differential was negative, meaning the good practice score was higher than the compliance score.

In conclusion, the data shows a variety of approaches used by issuers, even those in the same industry groups. Much of this likely stems from the lack of clarity that exists in the disclosure requirements and the variability in interpretations of key components of the rule. At the same time, the numbers themselves can be misleading as they do not provide visibility into meaningful differences in circumstances between issuers, even those in the same peer groups. It can also be said that these numbers don’t reflect year-over-year improvement or progress made by many issuers, even if their score is considered low.

There is much value in this study, even if it is not perfect. Issuers slogging through the haziness of the rule need a stationary beacon as a navigation guide. These scores offer a generally consistent point of reference, especially for companies in the same peer groups. Dr. Bayer commented, “All together, issuers have invested millions of hours of effort to implement the Rule within their supply chains. In a way, our evaluation validated much of that effort by applying a coherent, comprehensive evaluation framework, and finding that many companies did great in terms of compliance. The report also points to weaknesses and low-hanging fruit for improvement. I am optimistic that next year overall we will see a higher compliance score.”


*   The differential is determined by subtracting the good practice score from the compliance score.  A smaller differential indicates more parity between the two categories, which we took as meaning comparatively more attention was apparently paid by the issuer to the good practice indicators.  We understand this is far from scientific or statistically precise, but we only sought to find generalized trends.

Conflict Minerals Reporting Indicators, Investor Rankings From Responsible Sourcing Network

On May 19, in a webinar hosted by Michael Littenberg at SRZ, the Responsible Sourcing Network (RSN) will release its full report Mining the Disclosures: An Investor Guide to Conflict Minerals Reporting. The report is aimed at helping investors better understand the US Securities and Exchange Commission (SEC) conflict minerals disclosures and determine potential financial implications of the information, as well as offer guidance to reporting companies on broadening their disclosure.

RSN states that they applied their ranking system to “51 of the largest market cap companies from 17 high exposure industries”, and these results will be announced in the webinar. In advance of the release, RSN has made available three documents – their Indicators Shortlist, Indicators Longlist and Step-by-Step Guidance for Companies and Investors.

We have reviewed these documents and provide our thoughts, beginning with a surprise. Although we don’t agree with everything, RSN’s indicator lists are generally reasonable and appropriately aligned with the OECD Guidance and the SEC disclosure requirements. RSN presents their information in a way that is easy to understand and clearly separates best practices from basic compliance – something that the Global Witness/Amnesty International report on the SEC conflict minerals disclosures falsely considered as one and the same.

Two of the indicators advocated by RSN we have thoughts on are:

  • Whether the issuer disclosed various quantitative metrics on products, suppliers, supplier response rates and smelters/refiners. As RSN makes clear, disclosure of this information is voluntary, and each issuer will make their own decision about reporting metrics. We feel this is appropriate in certain instances. For instance, where an issuer has a very small number of suppliers, metrics help make clear the context of a short smelter/refiner list.
  • Whether the issuer provided details about the specific steps they took to conform to the OECD Guidance or simply referred to the Guidance. This has broader implications than perhaps understood by RSN as doing so could significantly increase the cost/effort of the Independent Private Sector Audit (IPSA) when that is required.

The timing of the release of RSN’s indicator lists may be problematic as there are only days left before the filing deadline, which leaves issuers little time to make any changes they may want. Each investor group will decide the level of importance they place on the conflict minerals disclosures, and of course each company should assess the context of their reporting and decide what approach to take. There will certainly be some companies who adopt RSN’s concepts, but not all.

New “Expectations” for Conflict Minerals Reporting

The Responsible Sourcing Network (RSN), based on “input from stakeholders across the conflict minerals supply chain,” has published their updated performance criteria for what they consider best practices in conflict minerals reporting to the Securities and Exchange Commission.

Their Indicators Shortlist sets forth 18 performance indicators grouped into four “Measurement Areas”:

  • Assessing Exposure and Responding to Risk
  • Policies and Management Systems
  • Transparency and Reporting
  • Promoting a Conflict-Free Minerals Trade.

The document also addresses RSN’s expectations for Form SDs from issuers who do not conduct due diligence (and therefore do not need to file a Conflict Minerals Report because, based on the Reasonable Country of Origin Inquiry results, the company has no reason to believe it has any material from Covered Countries in its supply chain).  RSN’s description of the desired Form SD content is essentially a mini-CMR.  We remind readers that there will be more scrutiny of Form SD-only filers, so we suggest adequate preparations be made.

RSN further indicated that these indicators were used in a pilot study conducted in partnership with ESG research and analysis firm Sustainalytics.

Enough, Responsible Sourcing Network Publish Their Expectations of SEC Conflict Minerals Filings

NGOs The Enough! Project and Responsible Sourcing Network (backed by socially-responsible investment firms Boston Common Asset Management, LLC and Calvert Investments) have published a document titled “Expectations for Companies’ Conflict Minerals Reporting”.  This paper is offered as detailed guidance for issuers submitting a Form SD and Conflict Minerals Report (CMR) to the US Securities and Exchange Commission (SEC).

According to the authors, the intent of the paper is to “articulate key reporting components that are important to many SRIs and NGOs and to suggest indicators that can be tracked over time to allow for comparability between reports and measure improvement.”  The paper continues that the “listed indicators will allow stake-holders to easily compare reports and measure progress” and that “competitive evaluations will likely occur on these public disclosures.

The document sets forth a significant amount of detail, what the authors consider best practices and relevant numeric indicators well beyond the SEC requirements.

And as if there is not already confusion about the concept of “due diligence”, the paper references four processes an issuer should undertake that combine – and in our view, expand – what SEC and OECD establish.  SEC outlines three steps, only one of which is defined as “due diligence”.  The OECD Framework contains five steps, although only one or two map to SEC’s due diligence component (see this graphic for an explanation).

While we agree that the report provides potentially valid ideas for future conflict minerals program improvements, issuers need to walk before they run.  The paper may spark further thought/discussion, but existing SEC regulatory requirements and OECD framework offer enough significant and unprecedented challenges for Year 1 implementation and reporting.

In another article, we explore implications of this paper on the Conflict Minerals Report (CMR) audit effort and cost.