More disclosure on the horizon

aksaroya —  31 May 2013 — Leave a comment

By Ramona Dzinkowski, economist and business journalist.

african-mine

On 2 April, the European Commission (EC) issued a consultation paper requesting comment on potential new disclosure rules regarding the use of conflict minerals in the manufacture of goods listed on European exchanges. This initiative follows the US Securities and Exchange Commission’s final 2012 rule on conflict minerals that requires companies listed in the US to disclose their use of conflict minerals manufactured in the Democratic Republic of Congo (DRC) and adjoining countries.

The US rule fulfills the requirements laid out in the Dodd-Frank Act 2008, which required companies using minerals from Africa’s Great Lakes region to publicise their due diligence practices to ensure the minerals they use in their products have not financed illegal armed groups engaged in the Congo’s war. These minerals include tin, tantalum, tungsten and gold, which are often used in the manufacture of a wide range of products. It is anticipated that the rule will affect approximately 6000 issuers in the US who will have to file their first minerals report in May 2014.

The gist of the US rules upon which the EC has framed its proposed disclosure requirements is that companies must determine whether or not they manufacture or contract to manufacture products that contain conflict minerals, whether these minerals originated from the specified conflict region or were obtained in scrap or recycled sources, and whether or not the conflict minerals benefited armed groups in the region.

While many have lauded the initiative, others see it as a prohibitively tall order and are concerned about the costs of the disclosure and the implications for using the reporting system in this way. Similar issues are unlikely to unnoticed by affected parties in Europe.

In response to the proposed ruling, the US-based National Association of Manufacturers pointed out that, among other things, the SEC has ignored the complexity of manufacturing supply chains. More specifically they say there are three major challenges for downstream users attempting to establish a chain of custody from the mine to the product:

1. identifying which mines are conflict mines – that is mines whose output is controlled by or taxed by warring factions;

2. tracing ores from the mine to the smelter; and

3. tracing conflict minerals from smelter through complicated supply chains to the finished product.

Implementation of the legislative language, must therefore, take into account these on the ground realities.

Some CFOs are questioning why the financial reporting system is being used to resolve political conflicts in the first place. For instance, how would CFOs be able to answer the question of which are conflict mines, and tracking down the sort of information required is not a traditional finance function. There’s also the level-playing-field argument that suggests that North American and European companies will now be at a competitive disadvantage against companies originating from countries that have no such disclosure requirement like China, Brazil, Indonesia and Canada.

In Europe, the EC is requesting all interested parties to comment on whether they should craft similar rules. Comments are due by 26 June 2013.

This article first appeared in Accounting and Business magazine, May edition, 2013.

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