Supply chain sustainability: evidence on conflict minerals

What is it about?

Proposed federal rules that would require companies to disclose their use of “conflict minerals” — those mined in the Republic of Congo and neighboring countries and linked to armed conflict and human rights abuses — would cost shareholders billions of dollars. The study, looks at the costs of implementing section 1502 of the Wall Street Reform and Consumer Protection Act, a broad national reform of the U.S. financial system signed into law by President Obama in 2010. Section 1502 would require publicly traded companies to report to shareholders and the Securities and Exchange Commission whether their mineral supplies come from strife-torn areas of Central Africa. While Congress continues to press the SEC to issue final rules, companies also express the view that section 1502 comes with a hefty price tag, not only for the out-of-pocket costs of compliance and implementation, but also because of the potential loss of shareholder value from uncertainty about conflict minerals resourcing and customers’ and others’ social concerns. Conflict minerals — such as gold, tantalum, tungsten and tin — are found in such common consumer products as cell phones, game consoles and most products with integrated circuits (including automobiles). We examined 206 companies from December 2010 through March 2012 and found those companies — half who had voluntarily disclosed before the law became mandatory — lost $6.5 billion in shareholder value due to declining equity values. Both disclosing and nondisclosing companies were affected because of the ripple effect in capital markets when uncertainties arise about a particular business practice — using conflict minerals, in this case. The losses experienced by the firms were similar to earlier predictions by academic researchers and company trade groups, but exceeded the SEC’s estimated compliance cost of $71 million. The proposed disclosure rules would not prohibit companies from using conflict minerals, nor impose penalties for their use. In their pursuit of a social remedy to expand transparency and eliminate trade in U.S. companies’ use of conflict minerals, the U.S. Congress and the SEC should understand the amount and cost of this remedy, and who bears that cost.

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