NGOs are providing feedback that is driving companies to be more detailed in their conflict minerals reporting and make other changes to their filings. Most understand that improvement is a multi-year process. With the final months of 2015 reporting underway, it’s clear that learning from the gaps in last year’s reporting is critical.

Michael R. Littenberg is a Partner in the New York office of the Schulte Roth & Zabel law firm where he heads up the firm’s public companies practice. As an adjunct to that practice, he advises a significant number of companies and trade groups on the SEC’s Conflict Minerals Rule and other supply chain compliance matters and is widely considered to be the foremost legal authority in this area.

What are some of the more important trends for companies to focus on with regard to responsible sourcing and conflict minerals?

Supply chain transparency, traceability and ethical sourcing are increasing areas of focus. Government agencies and regulators aren’t the only ones focused on these issues. NGOs, socially responsible investors (SRIs), consumers and commercial customers are paying close attention as well.

In addition, companies are increasingly concluding that implementing ethical sourcing practices is helping them to recruit a top quality workforce. Many millennials expect companies they work for to be socially responsible.

And the focus isn’t just on conflict minerals from the eastern Democratic Republic of the Congo. Responsible sourcing impacts many other commodities and other regions of the world. Compliance programs should take a holistic, flexible approach both to reduce supply chain risk and increase efficiency.

How does NGO and SRI feedback drive companies to build better compliance and reporting for conflict minerals?

The vast majority of companies want to “do the right thing,” but aren’t as conversant in human rights issues as the NGOs and SRIs, so the NGOs and SRIs provide valuable insight on these issues. Companies also recognize that in some cases NGOs and SRIs can impact brands and shareholder sentiment if they choose to target a company.

Many of the NGOs and SRIs have been engaged with this issue for several years or more, so they have a good sense of what they would like to see companies eventually achieve from a substantive sourcing perspective and the disclosure that will help them to assess sourcing practices. Although NGOs and SRIs recognize this is a multi-year process, they are also looking for continued progress. As companies continue to build out their compliance programs and prepare their disclosure for filing this year, they should take this into account.

A common criticism of last year’s filings from the NGO and SRI communities was that they often were not able to determine how companies reached their conclusions. There wasn’t enough information around the reasonable country of origin inquiry (RCOI) or due diligence process. In addition, many of the filings were considered hard to follow and could have been better organized.

Do you see more litigation in the months to come with challenges to the Rule? Will the First Amendment challenge move forward?

I don’t foresee any new litigation, but the First Amendment challenge to the Rule is still very much still alive and will take time to play out. But, keep in mind that, other than the labeling and auditing requirements, the Rule remains in effect and is likely here to stay.
Will there be major changes between the reports filed in 2014 versus 2015?
In many cases, yes. There will be both stylist changes and substantive changes. For example, among other things, I recommend that companies organize their CMRs to more closely follow both the organization of the OECD Guidance and the requirements of the Rule. In terms of substance, because many companies are further along with implementing their due diligence program this year, they will have more to discuss. For example, there will be more discussion of individual elements of the compliance framework. There also will be more smelter and refiner disclosure since many companies will have more visibility into their supply chains. And these of course will not be the only changes. In making disclosure decisions, among other things, companies also will need to take into account disclosure practices of their public company competitors and peers, SEC and other regulatory guidance, evolving audit community thinking on the independent private sector audit, trade association developments and working group guidance and NGO and SRI feedback and expectations. In addition to all of our client work in this area, we’re in regular contact with these other constituencies, as well as other market participants and thought leaders, including on the upstream side, to ensure that we are able to provide our clients with the most up-to-date advice and market intelligence so that they can effectively and efficiently implement and manage their compliance programs, including their reporting requirements.

Once this year’s filings are made, I expect that a significant portion of them will be closely looked at by the NGOs and SRIs, more closely than last year’s filings. Analytics are being developed to make it easier for these constituencies to assess and compare filings and compliance efforts.

How can companies that reported last year improve?

It’s fair to say that some companies did a better job than others last year, so the range of potential improvements will vary significantly.

There is a small advantage this year, since companies can review last year’s reports and benchmark themselves against their peers and competitors. Last year, as a first time filing obligation, companies were for the most part flying blind, not knowing what other companies were going to say in their disclosure. But, remember, peer and competitor compliance and disclosure will not remain static; it also will be evolving.

We talked about possible disclosure enhancements earlier. From a process standpoint, I recommend that companies start to focus now on their disclosure and filling in any gaps in their compliance programs. At many companies, conflict minerals compliance involves many different people and departments. A time and responsibility checklist is immensely helpful in making the compliance and reporting process more efficient and keeping it on track. As noted, reporting this year will take more effort than many companies expect, so it’s important to start the preparation and review process early.

How can companies move their 2015 and beyond conflict minerals compliance programs to the next level?

Every company is a little different and has its own set of challenges and opportunities, but I’ll share some broadly applicable things to think about, although this certainly isn’t an exhaustive list.

I recommend that companies assess their compliance program against the requirements of the Rule and the OECD Guidance, and against their CSR values. They should also assess the effectiveness of the program and where there might be room for improvement. These assessments will help inform the work that should be done for 2015 and beyond.

Companies also should assess their compliance efforts against those of their competitors and peers and align their programs accordingly. Although many companies aren’t looking to have the leading gold plated compliance program, they also don’t want to be compliance laggards. And, as the pack continues to move, it’s important to continue to assess where the pack is.

Many companies also will benefit from better articulating supply chain expectations and this is now an area of increased focus at many companies. Not only does this often yield better results, but it also results in more efficient compliance. For example, many companies are focusing more on ensuring that they are clearly communicating why supplier cooperation is important and what compliance efforts are expected from suppliers. Some suppliers also are working with their suppliers to help them to better implement the relevant elements of the OECD Guidance framework and to more accurately complete the CMRT, including through enhanced training.

Also, depending on the complexity of the compliance effort, if all of the data collection and analysis is currently being done internally, consider whether it may be more efficient to use a third party IT vendor to help with manage data collection and analysis.

Also, if not already a member, consider joining the CFSI.

And, finally, I recommend that companies hire us to help them, but of course I’m biased!

Bio:

Kelly Eisenhardt is Co-Founder and Managing Director at BlueCircle Advisors, an environmental compliance and sustainability consulting and training firm based in Massachusetts (www.bluecircleadvisors.com.)  In her role at BlueCircle Advisors, she is responsible for providing business intelligence, strategy and implementation of environmental, social and governance (ESG) risk programs.  Her experience aligns well with her client’s needs for technology, compliance, and sustainability expertise by helping companies create and manage their corporate environmental and social responsibility programs.

To contact Kelly Eisenhardt, send emails to kelly.eisenhardt@bluecircleadvisors.com or follow her on Twitter @KelEisenhardt.  For more information about BlueCircle Advisors and the company’s products and services, please visit www.bluecircleadvisors.com, on Facebook at BlueCircle Advisors, on Twitter @OurBlueCircle, and on the LinkedIn group at the BlueCircle Advisors group.