Five Questions about Conflict Minerals – Special Interview with David Schatsky, Principal Analyst and Founder, Green Research, New York, New York, USA – March 5, 2012

Today Emerging Markets ESG launches a new special interview series.

Beginning today, on the first Monday of each month Emerging Markets ESG will publish a special interview with an academic, expert or practitioner about a specific topic with relevance to environmental, social and/or governance (ESG) issues.

This month’s interview, the inaugural interview in the special interview series, is about conflict minerals and is with David Schatsky, Principal Analyst and Founder, Green Research, New York, New York, USA.

Founded in 2008, Green Research is a research, advisory and consulting firm focusing on clean tech, alternative energy and corporate sustainability.  It provides best practices and benchmarking research to sustainability executives and market analysis to vendors of clean tech and sustainability products and services.  Its syndicated research is offered for sale to the market.  It also undertakes custom research projects for clients.  David Schatsky, Principal Analyst and Founder, leads Green Research’s syndicated and custom research efforts.  Some of his recent research projects have focused on corporate sustainability goals, benchmarking and management; life cycle assessment; and smart meters and the smart grid, especially market dynamics and customer attitudes and behaviors.  His advisory work includes serving as entrepreneur-in-residence at NYSERDA.  Having spent almost a decade as an analyst and senior executive at JupiterResearch, a leading research and advisory firm focused on Internet business, David is an expert in business strategy, industry analysis and market research. Besides his expertise in clean tech, alternative energy and corporate sustainability, he has expertise in the digital media, marketing, advertising and commerce markets and the technology stack that enable them. His years building complex IT systems in the financial services industry are the basis for his expertise in systems analysis and design, requirements analysis, and enterprise software.  He studied international economics and U.S. foreign policy at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins and computer science at Tufts University.

Emerging Markets ESG:  What are conflict minerals?

David SchatskyGreat question. Even on this point there is confusion. The conflict minerals issue gained prominence in the US after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Section 1502 of which creates new obligations for companies surrounding conflict minerals. Section 1502 provides a definition of “conflict minerals” that boils down to this:  any of four minerals or their derivatives (tantalum, tin, tungsten or gold) or any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo (DRC) or an adjoining country. The label ”conflict mineral” is applied as a blanket term to all minerals named within the law, regardless of their origin or whether trade in any specific unit of them has financed conflict. For instance, by the language of the law, anything containing tin is considered to contain a conflict mineral, regardless of where or how the tin was obtained.

In the popular media, though, the term “conflict minerals” is often used the way the term “conflict diamonds” is used: materials whose purchase financed conflict. When people say they want products to be free of conflict minerals, they generally mean that they don’t want the products to have financed conflict; they don’t mean they want the products to exclude those metals entirely.

Emerging Markets ESG:  Why is the issue of conflict minerals so important?

David SchatskyThis issue is important for a host of reasons. Armed groups in the eastern Democratic Republic of Congo are inflicting misery on populations there and their activities are financed by illicit trade in these minerals. There is a widespread interest in curbing the activities of the armed groups there and improving the lot of the Congolese people. Fostering a legitimate minerals trade there is seen as a way of doing that. It’s also important because Dodd-Frank Section 1502 presents real challenges to businesses, which are unaccustomed to tracing the origin of the materials of which their products are made. This law imposes unprecedented new requirements on companies. I’ll add that it’s important also because it is an example of the inexorably rising standards of accountability and transparency to which companies are being held. The days of selling products containing substances of indeterminate origin produced under unknown conditions are coming to an end.

Emerging Markets ESG:  How did conflict minerals become part of the Dodd-Frank Law?

David SchatskyI have not traced the path that this legislation took that led to the conflict minerals provisions being included. The strategy that proponents of the law took was to frame these requirements as disclosure requirements rather than as a ban or some other kind of limitation on trade. The Dodd-Frank act deals largely with rules affecting financial institutions. Such rules are many cases are the purview of the SEC, as are disclosure requirements affecting publicly traded companies. So I speculate that it must have seemed expedient to include these provisions in this law for that reason.

Emerging Markets ESG:  Would you please describe the research report recently published by Green Research, The Costs and Benefits of Dodd-Frank Section 1502?

David SchatskyThe purpose of the study is to gather and share information that may be useful to the SEC’s rulemaking process and to industry. It aims to paint a picture of the costs and benefits of compliance with Dodd-Frank Section 1502 at the level of individual firms. This information is designed to provide some insight that will help companies follow best practices, minimize the costs of compliance, and take advantage of the business benefits that the process of compliance may present.  The research consisted primarily of interviews with executives at more than 20 global companies affected by Dodd-Frank Section 1502. The companies interviewed ranged in size from about a half billion dollars to over $120 billion in annual revenues and represent a variety of industries including electronic components, computers, consumer health care, automotive and retail. We also spoke with several industry associations, consulting firms and software providers. Despite multiple attempts, we were not able to secure interviews with representatives of the jewelry industry.

In a nutshell, we found that the law will impose real costs on companies, but not as much as detractors suggest. And there are a range of benefits, from improving risk management, to driving innovation, that may be available as a consequence of complying with the new rules.

Emerging Markets ESG:  What relevance do conflict minerals have to the US, and in particular to US companies, US consumers and US investors?

David SchatskyThe US has an interest in a peaceful, prosperous Democratic Republic of Congo and a legitimate mining sector there. Promoting order and the rule of law in the heart of Africa is a policy goal. And expanding the legitimate global supply of minerals essential to the manufacturing sector is good economics. Indeed, the US Department of State and the US Agency for International Development are directly involved in a public-private partnership, the Public-Private Alliance for the Minerals Trade, along with dozens of corporations, to help foster conditions on the ground in the DRC to help achieve the goals of Section 1502.

As far as the relevance to companies, many thousands of companies make use of these minerals. They will need to take stock of exactly how the law affects them and to ensure their systems and processes are capable of ensuring that they meet their requirements. For those companies that have been focused on responsible business practices and “responsible sourcing,” the law provides a boost at addressing an issue that no individual company could readily address alone. For consumers: Who wants to use products that may have helped contribute to misery half-way around the world? Consumers will benefit from knowing more about what companies are doing to ensure their business practices cause no harm. Finally, regarding investors:  Some investors are focused on issues of social responsibility, and conflict minerals are an obvious concern to them. Those investors that do not have such a focus may have to be concerned anyway, if consumers’ attitudes about conflict minerals threaten to turn them away from companies that are not working toward becoming conflict-free.