Conflict Minerals and Mandatory Disclosure, Part II

Guiding PrinciplesIn Part I of this post, I wrote about the momentum toward mandatory human rights disclosure in the US, as relates specifically to conflict minerals.  But the US is not acting alone.  Countries around the world are adopting their own disclosure regimes.

One day after the conflict minerals decision came down in Washington DC, a similar battle in the European Union (EU) ended in favor of disclosure.  After months of negotiations, the European Parliament adopted a reform Directive calling for mandatory non-financial disclosures, sending a strong message to businesses that the EU is responding to consumer and investor demand for corporate accountability and transparency.  The new Directive recognizes that non-financial reporting on business-related environmental, social, and human rights impacts is “vital” for sustainable economic growth. The language, which will be incorporated into an existing EU Directive on annual financial reporting, requires select large companies to disclose on their human rights policies, risks, and outcomes.

As with many other EU laws, the Directive only sets out minimum legal requirements and puts the onus on the Member States to implement.  Member States are free, for example, to require disclosure from companies other than those covered in the Directive, or to require that information in the reports be verified by an independent auditor.  Member States must also create their own compliance regimes, which must be available to all persons with a “legitimate interest” in ensuring compliance.

However, as with almost anything, there is much room for improvement.  Some of the language was watered down from an earlier iteration of the Directive.  Member States can exempt companies from disclosure in certain situations. Supply chain impacts only have to be disclosed when “relevant and proportionate.”  And there is no requirement to report existing abuses, only the risk of potential impacts.  More debates lay ahead as individual Member States move to implement the Directive in their own national contexts and address these shortcomings.

But even with these challenges, action in the EU is still indicative of the global trend. From Argentina to Ghana, more than twenty States have human rights reporting regimes.  India’s stock exchange requires its top 100 companies to file a mandatory “Business Responsibility Report,” which includes human rights impacts.  Brazil recommends that its listed companies publish sustainability reports, and the Brazilian stock exchange publishes an annual list of all the companies that report.

good businessFurthermore, governments are not acting alone in setting up disclosure regimes.  Socially responsible investors are calling for greater transparency with their investments and are publicly applauding even the qualified victories, including the US DC District Court’s decision.  They know that human rights impacts materially affect the bottom line and they are using their voting power to compel companies to report on their due diligence practice and procedures.

As both decisions last month have shown, crafting a perfect disclosure regime is difficult, and it is impossible to predict exactly how States will continue to implement their duty to protect people within their borders from business-related human rights abuses.  But if last month’s decisions are any indication, businesses need to get used to the idea that human rights matter.

Conflict Minerals Case Affirms Inevitability of Human Rights Disclosure

posted by Nicole Santiago, Northeastern University School of Law

No Conflict MineralsDuring my co-op at the International Corporate Accountability Roundtable (ICAR), one of my focus areas has been corporate transparency.  ICAR believes – and I strongly agree – that companies have a responsibility to report on their human rights impacts.  This means that businesses must know how their daily operations impact human rights, and must then publicly disclose those impacts to the public.  This applies not only to business activities at home, but also to the activities of subsidiaries and supply chains, even if they are outside the country. We see human rights disclosure as important for investors (in corporations speak, it is “material” to investment decisions), and necessary for businesses to respect human rights, which is a responsibility that they have under the United Nations Guiding Principles on Business and Human Rights.

Companies have been reluctant to share information about their human rights impacts.  Some corporations do not have the internal resources and know-how to conduct detailed human rights investigations. Others do not want to spend the extra money. And some do not want to know – or they do not want the public to know – that they are involved in human rights abuses.  Unsurprisingly, businesses are fighting against mandatory human rights reporting.

However, after last month it is clear that they are fighting a losing battle.   Governments around the world are moving ahead towards broader mandatory reporting, and even the most influential businesses cannot stop it.

The first victory came on April 14th, when a divided panel of the DC District Court of Appeals upheld the majority of a US Securities and Exchange Commission’s (SEC) rule for conflict minerals disclosure.  The SEC rule requires companies to determine whether they source select minerals from the Democratic Republic of Congo (DRC) and to publicly report on whether those minerals are “conflict free.”

Screening MineralsThe rule was developed by the SEC in response to a Congressional call for action.  For over 15 years, communities in the DRC and the surrounding region have been victims of brutal violence in a conflict that is substantially fueled by the trade in certain minerals: tin, tantalite, tungsten, and gold. Labelled “conflict minerals” because of their dubious association with murder, mass rape, and environmental desecration, these are minerals that are found in many of the electronics we carry and the jewelry we wear every day.  In the 2010 Dodd-Frank Act, Congress addressed the role of US companies in the humanitarian crisis, and ordered the SEC to come up with a rule requiring companies to publicly show whether they are contributing to the violence.  The rule–referred to as Section 1502, in reference to the corresponding section in the 2010 Dodd-Frank Act–requires businesses to find out where their minerals are sourced from, and determine whether the trade of those minerals directly or indirectly benefits an armed group.

Business and industry groups, led by the National Association of Manufacturers, were quick to challenge the rule on several grounds.  Yet, as the opinion last month illustrated, their efforts were almost entirely wasted.  The Court threw out their first two challenges, one based on the Administrative Procedural Act’s “arbitrary and capricious” standard, and other based on the 1934 Securities Exchange Act, which established the SEC and its mandate.

Mine SiteOn the whole, the Court agreed with the SEC rule-making decisions.  It made clear that companies cannot ignore warning signs from preliminary inquiries and they cannot contract-away responsibility.  The SEC has the authority to make rules even when the benefits are experienced “half-a-world” away, and those benefits cannot be directly compared to the financial costs–the Court likened it to comparing apples to bricks.  The Court also explicitly stated that the SEC need not have “particular expertise” to make a rule, so long as Congress stipulates that a rule would effectuate an end goal.  All in all, this is very powerful language for human rights advocates.

The only thing that the Association can claim victory on is a First Amendment challenge against the labeling provision, which would have required businesses to state on their websites whether the minerals they source are “DRC Conflict Free” or not.  It’s hard to believe that the costs–financial, reputational and otherwise–of fighting over those three little words was really worth it.  This is especially true when you consider that a different case, in which another DC District Court panel has already rejected a similar First Amendment argument in relation to meat labeling, may make the majority’s analysis of the appropriate standards of review irrelevant.

Moving forward, companies are still required to file their first reports in less than a month, and at least one company has already done so.  On May 1st, the SEC issued guidance for the roughly 6,000 companies affected by the rule, clarifying that the reporting requirements in the rule are still good law.

We still have a ways to go, and the future is not crystal clear.  But for reluctant companies, one thing is evident: Mandatory disclosure is going to happen.  Twenty years from now, these companies may find themselves in the same position as toxic polluters in the 20th century now find themselves: retroactively liable for failure to take action on an important issue.  There is no time to waste.

Colombia Part II

This blog post is part II in a continuing series of posts about my recent trip to Colombia. For Part I, scroll back in the blog to April, 2014.

 

My first stop was Bogotá, which would serve as a base for the rest of the trip. In Bogotá I met the staff and attorneys from the Solidarity Center, who were instrumental in setting up my subsequent interviews.

The second day in Bogotá I met with a number of leaders of the petroleum workers union at their headquarters. Metal detectors and armed government agents guard the entrance of the building, which also houses the largest trade union confederation in the country. Nearly all of the leaders I met with had received death threats for their organizing, and many had been forced to leave the region they were from, only to live under a constant threat of being assassinated in Bogotá. One union leader had recently returned from exile in Canada where he had spent the last ten years after members of his family were murdered.

Perhaps most shocking about these stories was the fact that the government appeared to be directly implicated in the threats. One leader, Hector Sanchez, explained how days after filing a complaint with local authorities concerning the first threats he received, an investigator from the government contacted him requesting that he provide information concerning the addresses of all his family members. Without fully understanding why this was necessary, he reluctantly provided the details. Within days, each of those family members received threats at the addresses he had provided.

Campo Elias Ortiz was another worker who had received threats yet persisted to organize with the union. He explained how employment was so precarious, and dangerous, that he believed it would never change without the power of a union to force the company to do the right thing. He added that he felt a responsibility to stand up in the face of such threats and fear, because as a younger worker, he did not have the same family obligations that some of his comrades had spoke about.

Both Hector Sanchez and Campo Elias Ortiz were planning to testify against Pacific Rubiales in a criminal case in December of 2013, a few months after my visit to Colombia. The Solidarity Center was helping them with their case and their testimony was to be instrumental in establishing a direct link between local authorities, the company, and the para-military groups executing the threats and violence in the region. I later learned that just days before their testimony, they were arrested by local authorities on specious charges relating to their involvement in a strike that took place in 2011. They were held for months in prison before finally being released just recently – due in part to international pressure from allies.

 

Image From left to right:

Campo Elías Ortíz, Rudolfo Vecino Acevedo (President of the Union), and Frederico Pulicio, stand together with Héctor Sánchez.Both Campo Elías Ortíz and Héctor Sánchez were arrested shortly after my interview and remain in jail with their lives in jeopardy.