Critical Intel

Critical Intel
Conflict Minerals and the Game Industry: Progress and Setbacks

Robert Rath | 22 Nov 2012 16:00
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Last week we looked at the history and geopolitics of conflict minerals, detailing the conditions in the mines, the human rights abuses that minerals fund, and the supply chain that brings illicit metals into our gadgets. This week, we'll discuss the steps individual console manufacturers have taken in order to combat the problem of conflict minerals, and explore some the possible solutions to the problem as well as the ongoing challenges.

Congress Fires a Warning Shot
Conflict minerals were a fairly obscure topic before 2008, when the problem became large enough that it started making headlines in the New York Times. The increased awareness led to the first U.S. effort at legislation: the Congo Conflict Minerals Act of 2009. Originally killed in committee, the bill was later resurrected as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Namely, the bill became section 1502, a provision that ordered the Securities and Exchange Commission to develop rules that force companies to disclose the origin of their minerals.

The SEC regulations that resulted from section 1502 impose a three-stage control procedure that applies to companies quoted on Wall Street: Essentially, companies must determine whether they use any metal sources designated as "conflict minerals," and if they do, they're obligated to conduct due diligence to discover the origin of those minerals. If those minerals are not found to be from the DRC, or are from a mine in the DRC that's controlled by the government, they can label their products "DRC Conflict Free." On the other hand, if a company finds that their minerals come from rebel-controlled mines, or they can't determine the origin, they cannot use the "DRC Conflict Free" label. Either way, companies must publish a report that's reviewed by an external auditor, and afterward disclose those findings in their annual report.
The SEC does not impose any sort of fines or other punishment if a company sources from conflict mines. Rather, the idea is to force a company to publicly disclose they use conflict minerals in their annual reports and allow the public to shame or boycott them into compliance.
Overall, Dodd-Frank has worked. Companies that previously claimed that the process was infeasible or impossible made enormous strides in a single year, and smelters have rushed to comply when their customers requested it. Essentially, the new regulations encourage manufacturers to lean on their smelters - the 150-company bottleneck all minerals pass through - causing them to source clean or risk losing business.

Industry Strikes Back
The reaction to the new SEC rules was fairly mixed. Industry figures dislike that the rules passed at all and human rights advocates fear that the rules have been watered down by industry input, which added a two year phase-in period (four years for small businesses), meaning that companies won't file reports until 2014. Significant exemptions also exist, particularly for companies like Wal-Mart or Target who place their brand or label on a "generic" product made by another company rather than manufacturing it themselves. Like much of the Dodd-Frank law, section 1502 has faced major opposition from business groups and Republicans who claim that compliance with the new rules is costly and burdensome - the SEC estimates that it will cost $3 to $4 billion across the industry initially, and $200 million a year after that - and some opponents claim that the rules cause the SEC to overreach its mission and get involved in foreign policy. (It should be noted that consumers probably wouldn't see much of a price rise from this spending; sourcing clean minerals would likely cost 1-2 cents more.) In October, the U.S. Chamber of Commerce, the National Association of Manufacturers, and the Business Roundtable filed a lawsuit asking a federal appeals court to "modify or set aside" the rules in whole or in part, though the petition did not give legal arguments or reasons for the request. The move is part of a larger legal offensive that Democrats claim is aimed at chipping away the Dodd-Frank Act piece by piece.

Grading the Game Industry's Response
According to a report published by the Enough Project called Taking Conflict Out of Consumer Gadgets, console manufacturers made a great deal of progress on the issue last year. According to Sasha Lezhnev, one of the authors, the report ranks a company on whether they're tracing and auditing supply chains to find conflict-free suppliers, if they're pursuing conflict-free certifications for smelters, how engaged the company has been with other stakeholders or in legislation, and what the company is doing to contribute solutions to the wider problem. Each company is assessed a numerical score from 0 to 100.

Microsoft: Becoming an Advocate
Microsoft was the highest-rated console manufacturer in Enough Project's 2012 report, earning a score of 38, up from 15 the previous year. This places Microsoft just above the middle of the pack of the electronics companies surveyed and exactly on par with its rival Apple, though both are well below the highest scoring company, Intel, which rates a 60. Microsoft's solid progress comes from the meat-and-potatoes basics of the SEC compliance: working with component suppliers in order to identify smelters and verify mineral sources.

In addition, Microsoft has been actively working with industry partners and international organizations determined to mitigate the situation in Congo. Though Microsoft declined to give details, their Corporate Citizenship Report states that they seek to align their efforts with the Dodd-Frank Act, the SEC, and the Organization for Economic Co-operation and Development (OECD). In addition, Microsoft took a role in the Public-Private Alliance for Responsible Minerals Trade (PPA), a joint initiative among governments, companies, and civil society to explore supply chain solutions to conflict minerals and, crucially, create a clean minerals trade in Africa. They also enforce a Vendor Code of Conduct that includes inspections to ensure vendors are following their directives. When a supplier is unwilling to follow their code of conduct, Microsoft disciplines them, sometimes by terminating their contract.

However, the boldest thing Microsoft has done is to issue a statement against the U.S. Chamber of Commerce's plan to overturn the conflict mineral provisions in Dodd-Frank. The Chamber is a powerful lobby group and breaking ranks with them isn't to be taken lightly, but Microsoft - along with GE, Panasonic, and Motorola - chose to side with regulators regardless of any potential fallout.

Sony: Bridging the Gap Between Industry Associations
As late as 2010, Sony had taken little to no steps to address the problem of conflict minerals. However, in 2011 the company reinvented itself as one of the largest conflict mineral advocates in the Japanese market, and has played a lead role in encouraging companies in Japanese Electronics Information Technology Industry Association (JEITA) to work with the Electronic Industry Citizenship Coalition (EICC) where Japanese companies are generally under-represented. In addition, Sony has stepped up its relationship with the Global e-Sustainability Initiative (GeCI). These measures caused the Enough Project to rate Sony a 27 in its 2012 report, which seems low, but is a massive improvement over the 0 the company received in the 2011 report. While it still has a long way to go, Sony has gotten off to a strong start.

"Sony shares the concern that conflict minerals might be used in the electronics industry supply chain and is taking steps to eliminate conflict minerals from the supply chain," reads a statement provided to me by Jade Mai Mendoza, a Sony corporate communications representative. "Recognizing that these issues are common across the electronics industry, Sony is also participating in the creation of an industry-wide framework, an effort spearheaded by the EICC/GeSI, to improve traceability of minerals and ensure responsible sourcing."

Sony is also trying to use its unique position to improve cooperation between Japanese and Western electronics manufacturers. Because Sony has supply chains in both the West and Japan, the company naturally occupies the space between the two industry groups and serves as a sort of ambassador between them, encouraging JEITA to adopt the EICC's approach with the hope of standardizing the industry response. "We believe in efficiency and effectiveness," says Mendoza. "And having a common approach and common template adopted by wide number of electronics companies in Japan helps streamline the efforts and effects on suppliers." This work resulted in the JEITA signing a memorandum of understanding to participate in the EICC's smelter audit program.

The Enough Project's report found Sony's progress encouraging. "A lot of this goes through industry associations," says Lezhnev, "but without the leadership of key companies the industry associations are going to move nowhere, so it's really up to some companies to take a leadership role. And frankly, Sony deserves a lot of credit here: they are facing a lot of financial difficulties and yet they are actually playing a leadership role in terms of harnessing the energies of other Japanese companies to get involved in the conflict minerals issue. That takes a lot of courage and commitment."

Nintendo: Turning a Blind Eye
Nintendo was the only major electronics company to score a 0 on the Enough Project's 2012 report, meaning they have taken no action on the issue of conflict minerals. While Nintendo did not respond to my request for comment by press time, in September they spoke to Polygon, saying that all production partners have taken steps to comply with Nintendo's guidelines, and that Nintendo "obtained individual confirmation from each production partner that they agree not to use conflict minerals." This confirmation, however, did not include any steps to track Nintendo's supply chain and audit sources, and seems to amount to little more than an oral agreement.

Lezhnev remains unimpressed. "At least they're at least acknowledging the issue, but frankly the statement that was made has no real facts or evidence to back it up, so really it's a very poor fig leaf put on a black hole." According to Lezhnev, Enough has tried to contact Nintendo to talk about these issues for two and a half years and gotten no response. He lists the many programs and industry groups Nintendo isn't a participant in: the conflict-free smelter auditing program, the EICC, the Public-Private Alliance for Responsible Minerals Trade, the due diligence standard put forth by the Organization for Economic Cooperation and Development that hundreds of companies have participated in. "I could go on," he concludes. As a contrast, Nintendo's fellow Japanese console manufacturer Sony is a member or participant in all of these programs and groups. "There's really no engagement. What they need to do is very clear: they need to trace, they need to audit, and they need to contribute to a certification process."

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