On 1 January 2021 the EU Conflict Minerals Regulation entered into force. From now on, companies importing certain minerals into the EU must ensure that their sourcing practices do not contribute to conflict and human rights abuses. The regulation therefore introduces for the first time mandatory human rights due diligence for companies in the EU. In its current version, the scope of the regulation is extremely limited. Nevertheless, its implementation can provide important lessons for the upcoming comprehensive EU due diligence legislation.
Lack of supply chain transparency in the raw materials sector
The mineral resources sector is often linked to severe environmental and social impacts as well as conflicts and human rights violations. However, supply chains in this sector are often particularly difficult to trace.
In the past years, public awareness about the responsibility of companies for their supply chains has increased. One trigger for these developments was the Second Congo War (1998-2003) where warring parties used income from tantalum and tungsten extraction which is essential for electronic devices to finance military operations. Various reports and campaigns with slogans such as „No blood on my cell phone“ led to the formulation of various initiatives and regulations on so-called “conflict minerals” from 2010 onwards.
The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas serves as a basis for these regulations. It foresees a process by which companies identify risks along their supply chains and subsequently respond to them appropriately. The process comprises the establishment of an appropriate risk management system, an independent audit, and specified reporting. The OECD guidance refers to the entire supply chain, from the extraction of raw materials to the final product, and to all minerals from conflict and high-risk areas.
In the European Union, a regulation on conflict minerals was adopted in 2017, after three years of controversial negotiations. The law provides that companies importing more than a certain quantity of unprocessed tin, tantalum, tungsten, and gold into the European Union must implement due diligence measures, based on the OECD guidance, to avoid contributing to conflict and human rights violations.
To help companies identify whether imported raw materials potentially originate from conflict and high-risk areas, the regulation provides for an annually updated list of such areas. It currently comprises 27 countries or specific regions in these countries. However, the list is indicative and does not spare companies from implementing risk management strategies with regard to their sourcing of these raw materials from other areas.
..with limited scope
The introduction of mandatory human rights due diligence in the extractive sector can be seen as a step in the right direction of companies’ responsibility for their supply chains. However, its narrow scope raises questions about its effectiveness.
- Whereas the OECD guidance refers to all minerals that contribute to the financing of conflicts, the EU regulation is limited to tantalum, tungsten, tin and gold. In 2019, imports of the first three minerals amounted to merely 0.05 % of the value and 0.003 % of the weight of all imports of metal ores into the EU. Only the value of gold imports account for a significant share (6 % of the import value of metals), according to UN Trade Data.
- One essential limitation of the regulation is that it only refers to the so-called upstream sector, i.e., importers of unprocessed ores or their concentrates. Companies importing processed products into the EU that contain the above-mentioned raw materials – the vast majority of companies – are not affected by the regulation.
- The regulation only includes Union importers whose annual import volumes exceed certain thresholds. In its current version, the law aims to cover 95 % of the respective import volumes into the EU. The threshold for gold is currently 100 kg per year, exempting the majority of companies – those annually importing less than ~5 million euros worth of gold.
- In addition, the EU regulation does not allow for sanctions for inadequate implementation of the due diligence obligations by the responsible national authorities.
As a result, only 600 to 1,000 companies are covered by the regulation across the EU.
Outlook: first test run
An evaluation of the EU Conflict Minerals Regulation is planned for the beginning of 2023, which could lead to adding further binding measures. In view of the planned EU legislation on corporate due diligence and corporate accountability, the implementation of the regulation can be seen as a first test run. Experience about its effectiveness can be used to readjust regulatory provisions. Based on this evaluation, the discussion on the regulation’s scope should include the coverage of a larger number of raw materials, its application also to importers of semi-finished and finished products, and the introduction of sanctions for companies not complying with their due diligence obligations.
Further, for increasing the regulation’s effectiveness, it will be important to closely cooperate with local actors to improve mining conditions, but also to avoid negative effects of the regulation on the ground. This includes solving the question of who has to bear the costs for necessary certifications. In the case of the Democratic Republic of the Congo and its neighbouring countries, these are borne by the actors in the small-scale mining sector. This adds a financial burden to those already in a precarious situation.
With these revisions, the regulation could substantially increase transparency and help reduce the negative impacts in the extractive sector. The sector could thus be a pioneer and an example for the introduction of corporate responsibility in other sectors. Along the way, there are still some unmined mountains to be climbed.
Karin Küblböck is an economist and senior researcher at the Austrian Foundation for Development Research (ÖFSE), with a focus on natural resource policies, private sector development, international trade and investment policies. She has been working on conflict minerals since 2016.
Source: European Association of Development Research and Training Institutes (EADI), Blog: Debating Development Research, Karin Küblböck, 03 August 2021