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Consulting, Industry

The Costs and Benefits of Dodd-Frank Section 1502 (Green Research)

Purpose of this Study

The 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 questions the research sought to answer include:

  • What changes in company systems and processes will be required to comply with Section 1502?
  • What are the costs, if any, of making the necessary changes, in terms of staff time, professional services fees, systems and technology?
  • What are the benefits of compliance with Section 1502?
  • How do conflict minerals fit into companies’ overall responsible supply chain strategy? How are the requirements set out by 1502 similar to and different from other responsible supply chain processes implemented?
  • What are the perceived advantages and disadvantages of continuing to source minerals of Congolese origin?

Study Methodology

This report benefited from 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. A full statement of the methodology of this study can be found at the end of the report.

This study was sponsored by Global Witness, an international NGO established in 1993 that works to break the links between natural resource exploitation, conflict, poverty, corruption and human rights abuses worldwide. Though client-sponsored, the research was independently conducted by Green Research. The findings are our own.

Key Findings

A common theme across our interviews was uncertainty. Participants had many questions. What would the final rules from the SEC be? What will this really cost us? Will the law produce the desired outcome in the DRC? On this last point we heard various blends of hope and skepticism. A number of participants voiced concern about facing new regulations. Some had the perception that the approach followed by Section 1502 was not devised in cooperation with industry. Beside all this, though, we found that the better informed the executive, the more likely he or she was to feel that the costs of compliance would be manageable. And many, but not all, executives could envision some business benefits arising from the compliance process. Some of the questions raised by the executives we interviewed will be swiftly answered after the SEC issues its final rules. Others will unfold as compliance measures are implemented and capacity building on the ground in the DRC and along companies’ supply chains continues.

The following are the key findings of the study:

1. As companies become familiar with the legislation and its impacts on them, the perceived costs of compliance tend to decline. Across industry there are differing levels understanding of the requirements and implications of Section 1502. Our interviews revealed that the more companies know about these costs and implications, the more manageable they believe the compliance process and associated costs will be.

2. Section 1502 compliance costs will vary widely with the size and complexity of companies’ supply chains but seem to be manageable for all company sizes. The largest companies (with annual revenues over $50 billion) are facing one-time costs ranging from $500,000 to $2 million; companies with well developed responsible sourcing systems may need to spend only half as much. Many smaller companies should be able to meet their obligations for less than the cost of a full-time employee in the first year, with costs declining over time.

3. Companies have an opportunity to reap a wide range of business benefits associated with Section 1502 compliance. Executives interviewed cited better risk management, improved supply chain performance, new innovation opportunities and the ability to prepare to meet a new generation of expectations for greater supply chain transparency and accountability as potential benefits of the new compliance regime. Companies should look for opportunities to seize these benefits as they review and update their supply chain processes and practices.

4. The impacts of the regulations on competition are likely to be benign. Many companies interviewed believe there will a negligible to positive impact on competition, as the regulations will tend to “level the playing field.” With incremental costs modest compared to the overall costs of being a publicly traded company, the competitive position of public companies versus their counterparts should not significantly change. Indeed, Green Research believes that offering conflict-free products will become a competitive advantage.

5. Firms should exploit opportunities to collaborate with industry and cross-industry groups to set standards and share costs as they define and implement their responses.  Where possible, companies and industry organizations should build on the work of groups like EICC and GeSI and others and centralize the design of industry-wide processes with industry groups. One company expects to save 80 percent on consulting fees by working through an industry organization rather than going it alone.

6. The days of selling products containing substances of indeterminate origin produced under unknown conditions are coming to an end. The trend toward greater supply chain visibility and accountability, driven by rising expectations of responsible corporate behavior on the part of customers, investors, employees, NGOs and regulators, is set. Section 1502 presents an opportunity for companies to move towards greater supply chain transparency and accountability in their businesses, and design their processes and systems for the long term.

7. Executives’ attitudes about the pros and cons of sourcing minerals of Congolese origin range widely from indifference, to acknowledgement of the difficulties of developing conflict-free Congolese sources, to an appreciation of benefits, ranging from supporting the legitimate Congo minerals sector and the workers who depend on it to expanding the global supply of these minerals.

(The full report is available as a free download at greenresearch.com.)

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About David Schatsky

Business planning/strategy consulting in cleantech, sustainability; principal at Green Research.

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