Conflict Minerals – the power of collaborative engagement

Conflict Minerals – the power of collaborative engagement

An update on our collaborative engagement on conflict minerals in the semiconductor supply chain and the Responsible Minerals Initiative Investor Network.

There is no such thing as a clean supply chain...all cobalt sourced from the DRC is tainted by various degrees of abuse, including slavery, child labor, forced labor, debt bondage, human trafficking, hazardous and toxic working conditions, pathetic wages, injury and death...

- Siddharth Kara, Cobalt Red: how the blood of the Congo powers our lives (2023)

Why and how we engage

At Stewart Investors we aim to generate strong long-term, risk-adjusted returns by investing globally in the shares of high-quality companies that both contribute to, and benefit from, sustainable development.  If we own a company for ten years, we must understand how that company is positioned relative to the inevitable shift the world must make to a more sustainable form of development.  Our engagement approach contributes invaluable insights into our bottom-up assessment of company quality and our understanding of the sustainability headwinds and tailwinds they face. We play an active role but are not “activists”. The purpose of our engagement and voting is to mitigate risks, enhance returns and improve sustainability outcomes. 

Genesis of our engagement on conflict minerals

Our engagement on conflict minerals began in 2020 when we identified the issue as a serious human rights risk. This risk is frequently overlooked by governments, companies, investors and consumers. Tantalum, tin, tungsten and gold, collectively known as ‘conflict minerals’, are vital materials for the semiconductor industry and are powering the green transition. Poor traceability along complex supply chains can lead to the inadvertent financing of armed conflict and the abuse of human rights.  Technically, cobalt is not a conflict mineral, but some estimates indicate that there may be as many as 40,000 children engaged in artisanal cobalt mining in the Democratic Republic of Congo (DRC)1.

We have significant exposure to semiconductors in our portfolios.  We engaged with one semiconductor company on the issue and were disappointed by their response.  We felt the company could be doing more to use their status as a leader to drive improvements in supply chain management across the industry.  In 2021, we commissioned two research reports2 on conflict minerals within the semiconductor supply chain to gain a better understanding of the issue and the potential opportunities for improvement. 

Research tender findings

The reports highlighted three broad trends seen over the last decade: 

1. Despite legislation introduced in the US in 2010 (Section 1502 of the Dodd Frank Act3) and in Europe (EU Conflict Minerals Regulation4) in 2017, which require companies to implement due diligence on their supply chains, company efforts to identify and trace the provenance of minerals stalled as demand increased.  We are yet to see a company prosecuted under the Dodd Frank Act.  In Europe the regulation is expanding to include all minerals and encompass human rights more broadly rather than just mining practices.  Things are slow moving as recently demonstrated by the delayed Corporate Sustainability Due Diligence Directive (CSDDD).

2. The mining of these minerals has shifted to central Africa from Australia and Canada.  70% of cobalt originates from the DRC5.  Ownership of smelting and refining capacity has shifted to Asia, particularly China.  90% of Cobalt is refined by Chinese owned Smelters or Refiners (SORs)6.  This creates geopolitical risk.  China could leverage their significant position in ownership of smelters and refiners to retaliate against The CHIPS and Science Act introduced by Biden which aims to boost semiconductor production on American soil.  If China decided not to certify any of their refiners, it would result in companies breaching the Dodd Frank Act. 

3. Demands for a transition towards a lower carbon economy require a large increase in the mining of these tainted ingredients. 

The Minerals Intensity of the Clean Energy Transition7

More can be read about the problem today in our previous article on the topic – Beyond Due Diligence: A multi-stakeholder approach to responsible mineral sourcing8

Escalating the engagement

These trends encouraged us to escalate the engagement to improve disclosure and raise standards of traceability through the supply chain.  The bulk of the existing investor initiatives we were aware of were focused on the upstream, engaging directly with the miners rather than the downstream, beyond the smelters and refiners.  We launched a collaborative engagement using the Principles for Responsible Investment platform to try and improve communication between these different silos along the value chain. The initiative was supported in November 2021 by 160 signatories representing US$6.59trillion of assets under management.

In December 2021 we sent a letter to the management of 29 companies requesting that they:

  • Develop and invest in technological solutions to improve traceability.
  • Increase transparency and reporting on minerals from mine to product.
  • Encourage and participate in industry wide collaboration to improve industry practices.
  • Impose and enforce harsher sanctions on non-compliance.
  • Reduce demand for new materials by improving recycling initiatives.

Since the letters were sent, we have met with many companies, attended conferences and become more involved with industry bodies and Non-governmental organisation’s (NGO’s) such as the Child Labour Forum and Global Witness and commissioned additional research from KUMI Consulting9. Most significant perhaps, is the evolution of our relationship with the Responsible Minerals Initiative (RMI). 

The role of the RMI

The RMI is the largest industry association in the minerals and electronic sector which provides companies with a full ecosystem of tools and resources that help its members make responsible sourcing decisions globally.  The industry places a heavy reliance on the processes and assurance by the RMI, even though the RMI clearly state, “This assurance process does not result in a material certification nor does it determine that material at the company is “conflict-free” or is otherwise free of human rights abuses in the supply chain”. 

In 2022 we attended the RBA10 and RMI annual conference in Santa Clara and believe we were the first known investor to have done so.  There was some scepticism around our attendance.  Fast forward a year and in October 2023, we became the first investors to speak at the same annual conference on the positive role of capital and we had the opportunity to host an RMI endorsed, closed-door workshop. 16 leading electronic companies attended the workshop, which was facilitated by KUMI. 

RMI’s Investor Network

It has become clear that conflict minerals remain an issue still to be integrated into many C-suite agendas.  They are not involved directly with the processes and decisions behind company supply chains and are therefore distanced from potential abuses.  To bridge this gap, we believe investors can play a key role in increasing the attention dedicated to supply chain issues by company CEOs.

One way we are trying to bridge this gap is through collaboration with the RMI.  Members of the RMI debated, over a number of months, whether they should allow investors to join their trade body. There were initial reservations that investors would disrupt what the RMI considered a ‘safe space’ for members. However, there were some strong supporters who canvassed on our behalf as like us, they believe investors could bring a new and constructive perspective to help influence improvements along mineral supply chains.  In February this year, we were delighted to became the inaugural member of the RMI Investor Network

Alongside the RMI, the plan is to develop a working group and connect both fellow investors and companies to build consensus around the need for the adoption of more effective due diligence frameworks.   We believe membership will offer investors a deeper understanding of mineral supply chains and greater engagement credibility. Membership should enrich engagements and highlight the importance of mineral traceability at the C-suite level.  To support these conversations, we also commissioned Kumi to develop engagement guidelines for initiative supporters, and other investors, to improve their interactions with companies.

Supply chain complexities

The issue of irresponsibly sourced minerals and the associated human rights abuses within the semiconductor supply chain is more severe than we first anticipated. Supply chain complexity means that even determined companies, such as Fairphone11 can only map four out of the twelve tiers of companies in their supply chain.  In our conversations so far, some companies have been open about the issues and successes have already been achieved with Korean producers.  Unfortunately though, many companies seem content with fulfilling minimum credible reporting standards and taking a basic compliance approach.  Most semiconductors are produced in parts of Asia and Asian companies are the most underrepresented members of the RMI so raising awareness and encouraging them to become members will be an essential part of our future engagement plans. 

Looking forward

We recognise that engagement on this topic will be a long journey, but we hope that by building a closer relationship with the RMI and influential companies in the electronics supply chain, this collaborative engagement is a step closer to effecting real world change.


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