An ambitious change in U.S. accounting rules appears to be helping to reduce violent conflicts in Africa, according to a new study.
The conflict minerals disclosure rule, or Dodd-Frank’s Section 1502, required companies as of 2014 to publish detailed reports on their sourcing of tantalum, tin, tungsten, and gold. These so-called 3TG or “conflict minerals,” used in smartphones, laptops, electric vehicles, and other devices, have fueled a humanitarian crisis by serving as a major source of revenue for armed groups in Central Africa.
“With Dodd-Frank, the SEC made an unprecedented move by requiring disclosures intended to tackle issues outside of the shareholder-protection realm,” says Omri Even-Tov, an assistant professor of accounting at the Haas School of Business, University of California Berkeley, and co-author of the study.
The hope was that if consumers, investors, employees, and other stakeholders knew more about the conflicts linked to the mining of minerals in the devices they use every day, they would push companies to change their supply chains—and more importantly, that the changes in companies’ mineral-sourcing decisions would reduce funding streams and help alleviate the conflicts.
That seems to be the case. Based on data from the first four years after the conflict minerals disclosure requirement became effective, Even-Tov and colleagues found that companies became substantially more responsible in sourcing minerals. What’s more, their analysis found that the number of conflicts decreased by 15% in the mining regions of the Democratic Republic of Congo and the nine neighboring countries covered by the disclosure rule, relative to those of countries not covered.
“I don’t want anyone to think that the conflict minerals disclosure rule is a panacea; it’s not,” says Even-Tov, who conducted the study with Bok Baik, a professor at Seoul National University, and PhD students Russell Han, of the University of Illinois at Urbana-Champaign, and David Park, of Seoul National University. “But our results show that increased transparency is effective at nudging companies towards responsible actions that are having a real impact.”
Shifting toward “conflict-free”
The Enough Project, a nonprofit that advocated for Section 1502, estimates that in 2008, a couple of years before the disclosure rule was passed, armed groups in Central Africa earned $185 million from tantalum, tin, tungsten, and gold—together known as 3TG minerals.
Rather than impose sanctions on any country or industry, or directly penalize companies sourcing conflict minerals, the U.S. Congress opted to ratchet up transparency. Section 1502 requires SEC-listed firms to file conflict minerals disclosure reports that reveal whether they source 3TG minerals from the Democratic Republic of Congo or any of its nine neighboring countries.
The researchers collected data from over 4,000 minerals disclosure reports published by more than 1,000 companies between 2014 and 2018. Because of the conflict minerals disclosure rule, operators of smelters and refiners tend to know about the origins of the minerals they work with and third-party auditors can flag them for links to conflicts or label them as “conflict-free.” Companies are required to conduct due diligence on their supply chains and disclose their findings such as the proportion of conflict-free smelters and refiners in their supply chains.
Responsible sourcing—as measured by the percentage of conflict-free smelters and refiners—improved every year, the researchers found. Over the four-year time period, it nearly doubled, increasing from 44.6% to almost 82%.
Protecting against reputational costs
That raised another important question: Without an enforced penalty for companies that continued to source conflict minerals, what explains such a dramatic shift in behavior?
“We thought it was possible that this came down to perceived reputational cost, which means that employees of the company, customers of the company, and shareholders of the company could be applying pressure,” Even-Tov says.
The researchers found that the more public attention a company’s conflict minerals report garnered, the stronger its commitment to responsible sourcing became. For every 100 downloads of a company’s conflict minerals report, they noted a 1.2% increase in the percentage of conflict-free smelters and refiners and a 4.5% increase in the likelihood that a company would put in place a policy to disassociate from conflict minerals that fund armed groups.
Market reaction also appeared to play a role. Looking at market value over the five days surrounding the publication of a disclosure report, Even-Tov and colleagues found that a one standard-deviation increase in the percentage of conflict-free smelters and refiners that companies sourced from (which amounted to a 24.2% increase the proportion of conflict-free smelters/refiners they used) was associated with a bump of about 0.6% in market value. That equates to $66 million boost for the average company in the sample.
The humanitarian impact
The next question they dug into was whether the new rule was having any bearing on its humanitarian goal of reducing bloodshed. To find out, the researchers drew from the Armed Conflict Location & Event Database to obtain the dates, locations, and types of conflict events between 2010 and 2019.
They divided the entire continent of Africa into roughly ten thousand subnational units and compared changes in conflict incidence around mining areas within covered countries to those in countries not covered by the rule. Conflicts in covered countries’ mining regions fell by an average of about 15% after the disclosure rule went into effect, relative to non-covered countries’ mining regions. They also found that conflicts had not spilled over into non-mining areas.
Transparency’s Delicate Balance
Even-Tov points to these results as robust evidence that the conflict minerals disclosure policy works—and that it should be applied more broadly. For example, the Democratic Republic of Congo supplies most of the world’s cobalt, a mineral not currently mentioned in the rule. He believes cobalt should be added as a conflict mineral.
Still, he acknowledges the need for policymakers to strike a delicate balance with laws requiring more disclosure.
“The problem is that disclosure rules don’t come without costs,” Even-Tov says. “There’s the cost of disclosure for companies and that trickles down to consumers. I think we need to consider the costs when we ask for more disclosures.”
“It’s easy to ask companies to disclose more,” he adds, “but what’s crucial is to measure the impact the disclosures have. That’s what we, as accountants, are endeavoring to do.”
Read the study:
“The Real Effects of Conflict Minerals Disclosures”
By Bok Baik, Omri Even-Tov, Russell Han, David Park