ROADMAP A. Context and problem definition

ROADMAP TITLE OF THE INITIATIVE

A comprehensive EU supply chain initiative for responsible sourcing of minerals originating in conflict-affected and high-risk areas

LEAD DG – RESPONSIBLE UNIT

DG TRADE – G.3

DATE OF ROADMAP

04/2013

This indicative roadmap is provided for information purposes only and is subject to change. It does not prejudge the final decision of the Commission on whether this initiative will be pursued or on its final content and structure.

A. Context and problem definition (1) What is the political context of the initiative? (2) How does it relate to past and possible future initiatives, and to other EU policies? (3) What ex-post analysis of existing policy has been carried out? What results are relevant for this initiative? (1) Minerals often play a pivotal role in conflicts. The extraction, handling, trading and processing of minerals have been associated with the misuse of revenues, corruption, political conflict and state fragility, which contribute to jeopardising countries' long-term development efforts. Since access to revenues from minerals has a crucial impact on the strategic position of belligerents, this struggle can prolong and exacerbate conflicts with spill-over effects on society, national prosperity and the strength of public institutions. Being endowed with highly prized resources can therefore have the perverse effect of undermining good governance, thereby increasing further the vulnerability of countries to conflict, in particular. In this context, there is increased global awareness that sourcing minerals from conflict-affected and high-risk areas may contribute, through the supply chain, to the financing of armed groups and the fuelling of violence and instability in the developing world. The business community also increasingly recognises its role in providing better consumer information and transparency, while identifying, preventing, and mitigating possible risks of adverse impacts along mineral supply chains when sourcing from conflict-affected and high-risk areas. On an international level, these issues are addressed by the Corporate Social Responsibility agenda, where several voluntary initiatives supporting responsible business conduct and developing the concept of due diligence of supply chains have been adopted, including the UN Guiding Principles on Business and Human Rights and the update of the OECD Guidelines for Multinational Enterprises. Specific initiatives have also been developed for the extractive industry sector, such as the OECD Due Diligence Guidance for responsible supply chains of minerals from conflict-affected and high-risk areas (hereafter, OECD Due Diligence Guidance), or the Extractive Industry Transparency Initiative. Moreover, the UN General Assembly is expected to adopt in September 2013 a Resolution on the promotion of sustainable development through transparency in the management of natural resources. Specifically, in the case of Central Africa, the Unites States has adopted provisions under Dodd-Frank Wall Street Reform and Consumer Protection Act (hereafter, "Dodd-Frank") sections 1502 and 1504 respectively addressing the supply chain and financial transparency. In particular, section 1502 requires all U.S.-listed companies to disclose annually whether they and their suppliers use "conflict minerals" (specifically: tin, tungsten, tantalum and gold) defined as those minerals originating from the Democratic Republic of Congo or a neighbouring country. Companies must report on the measures taken to exercise due diligence and to mitigate potential risks. They are liable for the accuracy of the information provided and accountable to the general public for their corporate behaviour. The Dodd-Frank has substantially complicated accounts for the US industry in particular, but also for their international suppliers. It has resulted in various response strategies applied by companies affected and therefore has mixed implications for the Great Lakes region. Separately, a draft legislative proposal seeking to support the use of OECD due diligence guidance has been tabled before the House of Commons in Canada at the end of March 2013. In conflict-affected regions, resource-rich countries have also developed policies, including on due diligence of supply chains, in order to allow responsible minerals sourcing and to allow and promote legal trade in minerals. There is one known region-wide initiative: efforts by the International Conference on the Great Lakes Region (ICGLR) to set up a certification scheme in member countries for conflict-free minerals. In the EU, the European Parliament passed a resolution on 7 October 2010 calling for the EU to legislate in this area, while a number of EU Member States have taken initiatives relating to conflict minerals. Germany, for example, has developed a certification and traceability system for minerals supply chains for the use of

governments in Central Africa. The Dutch government has brokered the Conflict-free tin initiative allowing the private sector in collaboration with the Congolese government and NGOs to promote responsible sourcing of minerals from the eastern DRC. The Belgium Senate has adopted a resolution asking for more transparency in minerals’ supply of companies. The UK is making efforts to raise global standards of transparency for extractives in the context of its G8 Presidency. Meanwhile, the European Commission announced in its 2011 Commodity markets and raw materials communication, and its 2012 Trade, growth and development communication, its intention to explore ways (including aspects of due diligence) of improving transparency throughout the supply chain. Also, in the latter Communication, consistent with the recommendations of the OECD Council on Due Diligence Guidance, the Commission advocated greater support for and use of the OECD Guidelines for Multinational Enterprises, and of the OECD Due Diligence Guidance – even beyond OECD countries.

Finally, the EEAS and the European Commission are already working to assist resource-rich developing countries affected by conflicts to sever the link between the exploitation and trade of mineral resources and conflict through existing policies and programmes.

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(2) Complementary action at the EU level includes the review of the Accounting and Transparency Directives tabled by the European Commission in 2011 which – among other things – promote the disclosure of payments to governments on a country and project basis by listed and large unlisted companies with activities in the extractive (oil, gas and mining) and forestry sectors. On 9 April 2013, a political agreement on disclosure requirements has been reached by the EU institutions and the adoption of the legal text is expected soon. This is considered an important step towards a more transparent environment that could promote governments’ accountability and reduce the risk of corruption, and is comparable with the U.S. Dodd-Frank Act, section 1504. The Commission also prepared a further amendment of the Accounting Directives proposing to strengthen the existing requirements on disclosure of non-financial information. This initiative has been adopted by the College on 16 April 2013 and includes an obligation for large listed and unlisted companies to disclose material information concerning environmental, social and employee-related matters, anti-corruption and human rights aspects of the business operations. The co-legislators will now take work forward. Furthermore, the Communication on a renewed EU strategy 2011-2014 for corporate social responsibility recognises the importance of complementary regulation in order to create an environment that is more conducive to enterprises voluntarily meeting their social obligations.

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(3) This is a new area of policy intervention for the EU, and therefore there is no specific existing policy framework that might be the subject of an ex post evaluation. However §E(1) – below – provides details of studies of other interventions with similarities to that proposed by the present initiative, or which otherwise have some relevance for the initiative under consideration. What are the main problems which this initiative will address? 1. Global supply chains for certain minerals may be used - by accident or by design – to source from regions affected by conflicts. The extraction, trading, handling, and exportation of minerals may have a direct or indirect effect on the conflict. 2. EU economic operators – throughout the supply chain of the minerals concerned – are increasingly aware of the need to responsibly source from conflict-affected and high-risk areas. However, the present international regulatory environment lacks a collective EU response that would facilitate legitimate and responsible trade in minerals. An EU legal framework that safeguards the free but responsible choice of supply of EU operators could be part of the EU's response. Appropriate incentives need to be studied to offer a comprehensive response. 3. Due to conflicts, legitimate mining communities in mineral-rich countries are unable to supply their minerals to global markets. 4. EU consumers and investors are increasingly concerned that purchasing decisions of end-products containing for example tin, tantalum, tungsten and gold are potentially contributing, through the supply chain to conflict. 5. There can be a lack of governance, sustainable management and law enforcement in relation to the exploitation of natural resources in conflict-affected and high-risk countries.

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Who will be affected by it? Business operators throughout the supply chain of minerals within the scope of the initiative, notably if the option chosen imposes obligations on the industry. Governments and public administrative structures in producing countries and in countries throughout the supply chain (in particular concerning smelters). Local populations living in mining areas in conflict-affected and high risk countries.

Is EU action justified on grounds of subsidiarity? Why can member states not achieve the objectives of the proposed action sufficiently by themselves? Can the EU achieve the objectives better? If the proposal is drawn up on the basis of Options 3 and 5 (See Section C below), it will deal with EU trade in minerals from outside the EU, and entering the EU market for the first time. As such, it falls within the exclusive competence for external trade granted to the EU by the Treaties. The initiative should also cover measures relating to the circulation of selected minerals (to be identified in the impact assessment) on the internal market and the existing disclosure requirements that apply to listed and large companies in the EU. Such measures are adopted at EU level.

B. Objectives of the initiative What are the main policy objectives? 1. To support responsible sourcing by promoting transparent supply chains of minerals originating from conflictaffected and high-risk areas. 2. To mitigate these minerals' impact on conflict in a reasonable, effective and proportionate manner for economic operators. 3. To support continued EU access to mineral markets by promoting and sustaining clean trade from conflictaffected and high-risk areas. 4. To strengthen EU consumer and investor confidence that products containing, for example, tin, tantalum, tungsten and gold do not contribute to fuelling conflicts thanks to responsible behaviour by companies. 5. To contribute to the comprehensive foreign policy and development strategy of better governance, sustainable management and law enforcement in relation to the exploitation of natural resources in mineral-producing conflict-affected and high-risk countries. 6. To improve the livelihood of local communities dependent on mining activities in conflict-affected and high-risk countries. Do the objectives imply developing EU policy in new areas? Yes

C. Options (1) What are the policy options (including exemptions/adapted regimes e.g. for SMEs) being considered? (2) What legislative or 'soft law' instruments could be considered? (3) How do the options respect the proportionality principle? (Option 1) No action (Option 2) Voluntary approach, which could include a Commission Communication, a Council Recommendation and/or EU support measures to promote European enterprises to apply voluntarily the OECD Due Diligence Guidance (only if they are not already subject to a mandatory third county scheme). 1

(Option 3) Due diligence when placing products on the market , covering the following two sub-options: (3a) Operators to exercise supply chain due diligence when placing selected minerals (ores, concentrates, and metals) for the first time on the EU market. (3b) Operators to exercise supply chain due diligence when placing selected minerals (ores, concentrates, and 1

Placing on the market means the supply by any means of certain minerals (option 3a) and certain end-products containing those minerals (option 3b) for the first time on the internal market for distribution or use in the course of a commercial activity.

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metals) for the first time on the EU market + Operators to exercise supply chain due diligence when placing certain end-products that contain certain minerals for the first time on the EU market. (Option 4) Public disclosure for EU-listed and large companies to demonstrate due diligence for certain minerals in their supply chains. (Option 5) Prohibition on placing selected minerals on the EU market for which operators fail to provide evidence of supply chain due diligence, and which in the case of imports would include border measures. All options are subject to additional modalities including implementation procedures (e.g. audit requirements, de minimis clause, recycling conditions, specific SMEs treatment and other exemptions) and to the question of whether due diligence should be exercised on the basis of the respect for domestic legislation notwithstanding inherent weaknesses and/or lack of implementation. These aspects are to be further developed on the basis of the impact assessment and a public consultation. The proposal is intended to be a comprehensive one, so preparatory work will also look into possible supporting incentives.

D. Initial assessment of impacts What are the benefits and costs of each of the policy options? (Option 1) 

Early work and discussions with stakeholders suggest at this stage that the cost of no action is that EU access to certain vulnerable minerals markets is impaired. The impact assessment will study this hypothesis allowing appropriate policy conclusions to be drawn with respect to this option.

(Option 2) 

Benefits: This option supports the development of voluntary private sector initiatives on responsible sourcing in line with the OECD Due Diligence Guidance or in response to other third country schemes. This option has merits such as flexibility, good cost/efficiency balance (although not an exhaustive private sector scale) and the voluntary nature which offers a powerful motivation for companies for being proactive.

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Cost: Additional administrative and other costs may be borne by companies willing to take up voluntary initiatives on responsible sourcing in line with the OECD Due Diligence Guidance. The impact assessment will assess whether it represents a good cost/efficiency balance. In addition, this option could entail additional financial or other EU support to further implement the Guidance

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The impact assessment will also assess to which extent European companies are already subject to other mandatory third country legislation, in which case for them this option is not necessarily relevant.

(Option 3a) 

Benefits: This option requires operators to exercise due diligence along the upstream part of the supply chain (i.e. extraction, transport, handling, trading and smelting/refining/alloying) of selected minerals originating in conflict-affected and high-risk areas. This would promote responsible sourcing covering an important part of the supply chain directly in the producing country where most of the risks of adverse impacts on conflict are expected.

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Cost: The obligation to exercise supply chain due diligence when placing certain minerals (ores, concentrates, and metals) for the first time on the EU market could impose additional administrative and other costs. Bearing in mind existing compliance schemes, the impact assessment will look into how a possible EU initiative dovetails with on-going initiatives and will be able to draw informed conclusions on gains or losses in terms of overall EU competitiveness relating to minerals trade.

(Option 3b) 

Additional Benefits in relation to Options (3a): This option requires operators along the entire supply chain to exercise due diligence when placing selected minerals and end-products containing those minerals for the first time on the EU market. In this option, the scope for the identification and mitigation of adverse impacts on conflict is again higher as the entire supply chain from mine to end-product and all operators are subject to it.

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Additional Costs in relation to Options (3a): More administrative and other costs are to be expected if all operators in the supply chain have to demonstrate due diligence. Where the operators concerned are already involved in existing compliance schemes, some of the costs will be abated. Operators under option 3(a) and 3(b) would be subject to fines and administrative sanctions in case they fail to pass EU ex-post control systems.

(Option 4) 

Benefits: This option does not have a specific geographical coverage, and the impact assessment will study 4

the assumed benefit of lower global market distorting effects. This option would require EU listed and large companies operating in the EU to source responsibly by demonstrating and disclosing the results of due diligence of their supply chains for certain minerals originating in conflict and high-risk areas. The impact assessment should identify additional benefits as compared to the previous options. 

Costs: Administrative and other costs are expected when EU listed and large companies have to demonstrate supply chain due diligence. Also in this context, sector-specific costs need to be assessed. If operators concerned are already involved in existing compliance schemes, some of the costs will be abated. In this option EU listed and large companies would suffer from potential “naming and shaming” consequences as opposed to fines and administrative sanctions under option 3.

(Option 5) 

Benefits: This option allows for greater coercion compared to previous options since border controls are placed on importers of listed minerals who must exercise due diligence along the upstream part of the supply chain covering extraction, transport, handling, trading and smelting/refining/alloying of minerals.

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Cost: Besides additional costs (administrative and other) for economic operators, this option has a high risk for adverse impacts in terms of trade diversion and the "health" of mining industries in producing countries, especially small-scale and thus labour-intensive activities. In addition, border controls and costly import procedures will be necessary. The initiative could be challenged in the WTO.

For all options: Different costs as a result of the exemptions (e.g.: SMEs, de minimis thresholds) described under chapter C have not been taken into account. The impact on regulatory costs on governments and on public administrative structures in producing countries as well was throughout the supply chain are to be further developed in the impact assessment. In addition, the impact assessment will also look into costs/benefits on local livelihoods. Could any or all of the options have significant impacts on (i) simplification, (ii) administrative burden and (iii) on relations with other countries, (iv) implementation arrangements? And (v) could any be difficult to transpose for certain Member States? (i) Simplification: For those EU companies engaged in compliance schemes and depending on the Option ultimately selected, some simplification of present costs could materialise. This aspect has to be further studied. (ii) Administrative burden: All options should increase the administrative burden in producing countries and for economic operators to the extent that they are not new costs for those already engaged in compliance schemes. (iii) Relations with other countries: Where balanced outcomes can be achieved by some of the options, the opportunity for eased trade flows in certain minerals can receive a positive welcome in particular by producing countries. Conversely, WTO members may claim that discrimination is established by certain options and/or may invoke proportionality. (iv) Implementing arrangements: EU Member States will be in charge of the monitoring and enforcement of the proposed rules for which administrative and customs arrangements could be needed depending on the option. (v) Transposition difficulties for certain EU Member States: these options are broadly inspired by the 2010 Timber Regulation so Member States are already acquiring relevant experience. (1) (2) (3) (4)

Will an IA be carried out for this initiative and/or possible follow-up initiatives? When will the IA work start? When will you set up the IA Steering Group and how often will it meet? What DGs will be invited?

(1) An IA will be carried out (2) End of March 2013 (3) March 2013, 4 or 5 times during the process depending on the need (4) All DGs and in particular: MARKT, ENTR, DEVCO, ENV, EMPL and EEAS (1) Is any option likely to have impacts on the EU budget above € 5m? (2) If so, will this IA serve also as an ex-ante evaluation, as required by the Financial Regulation? If not, provide information about the timing of the ex-ante evaluation. (1) If the initiative succeeds in promoting more (but responsibly sourced) trade in certain minerals, there could be a positive contribution to the EU budget to the extent that transformed goods entering the EU market are subject to customs duties. In addition, some of the incentives to be considered could include some targeted EU development assistance support. Where foreign donors are involved in current compliance programmes, the contributions tend to be under EUR 5 million. (2)Not applicable.

RA (2013) art. 18, which details the requirement for ex ante evaluation, refers only to 5

“programmes or activities occasioning budget expenditure”.

E. Evidence base, planning of further work and consultation (1) What information and data are already available? Will existing IA and evaluation work be used? (2) What further information needs to be gathered, how will this be done (e.g. internally or by an external contractor), and by when? (3) What is the timing for the procurement process & the contract for any external contracts that you are planning (e.g. for analytical studies, information gathering, etc.)? (4) Is any particular communication or information activity foreseen? If so, what, and by when? (1) Some ex post analysis is available, notably in relation to the OECD due diligence guidance with a particular focus on the Democratic Republic of Congo. There are related OECD meetings with stakeholders taking place this year which would provide for focussed consultations with different operators in order to better study impacts and policy options. Based on information collected there, additional targeted consultations can be organised. Companies already engaged in responsible sourcing are doing so in different parts of the world which should help nourish our own preparatory work in the months ahead. EU delegations have some expertise on these issues and will be invited to share the public consultation and contribute useful input. The European Parliament will organise a hearing on responsible sourcing in September 2013. An impact assessment is available for the EU Timber Regulation, which includes supply chain due diligence requirements containing useful though not identical comparators. As this Regulation came into effect on 3 March 2013, no ex post report on the Timber Regulation is yet available. Furthermore, an impact assessment is available for the draft Regulation establishing rules governing access and benefit-sharing for genetic resources and traditional knowledge associated with genetic resources as well as establishing obligations for users to exercise due diligence. Finally, the rough cost estimates provided by DG MARKT in its IA on the recent proposal to amend the Accounting Directives in respect of disclosure of non-financial information, could be a useful initial element in our analysis. (2) See (1). (3) External study through negotiated contract - interim results due by mid-July (4) A public consultation will be conducted as part of the IA and was launched on 27 March 2013. Which stakeholders & experts have been or will be consulted, how, and at what stage? At an internal workshop in December 2012 external stakeholders from business, academia and nongovernmental organisations have been consulted for the first time.

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