As part of the Biden administration’s 100-day evaluation of U.S. supply chains, in June the Department of Defense (DoD) issued its review of certain “strategic and critical materials” that are key ingredients in electronics and green technologies. Supply chain resiliency is an increasingly important area of Environmental, Social, and Governance (ESG) focus for companies and stakeholders alike, and the DoD’s review has implications for ESG reporting.
The review found that to meet rising consumer and national defense needs, American manufacturing depends on materials supplied by overseas mines and processing facilities that are often located in regions lacking sufficient environmental or human rights protections. The DoD warns that a lack of domestic and sustainable sources could leave U.S. businesses vulnerable to disruptions in supply and unable to find suitable replacements.
The DoD’s concerns are not purely hypothetical. For example, cobalt is a necessary ingredient in most rechargeable batteries, but the current global supply chain is dominated by mines in the Democratic Republic of Congo (DRC) and processing facilities in China. A pending class action suit alleges that a group of U.S.-based technology firms knowingly sold products containing cobalt mined by children in the DRC. Although the firms named in the suit all had some policy in place to prevent human rights abuses in their supply chains, the nature of the cobalt supply chain has made it difficult to properly monitor suppliers or to find alternative sources.
The DoD report concludes with a series of policy recommendations intended to ensure the long-term security and sustainability of strategic and critical material supply chains. Most of the recommendations focus on long-term strategies to increase domestic production and processing capabilities, including plans to extract materials from mining waste and recycled consumer goods as well as a comprehensive geological survey of untapped mineral resources. More short-term goals include the development of uniform sustainability standards and increased SEC reporting requirements for industries that rely on strategic and critical materials. In fact, the SEC has identified the development of ESG and climate disclosure requirements, including those related to supply chain impacts, as a key priority. SEC Commissioner Lee has indicated that the agency is working on a proposed rule on ESG disclosures.
Based on the DoD’s recommendations, companies that source cobalt and other strategic and critical materials can consider the following three steps to proactively improve the sustainability of their supply chains:
- Develop clear and concrete sustainability standards for strategic and critical materials that ensure environmental and human rights protections. The DoD recommends the creation of uniform sustainability metrics and product labeling for strategic and critical materials to allow consumers to make informed decisions. For businesses looking to get a head start, the DoD points to existing standards developed by organizations such as the Extractive Industries Transparency Initiative (EITI) or the Initiative for Responsible Mining Assurance (IRMA) as potential sources of guidance.
- Conduct frequent, thorough, and transparent due diligence on strategic and critical material supply chains, including an independent audit. The SEC already requires heightened due diligence reporting for certain “conflict minerals” like gold and tin under Section 1502 of the Dodd-Frank Act, and the DoD recommends that Congress extend these reporting requirements to all strategic and critical materials.
- Prepare to take advantage of domestic strategic and critical material sources as they become available. The DoD recommends a government-wide effort to increase sustainable domestic production and processing of strategic and critical materials, and new suppliers will likely be entering the market as a result.
We will keep you updated as the Biden administration puts the DoD recommendations into action. If you have any questions please reach out to a member of our ESG Working Group.