Shopify finds conflict minerals in its third-party manufactured components


US, EU require conflict minerals reporting; Canada does not.

E-commerce giant Shopify has reported that some of its hardware products contain so-called conflict minerals. Conflict minerals are minerals originating from the Democratic Republic of Congo (DRC) or adjacent countries, and which may benefit armed groups in the region.

In this instance, conflict minerals were identified in Shopify’s chip and swipe reader, its retail kit, and its tap and chip reader, all of which are manufactured by third parties. Conflict minerals also showed up in Shopify’s collaborative mobile robot, Chuck, per SEC filing.

Publicly traded companies in the United States using particular minerals in the manufacture of products have an annual deadline to disclose the potential presence of conflict minerals in their products to the US-based Securities and Exchange Commission. If a company uses minerals including tantalum, tin, gold or tungsten and files reports with the SEC under the Exchange Act, it must then file an annual conflict mineral disclosure report.

The European Union introduced similar conflict mineral reporting in 2021.

“It’s really a question of corporate reputation with investors or with consumers. I think a lot of that pressure is coming from the end producers.”
– Jamie Kneen, MiningWatch Canada

Canada has no such regulations. However, because Shopify is listed on the New York Stock Exchange, it is subject to SEC requirements. Shopify has filed the conflict mineral disclosure forms with the SEC since 2019. However, this is the first time the company has reported that a portion of the conflict minerals in its components might have been mined in restricted countries.

Former NDP MP Paul Dewar introduced a bill in the House of Commons in 2014 to ensure Canadian companies carried out due diligence in terms of conflict mineral reporting. The bill was defeated in the house in the same year.

Jamie Kneen, the Canada co-lead for mining industry watchdog MiningWatch Canada, said a new bill is currently before the house, but it only proposes to have companies disclose potential forced labour within their supply chains.

Since discovering the presence of the conflict minerals, Shopify has exercised due diligence on the source and chain of custody of the necessary conflict minerals, according to a recent SEC filing by the company.

Beyond carrying out due diligence, it’s unknown what other steps Shopify may take to fall in line with the regulations. Shopify did not respond to multiple requests for comment from BetaKit.

Kneen, who also looks after the advocacy group’s African program, said Shopify is under no obligation to find new suppliers, and that the reporting of conflict minerals carries no implications for changes to a company’s supply chain. He noted such disclosures tend to be for the benefit of investors, and part of the overall ESG investing presentation of a company.

“It’s really a question of corporate reputation with investors or with consumers,” Kneen said. “I think a lot of that pressure is coming from the end producers. That’s why it’s showing up with companies like Apple or BMW who want to be able to tell their buyers and customers that their products are clean.”

Since the introduction of the SEC conflict mineral reporting requirements, numerous companies have filed conflict mineral disclosure reports, ranging from Lowe’s Canada and the Home Depot to IBM and General Electric. Apple, according to a 2021 SEC filing, has removed 163 smelters and refiners from its supply chain since 2009 over conflict minerals.

The United States Congress passed the Dodd-Frank Act in 2010, of which the mineral reporting is part. Part of the Act came about because of concerns that armed groups’ exploitation and trade of conflict minerals are helping finance conflict in the DRC region, contributing to an emergency humanitarian crisis, according to the SEC.

The Act directs the SEC to require certain companies to disclose their use of conflict minerals if they are necessary to the functionality or production of a product that those companies manufacture. The minerals in question include tantalum, tin, gold, and tungsten.

A KPMG report opined that determining a company’s exposure to conflict minerals will help deepen an understanding of the supply chain for executives. “The reporting process may also enable a company to assess the risks holistically, by connecting disparate threats that, when added together, may harm its operations and its corporate reputation,” the report said.

The KPMG report noted that a break in the supply chain can be enormously disruptive to a business. “A successful program therefore requires an understanding of the way in which conflict-minerals compliance might affect the business, both in terms of supply chain risk and opportunity,” the report said.

“For example, if a supplier of a crucial component is found to be non-DRC conflict-free, the question arises as to how the company manages the associated risks, including customers’ reactions.”

In its SEC filing, Shopify said that it reached out to each third-party manufacturer of the components, explaining the requirements of the rule regarding conflict minerals, and asked each third-party manufacturer to certify that the conflict minerals did not originate in a country covered under the rule.

The manufacturers were asked to fill out a Conflict Minerals Reporting Template (CMRT), which is a free and common reporting template for conflict minerals content and sourcing information worldwide.

Each CMRT from the manufacturers identified lists of smelters or refiners, and their countries of origin, which might supply minerals used in the Shopify products. Shopify said that based on those, its finding was that it had reason to believe that a portion of the conflict minerals used in its hardware might have originated from the countries the rule covers.

Shopify noted: “We believe our RCOI [Reasonable Country of Origin Inquiry] process was reasonably designed and performed in good faith, but there are inherent limitations in the information provided to us by third parties, including the possibility of information being inaccurate, incomplete or falsified despite our efforts to validate and confirm the information.”

Shopify decided that the results of the RCOI led them to believe “that a portion of the conflict minerals used in the Covered Products may have originated in the Covered Countries and may not be exclusively from scrap or recycled sources…”

In recent weeks, Shopify’s stock has been pummeled on the market as its earnings reports showed the company’s growth was slowing. The company also faces the broader tech stock sell-off that has hurt other publicly-traded tech companies.

At press time, Shopify’s stock had risen to $500.50 CAD from a 52-week low of $453.97, but far from its 52-week high of $2,228.73.



Source link Shopify News

Post Author: Adam Jacob

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