Due Diligence Obligations in Metal Supply Chains

High risks in mining, processing and transport

A survey of Swiss commodity traders in 2017 identified “labour standards; environ­mental protection; occupational health and safety; community health and safety; rights of Indigenous Peoples; use of security forces; issues relating to local community resettlement” as the biggest risk factors in the upstream supply chain. But (violent) con­flicts in mining regions, for example over land use, also present risks. The poten­tial negative environmental consequences of mining and refining include air pollu­tion, acidic mine drainage, contamination of ground and water with heavy metals, failure to rehabilitate abandoned mines, and the sector’s generally large carbon foot­print. There are also – to date less promi­nently discussed – human rights and en­viron­mental risks in connection with trans­port and storage, such as forced labour and debt bondage in the shipping sector.

Although metal exchanges and over-the-counter markets are not themselves in­volv­ed in the physical trade, they are none­theless exposed to risk if accredited producers vio­late human rights and environmental stand­ards, because that undermines con­fidence in the effectiveness of their regu­latory systems.

Specific trading risks

Other risks fall directly in the responsibility of commodity traders. One such is the issue of funding of armed conflicts, repressive regimes and terrorism through trade in illic­it metals or through business relationships with prominent politicians or crimi­nal individuals. For example Al Jazeera revealed in March 2023 that senior mem­bers of the Zimbabwean government were involved in a scheme to evade sanctions by smuggling billions of dollars’ worth of gold to Dubai every month. Efforts to address metal smuggling from repressive states and conflict regions often focus on formalising artisanal mining but fail to pursue sys­tem­atic action against criminal networks at the international level.

Precious metals like gold and platinum are most susceptible to criminal activities on account of their high value-to-weight ratio. Lax customs and import controls have made the United Arab Emirates a hub for the illicit trade in gold from Africa. After pro­cessing in refineries in the Emirates, it passes on to Switzerland, India and China – and thus indirectly to the EU market.

Action has already been taken to regulate the trade in conflict minerals – tan­talum, tin, tungsten and gold (3TG) mined in conflict-affected and high risk areas (CAHRAS). – and reduce the revenues accruing to warring parties. In 2010 the United States adopted the Dodd-Frank Act, which requires US-listed companies to disclose any use of conflict minerals from the Democratic Republic of the Congo or neighbouring states. They must also pro­vide assurances that the mining of 3TG minerals used in their products does not fund armed conflict. The EU’s Conflict Minerals Regulation of 2017 also places binding due diligence and auditing obli­gations on EU companies importing 3TG minerals from particular CAHRAS. Al­though the Swiss and British commodity traders who provide much of the EU’s supply of 3TG minerals are not directly affected by the regulation, they do treat the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas as the established sectoral standard. Its drawback is that it is not binding.

Conflict minerals apart, trade in metals in general is much more loosely regulated – although risks naturally exist there too. Dealings with actors involved in the illegal trade in metals bring physical commodity traders into (indirect) contact with money laundering, corruption and tax evasion. Some­times commodity traders are even directly implicated in criminal activities. A report by the Anti-Corruption Resource Centre in 2017 documents a string of cases where traders bribed politicians in pro­ducer countries in order to gain access to cheap minerals.

The great complexity of metal supply chains and the difficulties tracing provenance pose challenges for comprehensive due diligence. The trading sector has begun devoting greater attention to the issue of sus­tainability, but still lags a good way behind other metal supply chain actors.

Weak regulation in trading centres

The biggest deficit is weakness of regulation in metal trading centres. Switzerland and the UK are particularly relevant for the EU market. Switzerland is a member of the OECD and the Extractive Industries Trans­parency Initiative (EITI), which is an inter­national initiative of states, corporations and NGOs working for good governance and transparency in the commodity sector. Switzerland has also published guidance on implementing the UN Guiding Principles on Business and Human Rights in the com­modity trading sector. The Swiss Code of Obli­gations was amended in January 2021, to require resource-extracting enterprises to disclose all (aggregate) payments of 100,000 Swiss francs (approx. €102,000) or more made to government authorities. But over­all the legal obligations placed on businesses remain weak. The referendum for the Responsible Business Initiative, which pro­posed a Swiss equivalent of the German supply chain legislation, failed at the end of 2020. The UK also lacks such legislation, although the LME does fall under the 2015 Modern Slavery Act which requires busi­nesses whose turnover exceeds £36 million to report steps taken to ensure that slavery and human trafficking are not occurring in their supply chains.

Slow implementation of voluntary standards

Given the weakness of statutory regulation in the main trading centres, sustainability standards in the commodity trade are large­ly implemented and enforced on a voluntary basis.

The leading commodity traders are in­creasingly working to anchor environmental, social and governance (ESG) standards in their business practices. This process is driven by rising expectations on the part of their customers and massive pressure from NGOs. However a recent analysis of meas­ures adopted by twenty-five major commodity traders to fulfil their corporate due diligence obligations and disclose relevant information reveals that these traders are not working actively to address risks relat­ing to human rights violations, illicit finan­cial flows and environmental harm in their supply chains. Established systems for im­ple­menting due diligence obligations, the report says, are weak and frequently restricted to risk analysis, with little sign of progress.

In London’s metal exchanges and over-the-counter markets the implementation of sustainability guidance is already compulsory at the LBMA (since 2012 for gold and 2018 for silver) and the LPPM (since 2020). It requires accredited refineries to be inde­pendently audited. Not until 2019 did the LME publish a Policy on Responsible Sourc­ing of LME-Listed Brands, which is oriented on the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. From 2024 all market participants will be required to adhere to this guidance. If they fail to do so they can be excluded from trading. The LMEpassport introduced in 2021 allows producers to provide sustain­ability data on a voluntary basis. The LME’s measures are regarded as an important step forward, but also come in for criticism. It is argued that inadequate attention is paid to environmental risks and that data on com­plaints and violations is not published.

Lack of transparency hinders traceability

The unwillingness of commodity traders and exchanges to supply basic information about provenance and suppliers is espe­cially problematic. This makes traceability more or less impossible. For example the LME publishes no information on the coun­tries of origin of the metals in its warehouses. Commodity traders sometimes pro­vide information on refineries, but rarely on the specific mines from which the metals originate. Precisely that information would be important, because traders often blend ores and concentrates from different mines and conditions can differ widely between mines within a country. There is also a lack of transparency on the externalised costs and environmental impacts of the commodity trade. Information on the number, scope and recipients of prefinancing loans from commodity traders is also not always avail­able.

The traders argue that they need to safeguard commercial confidentiality. The major trading houses are mostly not public companies (with Switzerland’s Glencore representing an exception) and therefore not subject to the transparency and ESG rules applied by stock exchanges. Their reticence about providing information on provenance and production conditions poses a risk for German companies sourcing metals through Swiss traders or London’s markets.

The decentralised nature of the commodity trade

Ultimately the decentralised nature of the commodity trade stands in the way of sys­tematic implementation of sustainability standards. Alongside a few core trading centres and a limited number of major trading firms, most of Europe’s traders are (very) small specialist operations. A survey of the Swiss commodities trading sector in 2017 found that 42 per cent of traders had fewer than ten employees and another 48 per cent had between eleven and three hundred. This large group tends to be neg­lected when it comes to implementing standards and sharing information.

In the mining countries too, a multitude of actors are involved in trading metals. As well as major international trading com­pa­nies such as Trafigura, some mining compa­nies run their own trading operations. And then there are numerous smaller local inter­mediaries, especially where artisanal min­ing is involved. Often multiple traders are involved between producer and buyer. The power and influence of commodity traders in supply chains varies from metal to metal. This makes it very hard to properly identify the actors involved in the metal trade.

A strong EU supply chain law

The most important centres for the metal trade lie outwith the EU, which therefore lacks direct influence. Strong European supply chain legislation encompassing the entire financial sector would enable metal buyers within the EU to exert greater pres­sure on the exchanges and traders that sup­ply their metals. The financial sector plays a significant role in financing the capital-intensive physical commodity trade. So a requirement for financial actors to fulfil human rights and environmental due dili­gence obligations would also affect com­modity trading. The Council of the EU wants to exclude the financial sector from the scope of the EU’s directive on corporate sustainability due diligence, while the Euro­pean Parliament and Commission wish to include it. In order to maximise the impact of European supply chain legislation, the German government should press – both before and during the upcoming trilogue negotiations – for the financial sector to be brought within the scope of the legislation.

Political dialogue on standards

Apart from binding legislation, the German government can expand the political dia­logue on standards with important metal trading centres, in particular Switzerland, the UK and China. One obvious framework would be international organisations such as the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Develop­ment (IGF) or the G20. While Switzerland is not a member of the G20, it does partici­pate regularly in the group’s preparatory meetings. Above all, exchange with China should be maintained despite the geopolitical tensions, for example in the OECD con­text or through the Sino-German Centre for Sustainable Development, established in 2017 at the initiative of the German Federal Ministry for Economic Cooperation and Development and the Chinese Trade Min­is­try. By offering greater support for EITI and the UN Global Compact, the German gov­ernment can also promote transparency in commodity trading and stimulate the politi­cal dialogue on implementation of sustain­ability standards in this area.

Untied loan guarantees

The German government plans to expand the volume of untied loan guarantees (Un­gebundene Finanzkredite, UFK-Garantien) granted to commodity traders in order to boost security of supply for metals. In October 2022 Trafigura received a loan of US$800 million to supply up to half a million tonnes of non-ferrous metals to German firms. Given the lack of transparency in the commodity trade and the in­adequacy of due diligence fulfilment, the German government is entertaining con­siderable risks by pledging such guarantees. It could minimise them by expanding the pre-approval review of environmental, social and human rights (ESH) aspects and instituting regular additional ESH audits during the course of the project. Transparency and sustainability should be decisive criteria for granting untied loan guarantees. The standards for ESH audits should be stricter than the Performance Standards of the International Finance Corporation, which represent the established standard in development financing. Guarantees for long-term supply contracts with mining companies would be an alternative to the untied loan guarantees for loans to traders. This would also simplify the ESH auditing, because operators of mines and refineries provide more information on provenance and production conditions.

Multi-stakeholder initiatives

Despite their outstanding significance for implementation of standards, commodity traders (and metal exchanges and over-the-counter markets) are underrepresented in existing multi-stakeholder initiatives. The same also applies to actors from the finan­cial sector. Nevertheless these initiatives can still be an effective instrument for advancing standard-setting and promoting discussion of risks among actors along metal supply chains. The German Federal Labour and Development Cooperation Min­is­tries should therefore work – in national sector dialogues and at European level in the European Partnership for Responsible Minerals (EPRM) – towards greater inclu­sion of actors from the commodity trading and financial sectors.

Civil society and research

It tends to be NGOs and research institutes that bring to light human rights violations and environmental problems in the supply chains of commodity traders and exchanges. In the absence of public data, they make a substantial contribution to illuminating international trade flows and exposing the risks of the commodity trade. One option for the German government to improve trans­parency in metal supply chains would therefore be to fund and support relevant NGOs and research projects.