Tesla (TSLA) SDConflict minerals disclosure

Tesla Conflict Minerals Report

* This report has been filed with the Securities and Exchange Commission to comply with the reporting period for the calendar year ended December 31, 2017.

Tesla’s mission

The goal of Tesla is to accelerate world’s transition to sustainable energy.  

Overview of Tesla

We design, develop, manufacture, lease and sell high-performance fully electric vehicles, energy storage systems, and solar energy systems.

Tesla’s Supply Chain

Our products use thousands of purchased parts, which we source globally from hundreds of suppliers.

Tesla is committed to only sourcing responsibly produced materials. In addition to the Tesla Supplier Code of Conduct, Tesla has a Human Rights and Conflict Minerals policy that outlines our expectations to all suppliers and partners that work with us.  We strictly follow all U.S. and foreign law, and require our supply chain to do the same.  All of our contracts require suppliers to adhere to our human rights policy and environmental and safety requirements. Tesla is committed to making working conditions in Tesla’s supply chain safe and humane, ensuring that workers are treated with respect and dignity, and that manufacturing processes are environmentally responsible.  Tesla suppliers are required to provide evidence of the existence of policies that address these social, environmental, and sustainability issues as well as responsible sourcing.

Our complex supply chain is a unique hybrid of the traditional automotive and high-tech industries and encompasses suppliers from around the world.  Many of our Tier 1 suppliers (i.e., direct suppliers) do not purchase all their raw materials directly and instead obtain them from downstream suppliers and sub-suppliers.  Therefore, reliably determining the origin is a difficult task, but the due diligence practices outlined below provide additional information and transparency that help us, and our suppliers, adhere to the responsible sourcing principles of our Supplier Code of Conduct

Our Tier 1 suppliers are required to register and complete the domestic and international material compliance requirements in the International Material Data System (“IMDS”) to meet European Union and other international material and environmental related regulations.  This requirement is mandated for all suppliers who supply their products or raw materials to us as part of our production part approval process.

Supplier-provided data collected via the IMDS process is the starting point for our conflict minerals due diligence efforts.  In addition to the material requirements above, we require our Tier 1 suppliers to fully disclose material sourcing of certain materials as specified in supply chain purchasing contracts.

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Tesla Supplier Code of Conduct

In 2017, Tesla released our Supplier Code of Conduct (“Code”) to all our supply chain partners. The Code is the foundation for ensuring social and environmental responsibility and ethical conduct throughout our supply chain, no matter what industry, region, or materials. Tesla continues to identify and do business with organizations that conduct their business with principles that are consistent with the Code.

Tesla, along with our partners and independent third parties, conduct audits to observe these principles in action. If there is a reasonable basis to believe a supplier partner is in violation of the Code, Tesla will transition away from that relationship unless the violation is cured in a satisfactory manner.

Conflict Minerals Disclosure

Ensuring Supplier Compliance

Tesla is committed to sourcing responsibly and considers mining activities that fuel conflict as unacceptable. Pursuant to Tesla’s human rights and conflict minerals policy, Tesla’s suppliers are expected to use reasonable efforts to ensure that parts and products supplied to Tesla are “DRC conflict free,” meaning that such conflict minerals do not benefit armed groups in the Democratic Republic of the Congo.  “Conflict free” means such parts and supplies do not contain metals derived from "conflict minerals," which are defined as:

(i) columbite-tantalite (tantalum);

(ii) cassiterite (tin);

(iii) gold;

(iv) wolframite (tungsten); and

(v) any derivatives of the above.

The goal of this policy is to ensure that Tesla's products do not directly or indirectly finance or benefit armed groups through mining or mineral trading in the DRC or any adjoining countries. Tesla requires its suppliers to establish policies, due diligence frameworks, and management systems consistent with the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (“OECD Guidance”). Tesla expects its suppliers to stay up to date with and to use validated conflict-free smelters and refiners assessed by the Responsible Mineral Initiative (“RMI”) and similar organizations. Tesla performs ongoing due diligence and files annual reports with the U.S. Securities and Exchange Commission in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act. For more information regarding Tesla’s Human Rights and Conflict Minerals Policy, visit http://www.tesla.com/about/legal.

Tesla’s Conflicts Mineral Policy also includes a grievance mechanism where concerned parties may contact Tesla’s Board of Directors and provide comments about Conflict Minerals and other sourcing matters.

 The Recognized Framework used to develop Due Diligence Framework

Our conflict minerals process and policy are designed to conform in all material respects with the OECD Guidance.

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Description of Due Diligence Performed on the Source and Chain of Custody of those Conflict Minerals

Step 1: Establish strong company management systems

As noted above, Tesla has adopted a human rights and conflict minerals policy. The policy was last reviewed and updated in December 2015. We published the Tesla Supplier Code of Conduct in 2017. Our supplier manuals also address conflict minerals and state our expectation that all Tesla suppliers are accountable for performing due diligence on their mineral supply chains in accordance with the OECD Guidance.  Our contractual terms with suppliers (i.e., General Terms and Conditions) include verbiage that provides the expectation that all Tesla suppliers are accountable for performing conflict minerals due diligence aligned with the OECD Guidance as required by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

We maintain a specialized team within our supply chain personnel to lead these due diligence efforts. An internal cross-functional Tesla Conflict Minerals Steering Committee (the “Steering Committee”) composed of Tesla management from Supply Chain, Accounting, Sustainability, and Legal oversees these due diligence efforts and potential risks and issues within our supply base.  We use the RMI Reporting Template (“CMRT”) to query at-risk Tier 1 suppliers to identify smelters in congruence with the OECD Guidance.  

We are using the automotive industry standard International Material Data System (“IMDS”) to help determine which suppliers are at risk for conflict minerals for all Tesla products.  In 2017, we extended use of the IMDS database to the Tesla Energy supply chain in addition to our automotive suppliers.  From that database, we review the existing supplier base annually to include newly added suppliers and existing suppliers who provide products to Tesla in order to determine which Tier 1 suppliers are likely to supply a product with Tantalum, Tin, Tungsten, and Gold (these four minerals together are commonly referred to as “3TG”).  For any Tier 1 supplier which has products that are determined to be highly unlikely to provide 3TG, we do not pursue additional conflict minerals due diligence and do not include that supplier in the Reasonable Country of Origin Inquiry (“RCOI”).  

Step 2: Identify and assess risk in the supply chain

Based on our data analysis from IMDS, we send out an inquiry letter to the Tier 1 suppliers which have products determined to likely contain 3TG minerals.   Suppliers are given approximately one month to respond to this letter and submit their CMRT.  Any suppliers that has not respond are queried again.  We continually reach out to in-scope suppliers on a monthly basis at the tail end of each year to receive the most up-to-date report.

Any concerns with supplier responses throughout data collection are brought to the attention of a member of, or the entire, Steering Committee for further review and action.  Suppliers who do not respond are brought to the attention of a Steering Committee member for escalation.

In addition, we continue to engage with other manufacturing companies in Silicon Valley to discuss conflict minerals activities across multiple industries (the “Silicon Valley Conflict Minerals Forum”). The Silicon Valley Conflict Minerals Forum has been instrumental in developing an aligned strategy and approach to conflict minerals due diligence challenges. Tesla regularly participates, hosts gatherings, and encourages participation from other members.

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Step 3: Design and implement a strategy to respond to identified risks

We perform risk-based assessments on all Tier 1 and potential Tier 1 suppliers as part of our sourcing process and through IMDS we identify which direct suppliers are highly likely to supply products that contain 3TG.  Based on this supplier list, we conduct a supply-chain survey using the CMRT, requesting Tier 1 suppliers to identify smelters and refiners and country of origin of the conflict minerals. Using the CMRT, we receive reports back on Tier 1 supplier progress and collect the determined list of smelters used in the supply chain.  We follow up with suppliers who did not respond to our original request for information.  

We perform documentation review of the smelters and refiners identified by the Tier 1 suppliers using the CMRT and make further inquiries to suppliers if  additional clarification is needed.  We use an in-house template to track the progress and response rate to determine next steps and escalation as necessary.  

Step 4: Carry out independent third-party audit of supply chain due diligence at identified points in the supply chain

We support the RMI’s outreach efforts and Responsible Minerals Assurance Process (“RMAP”) smelter audits through our membership in these programs.  We reserve the right to ask any high-risk Tier 1 supplier to audit their supply chain conflict minerals due diligence using a third-party independent auditor.  

As outlined in the OECD Guidance, we support an industry initiative that audits smelters’ and refiners’ due diligence activities. That industry initiative is the RBA’s Responsible Mineral Initiative. The data on which we rely for certain statements in this declaration are obtained through our membership in the RMI using the Reasonable Country of Origin Inquiry report for member TSLA.

Step 5: Report on supply chain due diligence

We report on our due diligence efforts as required by law and to comply with Rule 13p-1 under the Securities Exchange Act of 1934, as amended.

Steps Tesla Plans to Take to Mitigate the Risk that Necessary Conflict Minerals Benefit Armed Groups, Including Any Steps to Improve Tesla’s Due Diligence – 2018 Focus

In 2018, we plan to continue our inquiry method and utilize the RMI’s CMRT to collect and report on due diligence activities with our supply base. We will perform another review of our suppliers who are determined to be highly likely to source 3TG.  In addition to the 3TG minerals, we plan to support efforts to integrate similar due diligence for responsible sourcing of other minerals of concern, such as cobalt. We plan to continue participation in the Silicon Valley Conflict Minerals Forum and work together with our industry peers to better understand the developments from our joint due diligence efforts.  Supplier

education is important to our efforts to collect reliable feedback, and we plan to better provide details on our conflict minerals due diligence efforts to our Tier 1 suppliers by distributing information about the RMI’s efforts and encouraging participation in the RMI.  In an effort to continuously improve, we will monitor our due diligence progress over the year as we receive supplier responses to our inquiries and have targeted a 100% response rate.  We expect to participate in more RMI smelter

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engagement outreach efforts and provide feedback to our own supply chain to improve the quality of responses from our suppliers.

Reasonable Country of Origin Inquiry of the Necessary Conflict Minerals in Tesla’s Products

Tesla has not yet been able to fully identify countries of origin of 3TG and the smelters and refiners used to process the necessary conflict minerals in Tesla’s products.

We identified 389 suppliers who supply 3TG in their products and required all of these suppliers to perform and report on their supply chain due diligence through the use of the CMRT.  More than half of these identified suppliers in scope were new to our supply chain in 2017, resulting from production of the new Model 3 vehicle and the integration of suppliers for our Tesla Energy products.  We received 186 supplier responses, more than doubling the responses from the previous year. From these responses, we identified 996 unique smelters and refiners reported comprehensively. This is roughly one third of the identified unique smelters and refiners from last year, despite an increase in responses by volume.  We believe the reduced number of unique smelters identified reflects an increased awareness by our suppliers of RMI’s smelter database, as well as an improvement in data scrubbing to align alternative nomenclature and spelling of smelter names to match the RMI database. The ratio of known smelters to unrecognized smelters increased dramatically, which is a positive trend, as known smelters can be validated to conform to the RMAP protocols.   

We recognize the importance of working with industry peers and organizations and believe that a consolidated effort to determine reasonable country of origin is the most efficient method. Through our involvement in the RMI, we contribute information to help identify the current status of many of our smelters.  To help determine reasonable country of origin, we continue to monitor and rely upon the RMI’s progress in dispositioning smelters and refiners.  Additionally, we continuously compare the updated list of facilities that are certified by the RMI as conflict-free smelters or refiners against our own CMRT results throughout the year.

Our Tier 1 suppliers are highly dependent on the information provided to them by their suppliers.   Determining the countries of origin of each and every 3TG mineral continues to be a challenge that will take years to complete.  While the RMI has made substantial progress in identifying and assessing smelters and refiners globally, there is still a lot more that can be done.

At the end of 2016, Tesla acquired SolarCity.  The addition of energy products to Tesla’s product line and supply chain scope required additional effort to incorporate Solar City’s responsible sourcing policies and due diligence processes into our existing programs.  In 2017, we incorporated our new energy suppliers into the Company’s 3TG due diligence efforts and will continue to do so moving forward.

Based on the information provided by our suppliers as well as the RMI, Tesla believes that the countries of origin of the 3TG contained in our products include the countries listed below in Annex I.    Annex II lists the smelters and refiners believed to be in Tesla’s supply chain.  The information in Annex I and Annex II is based off of RMI’s RCOI data from April 2, 2018 and Tesla’s 2017 supplier CMRT submissions.  

The RMI’s RCOI data generally does not specify the countries of origin of the conflict minerals processed by the list of compliant smelters and refineries in Annex II.  In addition, it is not always possible to know the countries of origin of the 3TG contained in scrap and recycled sources.

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Battery Materials

In addition to global laws and regulations focused on 3TG due diligence specifically, Tesla believes that it is of equal importance to ensure that all of our products and material inputs are sourced with the same proactive approach, irrespective of material or region.

Of particular importance to us is the sourcing of raw materials contained in the battery cells used in Tesla’s products. Tesla has built strong partnerships with our direct battery cell suppliers.  We work closely together to identify and engage with raw materials suppliers that support cell production, which does not typically include 3TG. We require suppliers to provide documentation and descriptions of risk management and mitigation policies on an annual basis, receive certificates of origin for raw materials, and visit production sites whenever possible to observe, review, and discuss these risks and how they are addressed. During these visits, we look for potential human rights risks, in addition to safety or environmental risks, and discuss mitigation efforts directly with the operators.

We also check third party audits and evaluations to ensure our direct battery suppliers are complying with all relevant laws and their own corporate policies against child labor, human rights abuses, and other issues that affect responsible sourcing.  Tesla also reviews the requirements that our direct suppliers have with their sub-suppliers.  Most importantly, Tesla visits these sub-suppliers when possible to observe and review their processes and risk mitigation techniques. This engagement by Tesla extends all the way back to the mining stages.

Cobalt

Tesla does not and will not accept human rights abuses in our supply chain. While Tesla’s responsible sourcing practices apply to all materials and supply chain partners, we recognize the conditions associated with select artisanal mining (ASM) of cobalt in the DRC. To assure the cobalt in Tesla’s supply chain does not come from ASM sites, we have implemented targeted due diligence procedures for cobalt sourcing.  

We have visited many cobalt mines and processing plants that support Tesla’s main supply chain, as well as potential future suppliers throughout the world. We discuss with these suppliers the major risks they face and the practices they have implemented to mitigate these risks, including chain of custody controls and iterative checks performed from mining until customer delivery to combat illegal or artisanal ore use; on-site security and access control; hiring practices and management engagement to protect against child labor onsite; internal and third party audit practices; and engagement with local communities to maintain a positive social license to operate. To date, we have not uncovered human rights abuses in our supply chains.

It is important to note that there is very little cobalt in Tesla’s battery cells. On a relative basis, cobalt simply is not that significant to the composition of Tesla’s battery cells, as we mainly use NCA batteries, which contain substantially less cobalt than NMC batteries. Cells used in Model 3 production are the highest energy density cells used in any electric vehicle. We have achieved this by significantly reducing

cobalt content per battery pack while increasing nickel content and still maintaining superior thermal stability. The cobalt content of our Nickel-Cobalt-Aluminum cathode chemistry is already lower than

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next-generation cathodes that will be made by other cell producers with a Nickel-Manganese-Cobalt ratio of 8:1:1.

Lastly, Tesla is a member of the RMI, which is part of the overall supply chain responsibility organization Responsible Business Alliance (formerly EICC). RMI has expanded its scope beyond conflict minerals, and maintains a cobalt sub-team, of which Tesla is an active participant. This cobalt sub-team is actively working on several initiatives, including developing a due diligence program for cobalt sourcing and covering the risk areas included in the OECD Due Diligence Guidance. 

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[Annex I]

Australia,  Austria,  Belgium,  Bolivia,  Brazil,  Canada,  Chile,  China,  Estonia,  France,  Germany,  India,  Indonesia,  Italy,  Japan,  Kazakhstan,  Kyrgyzstan,  Macedonia,  Malaysia,  Mexico,  Perú,  Philippines,  Poland,  Republic of Korea, Russia,  Singapore,  South Africa,  Spain,  Sweden,  Switzerland,  Taiwan, The Netherlands,  Turkey,  United Arab Emirates,  United States of America,  Uzbekistan, and Vietnam

[Annex II]

The following list of facilities are smelters or refiners believed to be in Tesla’s supply chain who have completed the RMAP audit program and is listed as conformant for responsible sourcing practices.  We publish this list to hold these smelters and refiners accountable and to give credit for their continued participation in the RMAP.  In addition, we hope that this encourages the remaining smelters and refiners in our supply chain to accelerate their efforts to demonstrate responsible mineral procurement through the RMAP.

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Conflict Minerals Information on Tesla’s Website

This Conflict Minerals Report and more information regarding Tesla’s Conflict Minerals Policy is available at: https://www.tesla.com/about/legal.

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