Slavery in supply chains – digging deeper as investors
The onus to uphold human rights across opaque, dynamic, and complex supply chains is often blurred across multiple actors, creating a situation of blame shifting and inaction. However, the impact of money affects more than just financial returns. Where we choose to invest or divest goes a long way in influencing a firm’s position on human rights. Shareholder pressure or divestment are powerful tools to influence companies to consider the people deep within their value chains and is an opportunity to improve workers’ wages and conditions while mitigating financial and reputational business risks. This article looks as what modern slavery is and provides resources for retail investors to help minimise modern slavery risks in their investment portfolio.
Slavery in supply chains generates an estimated $150 billion of illegal profit in the global economy. Modern Slavery encompasses a range of forced labour practices including, but not limited to, child labour, forced labour and human trafficking. It is best defined by the International Labour Organisation as service exacted from any person under the threat of a penalty or from which the person has not offered themselves voluntarily.
The onus to uphold human rights across opaque, dynamic, and complex supply chains is often blurred across multiple actors, creating a situation of blame shifting and inaction. However, as investors, the impact of our money affects more than just financial returns. Where we choose to invest or divest goes a long way in influencing a firm’s position on human rights. Shareholder pressure or divestment are powerful tools to influence companies to consider the people deep within their value chains and is an opportunity to improve workers’ wages and conditions while mitigating financial and reputational business risks.
Image from Anti-Slavery Australia
Causes of Slavery
It is mandatory for companies with revenues of $100 million or more to submit an annual modern slavery statement. However, research finds that companies are struggling to identify modern slavery risks, failing to comply with reporting requirements and continuing to make empty commitments over meaningful action. An analysis of company statements headed by The Human Rights Law Centre in collaboration with other research organisations found that 66% of companies did not address all the mandatory reporting requirements prescribed by the Act. While this was a modest improvement from the first year of corporate reporting, in which 77% failed to address all the mandatory criteria, compliance rates remain extremely poor with most companies continuing to miss the mark.
The monitoring of supply chains by top-of-chain companies often ends at the first supplier down the chain. Insufficient investigation enables companies at the top to supposedly “free” themselves from taking responsibility for the hidden labour that their profits rely on. Top-of-chain companies pay middleman businesses to source and produce cheap goods. However, the payment is often insufficient to provide a living wage for workers down the chain and is responsible for the downward pressure on employers to take advantage of vulnerable people. Many of Australia’s major businesses have provided minimal disclosure with 43% of companies failing to identify that they are sourcing from known high risk sectors for instance, three in four fashion companies sourcing from China are at risk of Uyghur forced labour in their supply chains . This is an opportunity for investors to vote with their money and select companies that are taking action to prevent and rectify instances of modern slavery.
Spotting red flags
The greatest geographic risk is concentrated in Asia, with 47% of supply chain malpractice. This is due to insufficient labour laws which foster an attractive environment for suppliers due to minimal compliance and low labour costs. Industries at highest risk of modern slavery include agriculture and fishing, apparel, mining, and electronics.
There is much more than just dye that has been tainting the clothing from China, a key case illustrating the pervasiveness of slavery in the clothing industry is that of Uyghur forced slavery. The minority ethnic group from Xinjiang China, have been systematically displaced and forced to work in textile factories across the country and face dire consequences for resistance such as holding families ransom and imprisonment in internment camps. A report by the Australian Strategic Policy Institute estimates that over 80,000 Uyghur people have been transferred out of Xinjiang to work in the sweatshops of multiple manufacturing suppliers between 2017–2019. The report further revealed that this forced labour is complicit in the supply chains of 82 multinational companies including brands like Amazon, Apple, BMW, Google, and Zara. While the US has banned imports from the Xinjiang province passing a bill earlier this year, with the EU soon to follow suit, Australia is yet to catch up.
Image from Anti-Slavery Australia
Investor actions: divestment and education
Beyond the moral virtues associated with divesting from modern slavery, there are potential financial benefits. Poor health, safety and labour practices in supply chains are recognised as material risks to long-term investment portfolio performance. Companies exposed to poor labour practices and slavery are urged to act or risk damaged reputations, falling share prices and potential loss of business.
Investing in companies with healthy supply chain labour practices reduces risks such as supply chain disruptions and legal and regulatory action. For example, in 2014 CP Foods in Thailand were exposed for slavery on fishing boats, retailer of CP Foods’ products Costco was subject to a class action and saw a 2% fall in the share price in the week following the announcement. Consequently, companies with business models that are founded upon poor supply chain labour practices are likely to face increasing unanticipated costs due to growing stakeholder awareness and activism.
Resources for retail investors to help minimise modern slavery risks in your investment portfolio
Resources for retail investors to help minimise modern slavery risks in your investment portfolio:
- Responsible returns: by the Responsible Investment Association Australasia, this tool helps you find sustainable or ethical banking, superannuation & investment options that match your values and interests.
- Broken promises — Two years of corporate reporting under Australia’s Modern Slavery Act: this report scores 92 companies reporting under Australia’s Modern Slavery Act.
- Ethical Fashion Guide: Baptist World Aid ranks hundreds of fashion brands according to their labour environmental practices.
- Corporate human rights benchmark: the World Benchmarking Alliance assesses the human rights performance of 127 companies across food and agriculture, technology, and automotive sectors.
The increased pressure from government, investors, and consumers is influencing, albeit slowly and inconsistently, the largest companies to identify and disclose their impact on people working in their supply chains. Shareholder pressure and divestment can reduce investment risk while encouraging companies to uphold labour rights and support the abolition of slavery in the 21st century.