Human rights issues in supply chains often occur beyond the visibility of investee companies, sometimes despite the best intentions of investee companies to manage them.

The impact this has on company performance is analysed in relation to earnings volatility and sustainability, brand impact, productivity, labour rights and business disruption. Comprehensive guidance is provided as to the differences in leaders and laggards in this space. Key red flags to look out for in companies that may be violating human rights in their supply chains are identified. Potential questions for investors to ask investee companies when evaluating the risk of human rights in their supply chains are provided based on five engagement areas as follows –

• Knowing your supply chain
• Adopting a robust ethical sourcing policy
• Knowing your supplier and building a strong relationship with them
• Adopting a unified auditing approach
• Providing training on human rights to staff and suppliers.

1. Ensuring human rights risk exposures are minimised in business supply chains is critical for investors to ensure earnings sustainability and minimise earnings volatility. Business risks arising from supply chain human rights risk exposure include negative brand impact, disruption to productivity and product quality, regulatory sanctions, and compromised social licence to operate.
2. Management of supply chain human rights risk should extend beyond legislative compliance. Companies must understand current wage practices and what constitutes a ‘living wage’ in the supply chain. This can be accomplished using various benchmarks provided by NGOs, such as the Global Living Wage Coalition and the Asia Floor Wage Index. In addition, the Anker methodology provides guidance on how to
   calculate a living wage.
3. Complex and long supply chains with several intermediaries, as well as lack of disclosure on supply chain management are reliable indicators of heightened risk of human rights violations.
4. Investors must look beyond an investee company’s ethical sourcing policy to test if the company has the leverage to enforce it. Prioritising strategic over transactional relationships with suppliers will likely increase supplier loyalty and raise a company’s financial leverage, incentivising suppliers to better monitor labour rights conditions further down in the supply chain.
5. Key underlying issues which exacerbate human rights risks in the supply chain include the absence of living wages, freedom of association, grievance mechanisms, and absence of the use of
   certified labour hire companies.
6. Investor engagement should encourage companies to identify, disclose and mitigate human rights risks, rather than punish them for incidences found. The introduction of a Modern Slavery Act (MSA) in Australia should encourage companies to be a conduit for positive change, rather than taking a legalistic view on human rights.
7. Forced labour is often hidden deep down in the supply chains, which means the issues can be difficult for investee companies to detect. In 2016, the International Labour Organization (ILO) and Walk Free estimated that 40.3 million people (including 10 million children) were victims of modern slavery, of which 24.9 million were trapped in forced labour. Half of the latter were in debt bondage. Geographically, the risk is highest in Asia (47% of forced labourers are estimated to be in Asia).
8. Industries at highest risk of modern slavery include agriculture and fishing, apparel, construction and building materials, mining, electronics and electronics recycling.
9. Established global frameworks can provide useful guidance to investee companies willing to improve their supply chain risk management. These include the UN Guiding Principles on Business and Human rights, the UN Global Compact, Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption.
10. Investee companies with smaller footprints often contend that their size limits their influence over supply chain human rights risks. Such companies can participate in multi-stakeholder initiatives, and engage with NGOs, industry associations and governments, to adopt a multi-faceted approach to addressing this issue.