Poor performance flagged in benchmark report should act as a “call to action” as proposed regulation heightens risk to investors.
The largest food and beverage companies’ attempts to tackle the issue of forced labour in the food value chain is “stagnating”, leaving investors subject to heightened risk from upcoming regulations.
A benchmark report by KnowTheChain, a project from non-profit Business & Human Rights Resource Centre, found that the world’s 60 largest food and beverage companies had an average score of 16/100 when it comes to addressing forced labour risks in their supply chains.
Financial think tank Planet Tracker estimated that the enterprise value of the global food system to be around US$14 trillion with revenues in the region of US$15-19 trillion in a report published earlier this year.
The UN Guiding Principles-aligned benchmark is comprised of indicators that cover commitment, governance, management, and accountability. This includes whether companies have supplier codes of conduct, which are implemented throughout their supply chains, as well as board oversight regarding policy implementation.
It also examines human rights due diligence, including indicators related to companies’ assessment of risk, recruitment practices, supply chain tracing, and grievance mechanisms.
Áine Clarke, Head of KnowTheChain, told ESG Investor that the focus of the benchmark “really is on trying to extract how companies are implementing policies and how those policies are having real world outcomes for workers”.
Less than 50% of the benchmarked firms scored over 10/100, with five scoring zero. Only two of the 60 companies received a score of more than 50. Clarke described the results as “pretty disappointing and concerning”.
She said the benchmark report should act as a “call to action for investors”, with the overall scores “quite low”, even for public companies, indicating the need for increased engagement and scrutiny to drive positive change and improve human rights practices within the food and beverage sector.
Consistent forced labour failure
According to the report, 37% of companies have yet to disclose how they carry out a human rights risk assessment on their supply chains. It also noted that food and beverage firms perform “particularly poorly” on preventative measures such as incorporating the voices of workers into due diligence processes.
The report flagged that many food-related jobs offer lower wages than other sectors or even use payment systems that are “conducive to exploitative conditions”. It also said that one third of supermarkets have not yet disclosed a policy that prohibits worker-paid recruitment fees in their supply chains, and that 55% did not disclose details of forced labour risks when identified.
The International Labour Organization estimates that agriculture accounts for the fourth-largest share of forced labour globally, with the food system accounting for up to two thirds of all jobs.
“The critical role played by workers in this sector is not reflected in corporate approaches to protect them,” Clarke said. “At a time when forced labour risks are being exacerbated by the converging geopolitical, economic and climate crises, it is alarming to see how little is being done by companies to protect the workers in their supply chains.”
Some companies disclosed “little to no improvement” in the six years they have been assessed by KnowTheChain, with the report adding that these firms had “consistently failed to demonstrate even basic relevant policies and practices to address worker exploitation which is inherent in the sector”.
It highlighted that for investors, a company’s failure to “adequately understand and disclose information” about its supply chain labour practices means they have “only partial visibility into that company’s salient risks and impacts”.
This lack of disclosure also means that investors are unable to meet due diligence and reporting obligations under current and upcoming legislation and international standards, which exposes them to legal and compliance risk, as well as the reputational risk of whitewashing.
Rising regulatory risks
KnowTheChain’s report noted the “shifting regulatory environment” on human rights due diligence that will pose a risk to investors should investee companies not adapt and address the forced labour risk in their supply chains.
According to Clarke, current and upcoming regulations to tackle forced labour in supply chains is going to “create a lot of business risk and material risk for companies”, which she warned will negatively impact the financial returns of investors.
The European Corporate Sustainability Due Diligence Directive (CSDDD) encompasses human rights, while the US Tariff Act bans imports of goods produced using forced labour. The EU has also proposed a forced labour product ban with the rule aimed at prohibiting products made by forced labour from entering the EU market.
A letter from the Investor Alliance for Human Rights, signed by 87 investors, recommended mandatory human rights due diligence complementary to the EU CSDDD and as well as requiring complete value chain tracing and public disclosure for companies.
Additionally, Canada recently passed a Modern Slavery Act, Norway has introduced a Transparency Act which introduced mandatory due diligence and& right to information about corporate impacts, while companies including Amazon and IKEA have recently faced legal challenges based on Germany’s Supply Chain Due Diligence Act.
Clarke said that the EU CSDDD is “groundbreaking” and a “fantastic piece of legislation” that could potentially “level the playing field” regarding how companies are conducting due diligence and how they are reporting, or not, on human rights and environmental violations within their supply chains.
She added that the implementation of regulations is a “huge step forward” in addressing forced labour within supply chains, underlining the need to introduce financial penalties as food and beverage companies currently have “no incentive to improve practices”.
Greater investor interaction
The increase in financial and material risks for investors as a result of regulation and the inaction of companies to address this issue means that engagement with investee companies on how they manage and mitigate human rights issues will become increasingly crucial.
“It’s important that investors have the right information and to be able to interrogate company practice on this on this issue,” Clarke said. “Through engagement they will be able to get a better understanding of how companies are, working to address forced labour issues within their supply chains.”
She added that the food and beverage sector could “really benefit” from greater collaborative engagements between investors.
Clarke also flagged that investors could be more vocal in advocating for robust human rights legislation and incorporating public policy positions within their investment firms.
Investors could also respond to consultations, such as the International Sustainability Standards Board’s two-year workstream, to advocate for a focus on social issues, human rights, and human capital in sustainability standards going forward, she added.