FRC: UK Firms Failing to Disclose Modern Slavery Risks

Investors rarely pressing investee companies on modern slavery, according to asset manager.

UK-based corporations are failing to report on, and eradicate, modern slavery and related human rights abuses within their businesses and supply chains, according to a report by the Financial Reporting Council (FRC), the accounting and auditing regulator.

The report, Modern Slavery Reporting Practices in the UK, which analysed the reporting procedures of a sample of 100 companies across the FTSE 100, FTSE 250 and Small Cap indexes, revealed reporting across both disclosures and annual reports were “lacking the information needed” for stakeholders, including shareholders, to make informed decisions.

The report outlines findings from research commissioned by the FRC, in collaboration with the Independent Anti-Slavery Commissioner (IASC), and carried out by Lancaster University. It follows a 2021 FRC Review of Corporate Governance Reporting which examined the extent to which companies were taking account of modern slavery in their disclosures, as part of their obligation to assess stakeholder interests in annual reports.

Under Section 54 of the UK Modern Slavery Act 2015, businesses with an annual turnover of £36 million or more must produce an annual statement addressing the steps they are taking to address modern slavery risks across their value chains.

The latest report found 12% of companies failed to produce a statement of any kind, while just a third of documents produced were considered inaccessible.

Statements were overwhelmingly retrospective, and failed to account for emerging issues and risks, the report said. Furthermore, just 14% of annual reports provided a link to the corresponding statement on modern slavery.

Further research needed

“With an estimated 16 million modern slavery victims working in the private sector globally, businesses carry significant material and reputational risk of modern slavery being found somewhere in their supply chains,” said the UK’s Independent Anti-Slavery Commissioner Dame Sara Thornton DBE QPM.

“Modern slavery is perpetrated by organised criminals and cynical opportunists, however irresponsible commercial practices and poor governance can also create the conditions that allow exploitation to thrive. Companies have a responsibility to demonstrate the steps they are taking to minimise modern slavery risks and to show strong leadership in this area,” she added.

Separately, the IASC issued a statement detailing the need for further research into aspects of modern slavery, while also collating its research priorities from 2021, which highlighted a pressing need for focus on prevention, including a closer examination of business best practice in understanding supply chains and mitigating modern slavery and human trafficking risks.

The body has also published a paper bringing together a number of briefings provided by academic experts on modern slavery and human trafficking.

In 2011, the United Nations (UN) published a set of guiding principles on business and human rights (UNGPs) which outlined that member states must protect against human rights abuses by third parties across their territories, and that they should take appropriate actions to prevent, investigate, punish, and remedy abuses.

In Europe, various regulatory initiatives have been set up to improve business disclosure and management of human rights d risks. Last year, European Commission president Ursula von der Leyen announced plans to allow the EU to ban importing products that had been manufactured using forced labour.

However, experts criticised as inadequate a proposed EU directive on corporate sustainability and due diligence that would ensure European companies identify and mitigate negative impacts of their activities on human rights and the environment.

Investor actions

In 2019, UK asset manager Rathbones set up the Votes Against Slavery (VAS) initiative, an investor collaboration representing £7.8 trillion in assets under management, to coordinate the response of the investment community to modern slavery risks, and to ensure both accountability to and compliance with the UK Modern Slavery Act.

The initiative calls on members to vote against investee report and accounts, an aspect of stewardship which is under-used, it said.

A VAS report published last month revealed the Covid-19 pandemic had exacerbated non-compliance with the Act, citing several target companies had furloughed employees responsible for risk reporting.

It also found the number of companies with outdated statements had increased, though by the end of last year, 59 of 61 FTSE-350 companies targeted were compliant with the Act, according to Rathbones, while the remaining two companies were compliant by January 2022.

“Anecdotally, at the end last year’s campaign, it was apparent that more work must be done and investors need to ask more questions on modern slavery to companies,” said Archie Pearson, ESG and voting analyst at Rathbones.

Pearson said target companies have regularly commented that few investors have requested meetings to discuss the content of their modern slavery statements.

“However, on a more positive tack, it does highlight that companies are receptive to these requests and it is beneficial for all sides. Therefore, the vote is absolutely key if investors have any concerns regarding a company’s approach to modern slavery or the risk management in place.”

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