Hide and Seek

Child labour is an unfortunate reality in the supply chains of companies across several industries, with investors increasingly prepared to uncover and address the issue. 

Imagine what it must be like for a child working 12-hour days in hot, unsafe conditions, mining the critical minerals needed for vehicles and appliances around the world – all to put food on the table for their family.  

This is the reality of many children in the Democratic Republic of the Congo (DRC), which produces roughly 70% of the world’s cobalt, meaning it’s highly likely you have owned products containing cobalt mined by children. 

Around 20% of the DRC’s cobalt supply is produced through artisanal mining, which is where child labour is mostly found. These are small-scale miners not officially employed by mining companies, who congregate near large, structured mines, digging with their bare hands and basic tools in open pits and selling the scraps they find. These pits have little to none of the safety procedures and structures in place that are required within proper mines.  

Then there are the health risks. Prolonged exposure to cobalt can also damage the eyes, skin, heart and lungs.  

Child labour isn’t only found in the mining industry, but also the apparel, agriculture, food and beverage, and automotive sectors.

Research shows that there are 160 million children aged between five and 17 in child labour, with nearly half (79 million) performing hazardous work directly endangering their health and safety.  

“Engagement is an important tool that investors can use to tackle the complexities of this subject,” notes Anita Nagarajan, Associate Director of Morningstar Sustainalytics Stewardship Services.  

“Child labour and modern slavery are often systemic and structural; corporate policies and monitoring programmes are often insufficient to address the nature of the risks.” 

But acknowledging that child labour is a reality in their supply chains isn’t a comfortable admission for companies to make, says Kate Turner, Head of Responsible Investment at asset management firm First Sentier Investors.  

“There is often a reluctance by companies to talk about this issue; it is one of the more sensitive issues we engage on,” she says.  

However, if UN Sustainable Development Goal 8.7 is to be achieved by 2030, private investors must be more willing to open dialogue with investee companies, even if that involves uncomfortable conversations, and ultimately push for increased due diligence and transparency, according to experts.  

“Child labour is a problem we can all agree on – it’s not a divisive issue,” says Hannah Shoesmith, Head of Engagement within the Active Ownership team at Schroders.  

“We know that it is pernicious and hugely damaging, both to future generations and to businesses. 

“It’s inherently unsustainable.” 

The assumption that child labour is only occurring in less-developed markets – far down the supply chains of big multinational companies, thus making it difficult to keep track of human rights violations and exposure to forced labour – is also starting to change.  

As The New York Times reported, child labour is happening closer to home, meaning that companies and investors need to start viewing it as both a domestic and international risk, according to Aaron Acosta, Senior Programme Associate at Investor Advocates for Social Justice (IASJ), which works with a community of faith-based investors on human rights, climate justice and racial equity. 

“There is a wake-up call happening,” he adds. “Investors are increasingly interested in engaging with companies on the issue of child labour.”  

Digging into the supply chain  

IASJ Executive Director Courtney Wicks attended electric vehicle manufacturer Tesla’s annual general meeting (AGM) on 16 May armed with a floor proposal, which was filed on IASJ’s behalf by US shareholder activist group As You Sow.  

It called for Tesla to produce a third-party generated report describing if, and how, the company plans to eradicate child labour and forced labour from its supply chains by 2025 and to further introduce more supply chain transparency. 

“We’ve been engaging with Tesla on child labour for three years,” says Wicks.  

“Historically, Tesla has made it difficult for shareholders to engage on ESG-related issues. In this case, they moved the AGM date, meaning that many investors that normally file ESG-related proposals were not able to this year. 

“A way for us to address this was to file a floor proposal, as it would allow us to be present at the AGM and move this proposal before the board of directors, other shareholders and company management.”  

CEO Elon Musk made a commitment to conduct a third-party audit of Tesla’s cobalt supply chain, pledging that the company “will make sure six weeks ‘til Sunday that no child labour is being exploited”.  

Wicks says she is “cautiously optimistic” about this outcome, but notes Musk’s promise only addressed child labour and not forced labour, thus it was not completely in line with IASJ’s proposal. He also didn’t confirm when this report will be published or who will be conducting the audit.  

“I’m hoping that Tesla will reach out to investors on this topic to ensure we at least have a baseline understanding of the audit and its focus,” she says.  

Last year, Tesla acknowledged that child labour is a heightened risk in DRC cobalt mines and that exposure may result in the company and its investors facing financial, legal and reputational risks. The electric carmaker also argued that it does not source cobalt from artisanal and small-scaled mining, but from industrial mines “where no child labour has been identified to date”.  

However, research has highlighted that it’s almost impossible to separate what is mined through small-scale mining versus industrial mines. 

Tesla joined the Fair Cobalt Alliance in 2020, an initiative focused on improving workers’ conditions and ending child labour in DRC cobalt mines.  

IASJ’s floor proposal isn’t the first time Tesla has been challenged on the issue.  

In 2019, US-based NGO IRAdvocates filed a class action lawsuit against big tech firms and Tesla, alleging the corporations were profiting from child labour in their cobalt supply chains. It was filed on behalf of 14 plaintiffs who are the guardians of children killed or maimed while mining cobalt.  

The US District Court for the District of Columbia dismissed the case, citing lack of standing, prompting the plaintiffs to lodge an appeal at the Court of Appeals for the District of Columbia Circuit in February 2022. The case is still ongoing.  

Delving deeper 

IASJ’s floor proposal wasn’t the only child labour resolution to be filed this proxy season.  

Activist shareholder Tulipshare filed a similar shareholder proposal at Mondelez International, a US-headquartered confectionary, food and beverage company, calling for the board of directors to publish a report within one year of the company’s 2023 AGM, outlining if, and how, the firm will eradicate child labour in all forms from its supply chains by 2025.  

Concern for child labour is a key component of socially responsible investment,” Constance Ricketts, Head of Shareholder Activism at Tulipshare, tells ESG Investor, noting that many investors are “taking things at face value” and are “not delving deep enough” into a company’s due diligence reporting and supply chain tracing. 

Mondelez claims its approach to eliminating child labour is three-pronged, focusing on prevention, monitoring and remediation through its programme for sustainable cocoa – Cocoa Life. 

Tulipshare wanted more detailed metrics from Mondelez, such as current estimates of the total number of children in its supply chain on a regional basis; a year-over-year percentage decrease of children in its supply chains, working in hazardous jobs, and working during or after school hours; and a year-on-year percentage increase in liveable wages to farmers. 

Tulipshare’s proposal received a supporting vote of 19.8%, which crossed the 5% first-year threshold, meaning the firm can re-file the proposal next year.  

“In certain sectors, we know that child labour is likely to be found in the supply chain for every company, so those engagements should begin by developing an understanding of how many incidents of child labour a company has uncovered in the past 12 months, and steps that have been taken to remediate these incidents together with preventative measures to avoid it happening again in the future,” adds Turner from First Sentier Investors. 

“Practical questions like this are more likely to give an investor a sense of whether a company is taking meaningful steps to address the issue.” 

Systemic engagement 

But engagements on child labour are ultimately still in their earliest stages and are not yet dealing with the complexities that need to be addressed, says Shoesmith from Schroders. 

“Investors are currently tackling the overarching concerns around human rights,” she notes. “What policies do companies have in place? Are they disclosing their exposure to risk? Child labour feels like a subset of a subset.” 

If child labour globally is to be reduced, investors need to engage with companies in a way that considers the underlying reasons why children join the workforce in the first place, Shoesmith says. 

“It largely boils down to systemic poverty,” she says, noting that investors need to engage with companies on how they and their suppliers are supporting local communities. Are they paying fair wages? What is their gender pay gap? Are they keeping workers safe? Are they investing in children’s education and healthcare? If fair pay and safe standards are in place, then there will be less need for children to work alongside their parents, Shoesmith explains.  

“Sometimes I think we make companies afraid to admit what they have found in their supply chains,” she adds.  

“Investors need to encourage companies to be open about these issues and accept that they likely do have exposure to modern slavery somewhere in their supply chains, including child labour. 

“That acknowledgement is so important, because then investors and companies can work together to get to the bottom of the issue.” 

The solution to child labour is a multi-stakeholder one, Shoesmith says, requiring public and private sector participation.  

There are initiatives attempting to build bridges of cooperation between stakeholders.  

Turner from First Sentier Investors chairs Investors Against Slavery and Trafficking APAC (IAST APAC), which has a workstream on collaborative engagement with Asian companies to find, fix and prevent modern slavery in its operations and supply chains. It is the sister initiative of the Find It, Fix It, Prevent initiative, which is run out of the UK.  

“As part of the initiative, investors collaborate closely with each other and with broader stakeholders, like civil society organisations, to better understand and address the issue,” says Turner.  

There nonetheless remains a big role for governments to play in addressing child labour, such as installing mandatory human rights due diligence and modern slavery disclosure laws, says Nagarajan from Morningstar Sustainalytics. 

Turner adds that the modern slavery acts in the UK and Australia are examples of regulation that has been effective at “raising the profile of this issue” for both companies and investors.  

In February last year, the European Commission issued a Communication on Decent Work Worldwide, which focuses on the elimination of child labour and forced labour in the EU and around the world. The Hong Kong Stock Exchange requires listed firms to disclose ESG risks on a comply or explain basis, including exposure to forced labour and child labour risks. 

Schroders’ Shoesmith notes that investors also need to consider the broader spectrum of children’s rights issues, and how these are impacted by child labour.  

“There are so many other issues now affecting children – mental health, poverty, lack of education. 

“Investors and companies need to educate ourselves better on what the root causes of child labour may be, and the scope of impacts it is having.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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