See no Evil

Investors lament the lack of transparency on modern slavery, but addressing under-reporting will require multi-stakeholder action.

Lax reporting around modern slavery is a huge blind spot for investors.

Modern slavery presents a multitude of costs and risks to companies and their shareholders, including loss of reputation, legal challenges, import bans, risk to supply chains and operations, as well as highlighting poor governance.

“It is a specific type of labour market exploitation,” says Martin Buttle, Head of Good Work at UK-based NGO ShareAction. “It gets used as a term to cover almost all types of exploitation in supply chains. But specifically, it is the different ways that people can be forced to work: physical intimidation, debt bondage, and child labour.” Examples include forced prostitution, people made to commit criminal acts against their will, or poor working conditions in factories.

Reporting among companies – particularly in the UK – is generally weak, according to industry experts.

In November, the Financial Reporting Council’s (FRC) annual Review of Corporate Governance Reporting said that one of its major concerns around modern slavery was that companies were failing to disclose non-compliance. As a result, it issued recommendations on the quality of ‘comply or explain’ reporting.

“We expected an increase in the number of disclosures of non-compliance,” the audit and corporate governance watchdog said. “However, there is still room for improvement in relation to the quality of explanations.”

The FRC’s study showed the extent to which companies are including modern slavery as part of their duty to consider the interests of stakeholders in their annual reports. A total of 42% of companies discussed those responsible for overseeing modern slavery. “Only 19% referred to performance indicators or other non-financial performance indicators relating to modern slavery.”

Even fewer had specific benchmarks around the reporting. Just 15% of companies included their assessment of risks to modern slavery in their annual reports.

The report revealed more damning lack of oversight, noting that only 13% of companies had explicitly disclosed board-level decisions relating to modern slavery in their annual report and just 2% referred to the long-term impact of modern slavery-related issues on their business. Just 9% of companies provided evidence that they had engaged their stakeholders on the topic. One of the reasons cited by companies for this low rate of action was the COVID-19 pandemic, the FRC said, which had a substantial impact on company governance.

The evidence suggests that modern slavery considerations are low on the agenda of boards, the report surmised. It added that reporting was superficial, with only 14% of companies providing any evidence, such as a webpage, to their modern slavery statement. “We were disappointed that companies did not use the opportunity to cross-refer to their modern slavery statement within their annual report,” said FRC.

Nothing to see here

Buttle says lack of reporting impetus is due to a mixture of reasons, including the UK’s high levels of migration, which contributes to a system where it is hard to even attempt to report on issues relating to modern slavery. Weaker labour market enforcement mechanisms compared to other European countries are also detrimental.

“I sit with a lot of civil society organisations that say modern slavery reporting is wholly inadequate. That’s partly because [companies] don’t have to report it,” says Buttle.

Until recently, there wasn’t even a public database for putting all modern slavery information in one place, he points out. The use of boilerplate statements on websites saying the company has a zero tolerance policy and has no knowledge of modern slavery occurring anywhere in their supply chain is also a problem, he says.

“It is saying ‘nothing to see here’ and that counts as compliance with the law,” says Buttle. “If you make that statement you don’t actually have to provide any meaningful data for investors or stakeholders to determine the extent to which the company is doing its due diligence.”

The FRC report lambasted the wide use of unsubstantiated declaratory statements, adding that these do not offer sufficient insight into company governance.

“Nothing is 100% foolproof, and because [modern slavery] is illegal, exploitative behaviour, it is difficult to stop entirely but the vast majority on slavery reporting is poor and doesn’t help solve the problem,” Buttle adds. “Investors should be encouraging companies to be clearer on modern slavery reporting, and doing their due diligence on supply chains.”

The supply chain is often where reporting falls down.

In the FRC’s report, it said that reporting on engagement with suppliers over modern slavery statements was limited. “Only 27% of companies disclosed how they work with suppliers to improve their labour rights practices, with only a quarter of those providing a comprehensive disclosure.”

The UK’s Anti-Slavery Commissioner has also pushed for more work from the financial sector on reporting, making recommendations in areas including risk management, information sharing, collective action and reporting.

Greater engagement

Elsewhere more progress has been made. In Australia, due to the country’s Modern Slavery Act 2018, investors are becoming more engaged in how companies identify and mitigate modern slavery risk in their operations and supply chains.

“We see investors moving beyond binary scorings and the demand for investee companies to have deeper insight,” says Kim Randle, Executive Director and Principal Lawyer at Australian investment consultant firm FairSupply. Because operations are defined as including investments, mandatory reporting requirements have made a stark difference.

“Investors have a position of exercising leverage to ensure due diligence is undertaken prior to an investment being made,” says Randle. These include circumstances where – if areas of concern are identified – investors can impose conditions on investee companies to implement appropriate mitigation and remediation strategies.

“Investors need to identify modern slavery risk beyond tier one of their operations and supply chains,” she adds. Randle says boards should undertake modern slavery training to understand their company’s specific risk profile.

In the US, legislative initiatives have been raising awareness and vigilance for decades, such as the sector-specific Harkin-Engel protocol. Many see the issue as something that must be gripped by both business and legislators equally.

“Investors can only do so much,” says Pat Zerega, Director of Shareholder Advocacy at Mercy Investment Services, the US-based fund for the Sisters of Mercy of the Americas, which largely focuses on programmes for women and the poor. “Countries have the primary responsibility, but how investors, corporations and nation states work together is a problem, and we need to address it. The problem is too big for any one of us.”

Penalties for poor reporting on breaches of modern slavery laws are varied globally and the weak consequences may encourage a lack of focus on the issue.

“Across geographical jurisdictions, there are different kinds of risks to businesses,” says Buttle. “In the US, they have import bans, which can actually be a significant deterrent for companies that are found to be implicated in modern slavery. That concentrates investors’ minds. If you’re going to lose access to markets the size of the US, then that’s going to have a real impact. But we don’t have that yet in the UK, or Europe, although there have been some discussions about it.”

Comprehensive compliance

However, the importance of markets such as China means it can be difficult for firms to meet their legal obligations across their entire operations. The recent spat around the use of Xinjiang cotton – which saw fashion brand H&M shunned after it flagged possible human rights abuses in China to do with working conditions – highlights that enforcement is an issue many are ducking, says Buttle. He adds that the US is showing more confidence in this area.

More comprehensive compliance in countries with recently introduced legislation should be higher up the agenda for directors and investors. In the UK, the Anti-Slavery Commissioner was created under Part 4 of the Modern Slavery Act 2015. The Commissioner’s remit includes encouraging good practice in the prevention, detection, investigation and prosecution of modern slavery offences and the identification of victims. Technically, this includes often working with the investment community to encourage due diligence, but huge gaps still exist.

“Businesses should be hitting their stride on modern slavery reporting, moving away from superficial and descriptive statements and preparing for more open dialogue with investors,” said the Anti-Slavery Commissioner’s office on the FRC’s reporting. “The investment community, in turn, needs to push harder on businesses to disclose more.”

To do this, investors should ensure that they have visibility beyond tier one of the supply chain of each investee company.

“We know that modern slavery is hidden deep within the supply chain, so transparency beyond the first tier is critical to assess exposure,” says Randle. Investors should look at the industry and country exposures of their investments to modern slavery along each tier, she asserts.

Buttle says reporting on modern slavery will be taken more seriously following planned European Union legislation introducing mandatory human rights due diligence.

Zerega agrees that legislation is the main way forward. “There are two parts to fixing this – one part is that investors can only do so much, and the second is that countries have to do more too. An improvement I would like to see is based around multi-stakeholder initiatives, where businesses, government, and investors work together,” she says. “We saw that in the environmental space. Hopefully, there is replication in the modern slavery space.”

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