Saskia Kort-Chick, Director of ESG Research and Engagement at AllianceBernstein, says there are altruistic and self-interested reasons why investors should better understand modern slavery risks.
Modern slavery is a social evil that still persists today. Whilst it’s illegal in many jurisdictions, currently more than 50 million people are subject to modern slavery-related practices. This can include things like child exploitation, sexual exploitation, forced marriage, wage theft, deceptive recruitment practices and forced labour. It’s not just an emerging markets issue, it happens around the world.
For us as investors, we may have unintended exposure to these practices in our investee companies, either in their own operations or in their supply chain. We think that investors have a key role to play – to detect and disrupt modern slavery. Not only is it the right thing to do, but for fundamental investors, it also helps us understand companies better. There’s a couple of reasons why we think that modern slavery has the potential to be a key priority when it comes to ESG integration.
Tsunami of legislation
The first one is legislation. We see a tsunami of legislation moving in this direction, which we generally categorise into three categories. One is the mandatory reporting, including modern slavery acts in the UK and Australia. The second category is mandatory due diligence requirements, which we’re already seeing in a number of European countries, while waiting for further details from the EU. The final category is legislation which bans products made with forced labour from entry into the country. All three combined can have reputational and legal implications for investee companies.
The second reason why modern slavery has the potential to be a major theme is the interest of issue by the media and consumers. On nearly a daily basis, we can see headlines related to corporates that may be associated with modern slavery practices either in their operations or in their supply chain. Further, consumers are increasingly paying attention to the ethical credentials of products they’re purchasing.
If we combine these three factors: legislation, media interest and changing consumer behaviours, we believe there is risk in opportunities that we as fundamental managers can incorporate in our investment process – allowing us to take a more holistic view of investee companies. Issues that are occurring either in operations or the supply chain related to modern slavery can be taken as a proxy for how companies are managing these issues more broadly.
Incorporating that into the investment decision can lead to better risk-adjusted returns. The first step is to identify how companies are exposed in their own operations and their supply chain. Companies acknowledging that risk is not necessarily bad, because in step two we then assess how companies are managing these risks. The third step is integration into the investment process.
In terms of how companies are managing these risks, a number of industries have a particularly high risk, but the level between these varies significantly.
If you look, for example, at the apparel industry, the workforce is largely dominated by females working in a factory. The risks are very different to the fishing industry, where there are young men working at sea, making social audits are much harder to complete. Being able to distinguish between risk factors and solutions helps us to have more thoughtful engagement with companies operating in these sectors.
Generally, companies are comfortable talking about things like board composition or remuneration plans. Most companies are aware of their carbon footprint and are comfortable talking about that too. But it’s much harder for a company to have open conversation about the potential human rights-related issues occurring in either their operations or their supply chain. We’ve been engaging on modern slavery-related issues for a number of years, with over 19 companies at more than 120 meetings.
In 2021, we included modern slavery in our thematic engagements campaign. We worked with investments analysts from the various actively managed equity portfolios and a number of fixed-income analysts. They picked the target companies they wanted to focus on and have a conversation around their modern slavery practices. We learned that companies with high-risk exposure generally have a better understanding of the risk and are better at managing that risk. Those companies with less obvious exposure are generally less aware of the risk.
Generally, companies do not want to be associated with human rights abuses either in their own operations or in their supply chain. In our experience, if you communicate your expectations clearly and do not try to single out a particular company, while clearly giving indication of where you think a company can improve, you can have very positive engagements. We have seen companies making progress on some of the issues that we’ve asked them to take action on.
There’s generally a misunderstanding that modern slavery and human rights–related risks are not necessarily material. We may have a slightly different view. If you look at event-driven ESG risk related to modern slavery, there are plenty of examples where you can see that the issue has had an impact on the company, including a financial institution which failed to report a large number of transactions related to child exploitation. As a result, both the CEO and the Chairman ended up leaving. During the pandemic, a number of latex glove producers were hit with import bans in the US. That had an impact on the companies themselves, as well as on the broader medical industry. Finally, there have been plenty of examples in the apparel industry that have hit the news.
If you look at all those event-driven issues, they do have an impact on companies. We as active investors are trying to understand these issues. Looking at how companies are managing these issues, we can take as a proxy for supply chain management more broadly. From the engagements that we’ve had with companies, managing your supply chain well, including modern slavery-related risks, may lead to a more flexible supply chain and may even lead to greater supply chain stability. All these factors are taken into consideration when we assess how companies are managing modern slavery-related risk and how that can impact the financials of a company.
The financial industry can play a key role in detecting and disrupting modern slavery. It obviously starts with raising awareness. People need to understand that this social evil still persists. It needs to be tied into action, and there’s plenty of action that we can take.
We’ve tried to take action through engagement, but we also recognise that this is a big social economic issue and we cannot do it alone. For this reason, industry initiatives increasingly focus on collaborative engagements, as well as investor statements asking investing companies to provide more transparency, and collaborating with NGOs and other specialist organisations both for action as well as raising awareness internally.