Industry

Tech Sector at Risk from HRDD Rules 

Major firms are failing to monitor and address forced labour and human rights risks, especially along Asian supply chains.

Procurement and disclosure practices in the information and communication technology (ICT) sector are failing to protect workers, also leaving firms and their investors exposed to rising regulatory risks.

A lack of human rights due diligence (HRDD) across supply chains, especially in certain Asian countries with limited worker rights and representation, exposes increasing numbers of employees to forced labour and poor conditions, according to the Business and Human Rights Resource Centre (BHRRC).

new report by the centre’s KnowTheChain programme said forced labour risks were increasing due to hasty restructuring of ICT sector supply chains in response to China’s zero-Covid policy, as well as higher levels of geopolitical conflict and macroeconomic uncertainty, which were cutting profit margins.

It also pointed out the sector saw profits rise substantially on the back of the pandemic, with large tech firms in the Forbes Global 2000 posting record revenues of US$4 trillion in the 12 months to May 2022, while many workers further along supply chains saw a deterioration in pay, rights and conditions.

Major regulatory regimes are increasingly requiring large firms to protect human rights in their supply chains, including Europe’s planned Corporate Sustainability Due Diligence Directive (CSDDD), which requires companies to manage and address adverse human rights and environmental impacts across their supply chains.

The report called on large ICT firms to improve their purchasing practices and actively support freedom of movement and collective bargaining rights within their supply chains. It also advised investors to conduct thorough and ongoing due diligence of investee firms, and to incorporate labour rights more fully into their engagement priorities and stewardship policies.

“New legislation sanctions and incentives regimes are being developed around the world, which will hold businesses accountable for human rights abuses in their supply chains. Companies which are unable to keep up with due diligence requirements will find themselves facing increasing legal, financial and reputational risks,” said Áine Clarke, Head of KnowTheChain and Investor Strategy at BHRRC.

Poor purchasing practices

The KnowTheChain ICT benchmark analysed and ranked 60 of the world’s largest ICT companies’ efforts to address supply chain forced labour risks. Firms were scored on supply chain transparency, purchasing practices, recruitment of migrant workers, remedy processes, workers’ rights and various aspects of due diligence.

There were wide differences across the sector, with Hewlett Package Enterprise, Intel, Cisco and Apple scoring over 50 out of 100, while other much lower scores brought the average mark down to 14. But even the leading firms were let down by the procurement practices. BOE Technology, which scored zero, was one of three firms failing to provide any relevant information, and is a supplier to Apple, Dell, HP and Samsung.

Almost half of assessed firms (45%) did not disclose whether they were undertaking human risk assessments in their supply chains. Although 32% of firms disclosed information on forced labour violations within their supply chains, the absence of human rights risk assessments by such a large minority of firms means the true level is likely to be higher.

“This does not reflect the absence of risks and violations, but rather a failure to look for them,” said BHRRC.

The report identified a widespread failure to integrate human rights due diligence into procurement processes, leading to an average score of 2/100 across assessed firms, suggesting companies are not considering the impact on supply chain workers and conditions when negotiating prices with suppliers. BHRRC said there had been “little to no improvement in purchasing practices” since the 2020 KnowYourChain benchmark.

According to the report, price squeezes by large firms have the most negative impact on workers where there are no collective agreements to protect them from forced labour conditions. Only two companies disclosed the percentage of supply chains covered by collective bargaining agreements and only one reported working with a union, in collaboration with a supplier and a non-governmental organisation, to resolve a worker grievance.

One in eight (12%) companies disclosed data on the effectiveness of grievance mechanisms, despite 83% reporting the availability of a mechanism. BHRCC said this indicates that supply chain workers of benchmarked companies do not have meaningful access to remedy.

Material risks to investors

The report said the ICT sector was likely to be increasingly exposed to human rights and forced labour risks as its supply chains were in or close to low income and conflict-affected regions, where recently heightened levels of poverty would increase the vulnerability of local communities.

The sector was already at high risk, the BHRRC said, noting the recent shift of many firms’ supply chains from China to neighbouring countries where they may have even less oversight of supply chains and workers’ pay and conditions are being reduced through a combination of the global cost-of-living crisis and limited or no collective rights.

India has weakened its labour laws in response to the pandemic, the report noted, while ICT workers in Vietnam and Malaysia – one of the largest exporters of semiconductors – are experiencing reduced pay and failures to achieve collective bargaining rights. Both the Malaysian and Taiwanese semiconductor industries rely heavily on migrant workers, who are more likely to be subject to forced labour and debt bondage.

The ICT sector is a large part of many investors’ portfolios, particularly passive holdings, given the large representation of technology firms in leading indices such as the S&P 500. Companies from the sector have also been a large component of ESG-themed funds due to their comparatively low emissions.

Investors could face material financial risks through the rising wave of mandatory due diligence requirements and enforcement actions which are forcing firms to take greater responsibility for human rights in their operations and along their supply chains. As well as Europe’s CSDDD, domestic legislation in member states, as well as the UK, Canada and Japan, are requiring firms to exercise greater oversight. The US has listed China and Malaysia as being at particular risk from forced labour, and is using the Uyghur Forced Labour Prevention Act to block imports of goods made with forced labour.

The report said investors should develop human rights policies which commit to fundamental rights stated in the ILO Declaration on Fundamental Principles and Rights at Work, including Convention 29, and acknowledge their responsibilities under the UN Guiding Principles and the OECD Guidelines for Multinational Enterprises.

“The ICT sector is highly exposed to these issues – and should be a significant concern for investors looking to the sector to support the development of technology and infrastructure central to our daily lives,” said Vaidehee Sachdev, Senior Impact Analyst, Social Pillar Lead at Aviva Investors.

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