How many slaves made what’s in your pocket? In your car? Your house? Your supermarket trolley? How about your superfund or your investment portfolio?
More than you think. A lot more. And more than none, which is more than we should be willing to tolerate or accept as the ‘cost of doing business’ in the global economy.
As awareness of modern slavery has increased, so have questions around how organisations can make impactful change. We have seen these concerns resonate across many boardrooms in working with investor clients to help implement the Modern Slavery Act 2018 requirements for their first reporting period.
Investors, particularly superannuation funds, have an opportunity and responsibility to make a significant impact to modern slavery through changing practices in their supply chain and investment portfolios.
SLAVERY IN 2020
There are more slaves today than at any other time in history. Why? Slavery is cheap. In economic terms, slavery represents theft of labour where people are treated as disposable assets. Businesses that tolerate or engage in slavery practices have lower labour costs and therefore competitive advantage, albeit an unfair one.
But behind the economics there are horrendous violations of human rights. Behind the labels given to these violations, such as “servitude”, “human trafficking”, “forced marriage”, “deceptive recruiting for labour or services” and “the worst forms of child labour”, there are real people subjected to physical and psychological harm.
Like the young children working in the toxic pits of the Democratic Republic of Congo’s artisanal mines gathering the cobalt that is probably powering your smartphone. Like the young men, tricked away from families and onto fishing vessels, abused and forced to work months on end at sea in hazardous conditions, gathering the fish for the sushi roll we had for lunch. Like the women and girls trafficked for sexual exploitation, hidden out of sight, in the shadows of society.
Even in Australia there have been reports over the years of people being induced to Australia under foreign visas to work in industries such as agriculture, construction or meat processing only to find themselves exploited with little or no wages, pay deductions for accommodation, confiscation of passports and being housed in awful conditions.
The economic turmoil around the world caused by the COVID-19 pandemic has only exacerbated the problem, pushing vulnerable people into more desperate situations.
Every one of the 40.3 million slaves is a real person with their own story of tragedy, and hope. The contrast between their day-to-day lives and ours is so stark it’s incomprehensible. We simply cannot imagine a day in the life of a slave, but we do understand that slavery, in all forms, is wrong.
In addition to the moral imperative, there is investment risk, reputational risk, societal, client and member expectation, and of course, compliance with the Modern Slavery Act.
As noted in Liechtenstein Initiative’s Blueprint, investors have a key role in influencing practices that will help end slavery:
The financial sector cannot end slavery alone. Nor, however, will slavery end without the active engagement of the financial sector. As the world’s bankers, investors, insurers and financial partners, financial sector actors have unparalleled influence over global business and entrepreneurialism. They have a unique role to play in investing in and fostering business practices that help to end modern slavery and human trafficking. Finance is a lever by which the entire global economy can be moved.
Investors, particularly super funds, have a significant opportunity to change these practices in their supply chain and investment portfolios, which will help achieve Target 8.7 of the UN Sustainable Development Goals to eradicate forced labour and end modern slavery and human trafficking by 2030.
MAKING AN IMPACT THROUGH INVESTMENT
Since 2019, Mercer has been working with asset owners to help them understand and address modern slavery risks in their operations, supply chains and investment portfolios, in line with the requirements of the Modern Slavery Act. For many financial services firms, this first reporting period under the Modern Slavery Act is the first time they have been asked to focus, in some detail, on the human rights implications of their business and investment activities.
Whilst environmental, social and governance (ESG) considerations are embedded into the investment activities of many firms, up until now, the focus has predominantly been on environmental and governance issues. The social considerations, such as modern slavery, have not typically had the same level of attention. So it is not surprising there is a lot of interest in better understanding possible connections businesses may have to modern slavery practices and how to address these.
There is generally surprise (and relief) that addressing modern slavery risks does not necessarily require immediate termination of suppliers or exiting investments, but rather engagement and using the firm’s influence to increase understanding and change inappropriate practices.
However, there are situations where divestment or termination of a supplier or manager may need to be considered. Divestment could be considered if an investee or supplier refuse to engage despite clear unaddressed risk, or where their response or remediation is inappropriate given the seriousness of the allegations. However, such steps should not be taken lightly as such actions can have adverse human rights implications on vulnerable people.
Having a structured approach to governance is valuable to planning the short, medium and long-term objectives of an investor’s modern slavery program, and helps to plan implementation of the requirements in an orderly, considered manner.
Supplier and manager questionnaires are a common tool used for collecting data and organisations are utilising these in different ways. Some organisations send standard questionnaires to all suppliers and then use the responses to inform their risk assessment.
Other organisations undertake a risk assessment first using modern slavery risk factors and then prioritise sending tailored questionnaires only to the high-risk suppliers and managers. This approach is more efficient and effective in driving focused engagement, targeted at salient risks.
Risk assessment methodologies also vary in terms of granularity. For example, in some cases investment portfolios are assessed at the asset class level whilst in other cases there is a more detailed assessment of underlying portfolio holdings.
A granular assessment provides more detailed understanding of the portfolio’s specific risks, thereby enabling more targeted engagement. However, this is more time consuming and costly to complete. Complicated organisational and ownership structures and more sophisticated investment practices also impact the complexity of the risk assessment process. Properly identifying these aspects at the outset, prior to commencing the assessment, is important.
The first year has been about raising awareness and building a sound foundation for compliance with the Modern Slavery Act requirements. Significant progress has been made, but there is more to be done.
For many firms, next steps will involve taking further measures to embed modern slavery considerations in existing arrangements and policies, amending existing contracts and progressing with their risk assessments. There will also be the challenge of deciding how to effectively engage with high risk suppliers and deal with high risk investments from an investment, human rights, and legal perspective. Whilst risk identification and mitigation are key building blocks, it is informed and targeted engagement that is most likely to foster real positive change. This will require a thoughtful, patient and committed approach as well as having clear escalation arrangements for addressing inadequate responses.
In a highly-regulated industry used to compliance requirements, it will be important not to treat modern slavery obligations as a ‘tick the box’ compliance exercise and, in particular, not to lose sight of the overriding purpose of these laws; to use leverage to influence change to remedy adverse practices. To do so, firms will need to engage with their suppliers and investees. The ‘Investor Toolbox on Human Rights’ from the Responsible Investment Association Australasia (RIAA) has some suggestions for conversation starters.
Ultimately the Modern Slavery Act is just the first step in the right direction. Investors have an opportunity and responsibility to make a significant impact to modern slavery through changing practices in their supply chain and investment portfolios – but it takes commitment and ongoing engagement to make an impact.
Liana Brover is principal, governance consulting and Timothy Stamp is senior associate for responsible investment at Mercer.
