Modern slavery: Engagement update

In our last Viewpoint about modern slavery1, we highlighted that as long-term investors, we encourage companies – particularly those in high-risk sectors – to identify and manage modern slavery risks. We believe that companies that take robust action to tackle modern slavery are more resilient over the long-term, and are less likely to suffer financial and reputational damage.

Our engagement in 2018 focused on companies required to publish modern slavery statements in line with the UK’s landmark Modern Slavery Act 2015. Since the introduction of this Act, modern slavery legislation has progressed in a number of countries, including Australia, Canada, France, and the Netherlands. The COVID-19 pandemic has underscored the importance of legislation addressing modern slavery: in times of crisis, victims of modern slavery are at greater risk of exploitation, vulnerability to enslavement increases, and governments’ response efforts are hampered2. Against this backdrop, companies are facing heightened modern slavery risks, particularly in their supply chains.

…it is essential that businesses continue their activity to identify and address risks of modern slavery in their operations and supply chains3.

Source: UK Government guidance about modern slavery reporting during COVID-19, April 2020

Modern slavery legislation – key developments

The UK Modern Slavery Act 2015 is still one of the most far-reaching pieces of legislation in the world addressing modern slavery, and has undoubtedly contributed to enhanced due diligence on modern slavery risks in supply chains. However, an independent review of the Act published in May 20194 concluded that a number of companies are approaching their obligations as a mere tick-box exercise, and approximately 40% of in-scope companies are failing to comply with the legislation. The review pointed out that there have been no penalties to-date for non-compliant companies, leading to serious question marks over the Act’s effectiveness. The review made 80 recommendations, including some, such as fines and directors’ disqualification, designed to improve compliance.

In a detailed response to the review, the UK Government stated its intention to “consult to explore potential enforcement options and appropriate timeframes for enforcing compliance”5. The issue of how to respond to non-compliance has – crucially – been addressed by legislation targeting modern slavery in other countries:

Law (jurisdiction) In force? Applies to... Maximum penalties

Duty of Vigilance Law (France)

Yes - March 2017

Companies employing at least 5,000 employees in France

€10 million

Modern Slavery Act 2018 (Australia)

Yes - January 2019

Companies with business in Australia with an annual consolidated revenue of at least AU$100 million

No financial penalties; however, if an entity does not comply, the Minister may publicly identify the entity as being non-compliant

Bill S-211 – proposed Modern Slavery Act (Canada)

No - Bill S-211 introduced into the Senate in February 2020

Companies with business/assets in Canada meeting at least two of the following conditions*:

  • It has at least CAD$20 million in assets
  • It has generated at least CAD$40 million in revenue
  • It employs an average of at least 250 employees

CAD $250,000

Dutch Child Labor Due Diligence Act (Netherlands)

No - Expected to enter into force in 2022

Companies that sell or supply goods or services to Dutch consumers

€750,000 or 10% of total worldwide revenue (whichever is greatest)

In short, modern slavery legislation is continuing to progress around the world, and companies – particularly large companies with global footprints – may face material consequences if they fail to identify, address and report on modern slavery risks. Engagement on modern slavery is therefore growing in importance.

Our engagement sought to identify best practices implemented by “high-risk” companies

In 2019 and Q1 2020, we had 66 interactions with 32 companies on modern slavery. We focused on comparatively high-risk apparel, automobile, and information and communications technology (ICT) companies. We think that these companies will face greater stakeholder scrutiny due to growing awareness of modern slavery in supply chains and – in some cases – increased compliance obligations.

Leveraging the research of KnowTheChain – a resource for companies and investors to understand and address modern slavery risks in their direct operations and global supply chains – we identified gaps, and leading practices, in companies’ modern slavery statements (or equivalent). In terms of their core content, we think that all companies – regardless of geographic location – should elaborate on the following six areas referred to in the UK Modern Slavery Act 20156:

  • Structure and supply chains
  • Policies in relation to slavery and human trafficking
  • Due diligence processes in relation to slavery and human trafficking
  • Risk assessment and management
  • Effective action taken to address modern slavery
  • Training on modern slavery and human trafficking

Our engagement and research revealed that companies that are transparent about all of these areas tend to have more robust policies to combat modern slavery.

Supply chain transparency promotes corporate accountability and strengthens human rights due diligence

A key step for any company striving to mitigate modern slavery risks is supply chain due diligence, which should then be a stepping stone to supply chain transparency. We think that transparency reinforces due diligence, and demonstrates a company’s willingness to being held accountable if human rights violations occur in its supply chain. Moreover, transparency can contribute to enhancing a company’s reputation.

H&M is one example of a company that has improved its supply chain transparency in recent years. It is one of only 22 companies (as of November 2019) that are fully aligned or committed to aligning with the Transparency Pledge, which requires apparel companies to publish standardised information about their supplier factories. H&M discloses the names, locations and some additional information about the factories manufacturing its
branded products. The company has even gone a step further, disclosing the names and locations of 300 mills that provide its suppliers with fabrics and yarns7. It is important to note that companies manufacturing higher priced goods are not necessarily more transparent: Armani and Ralph Lauren are examples of luxury brands that have not yet publicly disclosed supply chain information.

Addressing modern slavery risks in lower-tier suppliers is not yet commonplace

Although many larger companies have improved their understanding of their first-tier suppliers’ (companies which directly supply them with parts/materials) exposure to modern slavery risks, very few companies are monitoring the labour practices of their second-tier suppliers, which supply first-tier suppliers. If companies do not audit their second-tier suppliers, we encourage them to cascade responsible labour practices to lower-tier suppliers by – at a minimum – requiring first-tier suppliers to include “CSR” (corporate social responsibility) clauses covering ESG issues in their own procurement contracts. In this regard, we are encouraged by the Responsible Business Alliance’s (RBA) stance:

RBA members must regard the Code as a total supply chain initiative, meaning that members must as a minimum require their next tier suppliers to acknowledge and implement the code8.

Responsible Business Alliance

We think that this concept should ideally be adopted by all companies, regardless of sector.

Supply chain transparency has to be accompanied by robust auditing

Supply chain auditing is an area which is rapidly evolving. Companies would ideally disclose the number of audits
integrating sustainability factors conducted per annum, and what steps are taken if areas for improvement are identified. For example, via our engagement we learned that an external service provider conducted on-site
sustainability audits of 947 Volkswagen suppliers in 2018, and in 551 cases, the audit results led to an action plan. Some companies, like ASOS, have gone one step further, and report confirmed instances of modern slavery:
“Discovered one case of child labour in our Chinese supply chain in this reporting period [April 2019 – January 2020]. Working with our local partner CCR CSR, we implemented our established child labour and remediation policy”9. In our view, this level of transparency is exemplary, and signals that the company’s modern slavery due diligence is robust and effective.

Transparency is key if companies face heightened modern slavery risks, and business model shifts may necessitate enhanced due diligence

Our dialogue with auto manufacturers demonstrated the extent to which increased demand for electric vehicles,
which depend on cobalt in their batteries, poses heightened reputational, operational and regulatory risks. More
than half of the world’s cobalt supply comes from the Democratic Republic of Congo, which has an extremely high Vulnerability of Modern Slavery score in the 2018 Global Slavery Index10. Serious, systemic human rights violations are commonplace in cobalt mining, including child labour, exposure to health hazards from high levels of toxic metals, and lack of the most basic safety equipment inside and around the mines11.

Against this backdrop, companies with products containing cobalt need to be as transparent as possible about the
steps they are taking to address and mitigate the risks associated with cobalt sourcing. It is encouraging that many large auto manufacturers – including Ford and General Motors – are members of the Responsible Minerals Initiative (RMI), which provides companies with tools and resources to make sourcing decisions that improve regulatory compliance and support responsible sourcing from conflict-affected and high-risk areas. An example of a company producing rechargeable battery materials which provides exemplary reporting on cobalt sourcing is Umicore, a global materials technology and recycling group. Umicore was the first company in the world to introduce a Sustainable Procurement Framework for Cobalt and to obtain external validation for its approach to ethical cobalt sourcing12.

More generally, it is important for companies in all sectors to conduct a risk assessment – factoring in product type and location of production – to identify supply chain areas which are high risk from a modern slavery perspective. Action to address modern slavery risks should then be prioritised in these areas.

Many companies still disclose very limited information about how they are identifying and managing modern slavery risks

Although we identified many examples of companies improving their policies to identify and manage modern slavery risks, and reporting on key developments, we are acutely aware of the growing gap between leaders and laggards. Unfortunately, a significant number of companies provide no or very little information about how their modern slavery policies are translating into tangible impacts.

It is particularly concerning when companies with direct operations and/or supply chains in countries/regions where modern slavery is comparatively prevalent disclose limited information about the steps they are taking to combat modern slavery. For example, Asia-Pacific is a global manufacturing hub and the region with the second highest prevalence of modern slavery in the world13; therefore, corporate human rights and modern slavery due diligence is called for. Unfortunately, because there is comparatively less emphasis on transparency, it is often challenging for stakeholders to evaluate the labour practices of companies headquartered in this region.

Our engagement with Anta Sports, a sportswear company headquartered in China, illustrates this issue: we encouraged the company to publish its child and forced labour policies because we could find very little publicly available information about them. We will continue to engage companies headquartered in Asia-Pacific on responsible labour practices because we believe that they continue to face elevated modern slavery risks.

Final thoughts

Our engagement with companies, the spread of legislation addressing modern slavery, and the disproportionate impact of COVID-19 on vulnerable communities are all factors reinforcing our view that companies cannot afford to ignore modern slavery. We urge companies to be as transparent as possible about how they are identifying and – crucially – proactively addressing modern slavery risks in their direct operations and supply chains.

As investors, we are paying particular attention to companies that are high risk, but we recognise that all companies – to a lesser or greater extent – are potentially exposed to financial, operational, regulatory and reputational risks stemming from modern slavery because it is so pervasive. Modern slavery has to be more widely acknowledged not only as a human tragedy, but also as a material business risk.

Next Steps

Going forward, we will engage on modern slavery on an ad-hoc basis and as part of CCLA’s Find It, Fix It, Prevent It initiative, focusing on companies which will fall under the scope of new legislation. During the COVID-19 pandemic, we are acutely aware that labour-intensive and customer-facing industries have faced criticism for not taking steps to protect their workers’ health and not paying fair wages. We will engage on these wider responsible labour practices, alongside our work on modern slavery.

Disclosures

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

1 https://www.bmogam.com/gb-en/intermediary/ news-and-insights/esg-viewpoint-modernslavery/

2 https://delta87.org/2020/03/impact-covid-19- modern-slavery/

* for at least one of its two most recent financial years

3 https://www.gov.uk/government/publications/coronavirus-covid-19-reporting-modern-slavery-for-businesses/modern-slavery-reporting-during-the-coronavirus-covid- 19-pandemic

4 https://www.gov.uk/government/publications/independent-review-of-the-modern-slavery-act-final-report

5 https://www.gov.uk/government/publications/government-response-to-the-independent-review-of-the-modern-slavery-act

6 https://corporate-responsibility.org/wp-content/uploads/2017/06/Core_RecommendedcontentFINAL-1.pdf

7 https://hmgroup.com/sustainability/leading-the-change/supplier-list.html

8 http://www.responsiblebusiness.org/code-standards-and-accountability/

9 https://www.asosplc.com/~/media/Files/A/Asos-V2/documents/modern-slavery-statement-2019-2020.pdf

10 https://www.globalslaveryindex.org/2018/data/country-data/congo-democratic-republic/ NB. The Democratic Republic of Congo has a score of 91.72/100

11 https://www.unpri.org/social-issues/how-investors-can-promote-responsible-cobalt-sourcing-practices/2975.article

12 https://www.umicore.com/en/cases/sustainable-procurement-framework-for-cobalt/

13 https://www.globalslaveryindex.org/2018/findings/regional-analysis/asia-and-the-pacific/

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