- Half of sustainable procurement leaders report limited progress in addressing modern slavery risk.
- The largest number of modern slavery incidents globally occur in the supply chains of US companies.
- Modern slavery incidents are most common in China and India with approximately 40% of all incidents.
A recent survey, by consultancy Gartner, of chief procurement officers found that 71% of companies say that addressing modern slavery risk is a key priority, but just half report effective progress on the issue. The most significant barrier is visibility, with many areas of companies’ supply chains outside the purview of traditional due diligence processes.
Nevertheless, companies are required to disclose incidents under a number of different regulations. The UK’s Modern Slavery Act has required annual reporting since 2015, while the Australian Modern Slavery Act has enforced disclosures since 2018. Similar legislation is in effect in France, Germany and Norway.
The latest version of the EU’s Corporate Sustainability Reporting Directive (CSRD) has been in place since 2022 and its sustainability reporting standards cover modern slavery. Once adopted, the EU’s Corporate Sustainability Due Diligence Directive (3D) will require large EU and non-EU companies to set up mandatory due diligence processes in their own operations, those of their subsidiaries and their value chains which will also cover modern slavery issues.
However, while legislation in California requires disclosures, US companies are only “required” to disclose modern slavery incidents if they also operate in the EU. Shareholders have responded by filing resolutions calling on companies to disclose incidents and while some companies, for example, American Airlines, have made comprehensive pledges to combat modern slavery and encourage employees to report incidents internally, few report externally except under EU regulations.
Portfolio exposure
ISS ESG, an arm of governance and proxy advisory firm ISS, launched a Modern Slavery Scorecard earlier this year to enable investors to assess portfolio exposure to modern slavery risks, but where does it get its data for US companies?
“Disclosure of incidents is voluntary, our data is obtained by analysts monitoring a variety of sources and is obtained through a robust validation process involving engagement with issuers and/or key stakeholders,” Brian Colantropo, head of research solutions product, ISS ESG, tells Capital Monitor.
Colantropo reports that developed market companies experience the most modern slavery and labour rights issues, and the majority of this occurs in the supply chains of those companies. “Of all the modern slavery incidents for US-based companies, 82% take place within the supply chains of those companies,” he says.
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Supply chain incidents are “most common in China and India with approximately 40% of all modern slavery incidents occurring within these geographies,” he adds.
Data from the scorecard also notes that labour rights issues are also most prevalent among US-based companies, with a slightly smaller percentage occurring within the supply chain, approximately 72%.
After the US, the largest number of incidents are found in China, Japan, Germany, and the UK. “The total global number of cases currently is 215. These include incidents of modern slavery controversies in various stages which have yet to be remedied,” he says.
ISS ESG aims for the data to be useful to investors for portfolio analysis. “Simply understanding where modern slavery risks exist within a portfolio is valuable,” says Colantropo.
Investors also use the data to inform engagement with companies. “Understanding the risk that exists locally and within the supply chain allows investors to understand the potential challenges that exist within a company, or within companies based in different geographies, and determine the steps they want to take,” he adds.
Colantropo also notes that some companies have policies which govern the supply chain, and this can be a performance driver when comparing companies.
Supply chain risks
Assessment of modern slavery in the scorecard includes monitoring: forced labour, child labour, human rights due diligence, torture/inhumane treatment and human trafficking.
A company’s record on labour rights is also looked at.
The scorecard examines 25 factors to assess a company’s exposure to risk. These include location, supply chain risk, and the number of modern slavery incidents. Location risk is an obvious factor, looking at a company’s country or countries of operation and the likelihood of there being examples of modern slavery in them.
“The factor takes into account the country’s record on basic labour rights and working conditions, inequality, political stability, corruption, safeguarding of civil and political rights, discrimination, and gender equality,” says Colantropo.
Supply chain risk is determined by industry, as well as other items such as dependence on high-risk materials and products with established links to forced labour.
Investors are not solely interested in their exposure to modern slavery from the point of view of justice and human rights, the awareness of financial risk comes largely from the potential negative effects of reputational risk.
“Consumers are keenly aware of the implications when diamond shopping,” says Colantropo, “or purchasing a cell phone. This wasn’t always the case. The reputational risk of modern slavery can undo years’ worth of goodwill in an instant.”
[Read more: How Australia’s Aware Super is tackling modern slavery]
