Managing the risks of modern slavery

Companies should commit to eliminating modern slavery from their operations and global supply chains – or face long-lasting legal, reputational and financial damage.

When Fortescue Metals Group and Mindaroo Foundation chair Andrew Forrest AO paid a surprise visit to a Middle Eastern supplier, he found 18 people packed into a room smaller than a pantry, unable to leave, their passports confiscated, kept alive with a bare minimum of food. “That’s just one example of slavery and it was in my modern supply chain,” he recalled in the third of his 2020 Boyer Lectures, Rebooting Australia. “I’ve come to the conclusion modern slavery is at least present, if not fundamental, to supply chains all over the world.” The United Nations has estimated that more than 40 million people are subject to modern forms of slavery, 71 per cent of them women and girls. Australian boards need to take this fact seriously for reasons beyond simple decency.

In Australia, directors of companies with annual revenue of $100m or more are required by the Modern Slavery Act 2018 (Cth) to prepare annual statements disclosing the risks of slavery in their supply chains and what they’re doing to remove it (see page 65). While the federal government reporting deadline was extended to 31 March for companies with a 30 June 2020 reporting period, many organisations are working on their first formal modern slavery reporting cycle. As Forrest said, “If you fail to comply with the Act, you will be discovered and named and shamed.”

There is also increasing pressure from investors. For example, the Australian Council of Superannuation Investors (ACSI) has identified that labour and human rights contraventions can have a material impact on a company’s reputation, disrupt operations, divert management and board resources, and potentially lead to long-running and costly legal consequences. Investors Against Slavery and Trafficking Asia-Pacific recently set out their expectations for reporting under the Act and sent these to 100 ASX-listed companies. The statement, which was signed by 24 investors with a collective $5.9 trillion in assets under management, warned that: “As investors, we expect companies to meet their reporting and compliance obligations and in doing so encourage companies to examine the broader risks of labour expectation as a leading indicator of modern slavery.”

“Modern slavery or human rights abuses in the companies we invest in, or their supply chains, pose significant financial risks to our portfolio and to our members’ long-term retirement outcomes,” added signatory Liza McDonald GAICD, head of responsible investments at Aware Super.

Going deeper

As at February 2021, 1021 entities had lodged reports with the federal Online Register for Modern Slavery Statements, administered by the Australian Border Force — 421 of the statements mandatory and 80 voluntary. Organisations reporting range from NFPs such as the Smith Family to retail/industrial conglomerate Wesfarmers and mutinationals.

Fortescue Metals’ statement — its third — reported that in FY20 it engaged with 2173 Tier 1 suppliers with a total contestable spend of over $6.1b — 279 of them internationally based. It found at least 12 of its suppliers were at risk of having modern slavery in their supply chains. Australian retailer Woolworths Group, which has 20,000 direct suppliers, noted that 332 of its Australian fruit and vegetable suppliers were at risk of slave-like conditions. Wesfarmers, which owns Bunnings, Officeworks and Kmart, reported 340 critical breaches across 105 suppliers during the reporting period.

Yet, according to Forrest, the first batch of reports will barely scrape the surface. “Fewer than one in 10 Australian companies dig deeper than the first layer of their supply chains,” he said. “This means the deep and buried slavery, the really nasty stuff at the start of supply chains, remains invisible.”

Fortescue notes the issues identified apply only to Tier 1 suppliers. “Due to the complexity of sourcing the wide range of goods and services required for our operations, there are a large number of businesses beyond Tier 1 of our supply chain where limited visibility of processes is available. This poses a significant modern slavery risk and requires us to establish specific processes to maximise our understanding of these risks and to ensure all Tier 1 suppliers comply with our standards.”

Valuable resource

Boards often overlook one resource, a supply chain manager, as they come to grips with a complex challenge that cuts across a range of functions — including risk, finance, procurement, HR, legal, sustainability and corporate affairs. “We’ve seen from COVID-19 and now reporting on modern slavery that supply chain management plays a critical role in today’s organisations,” says Alexandra Riha MAICD, president of the Australasian Supply Chain Institute. “Yet it’s very rare to see a supply chain manager in the boardroom, or even reporting directly to the board. With their knowledge of suppliers and their insights into market trends, it’s time they were contributing to strategy.”

Supply chain managers can also help by forming deeper relationships with suppliers. “That puts them in the best position to monitor working conditions and spot any signs of exploitation,” says Riha.

Drawing on experience

While modern slavery reporting is new to Australia, internationally, companies have been tackling the problem for a while. For example, South Africa’s Woolworths Holdings, which owns Country Road and David Jones, has included ethical sourcing as part of its Good Business Journey, launched in 2007.

Miner South32, which lodged its first statement in Australia in 2019–20, has published its modern slavery statements in the UK since FY16. “We’re listed on the London Stock Exchange as well as the ASX,” explains the company’s chief people and legal officer Nicole Duncan MAICD. “When Britain passed modern slavery transparency laws five years ago, we could have technically argued they didn’t apply to us, but [instead] we decided to report voluntarily.”

Duncan recommends leveraging programs that are already working internally. “For example, we have already embedded systems for managing the risks associated with bribery and corruption as well as health and safety,” she says, adding that she sees real value in collaborating across sectors and industries, as well as with peers.

“We established and co-lead the Modern Slavery Energy and Mining Industry Group. Recently, the group developed and launched a supplier self-assessment questionnaire to pre-screen for modern slavery risks, improve transparency and raise awareness with suppliers. Asking a common set of questions reduces the paperwork burden on suppliers, and provides consistency and clarity across the industry.”

Duncan believes the legislation can drive a process of continuous improvement. “The process starts with acknowledging there are risks, identifying where they lie and building awareness across the business,” she says. “Then it’s a matter of training your people and suppliers, testing what you do, building an audit or assurance framework and ensuring your processes are entrenched. Boards must be able to confirm that the company is making genuine progress in eliminating slavery from their own organisation and supply chains.”

Case Studies

Reports lodged with the Online Register for Modern Slavery Statements highlight different challenges.

• Myer With a global network of more than 10,000 suppliers, the retailer decided to focus on 350 suppliers that engage with its private brand. The review identified no zero-tolerance issues and 73 high-risk issues, mainly overtime and safety. Corrective action plans have been implemented in each case. It is now enforcing its Ethical Sourcing Program, including actions to improve risk and supply chain management, due diligence, communication, monitoring Tier 1 suppliers and training. It will monitor risk profiles through third-party ethical audit reports.
• Pilbara Ports Authority The WA government trading enterprise has adopted a due diligence process to identify and address potential risks. New training programs that introduce modern slavery concepts and prevention plans will be evaluated and approved by delegated authorities from within the internal audit program. The review ensures PPA will run annual refresher programs for key staff who regularly interact with vendors and a review process for high-risk countries.
• Woolworths Group Woolworths has committed to eliminating modern slavery from its operations and supply chains for the past eight years. Partnerships with initiatives, such as the Fair Work Ombudsman create an environment for shared strategic initiatives. Strict internal frameworks and contracts articulate the values and expectations of team members and suppliers. A human rights steering committee ensures Act requirements are met and the board sustainability committee monitors the effectiveness of the company’s five-step due diligence processes.
• Smith Family The NFP is incorporating funding relationships into its risk assessments, including those with major donors and corporate partners. It noted that “whole organisation” approaches to risk mapping were unrealistic for its activity model. Regular reports to the finance, audit and risk committee will give insight into the company’s effectiveness and inform the board if external support is necessary.

Information at modernslaveryregister.gov.au