New governance tools to combat modern slavery

Every industry exposed, every company’s responsibility to end this practice, says ACSI.

Two investor bodies have made an important contribution to governance of modern-slavery risks through the publication of guides for boards and investors.

The first report, ‘Modern Slavery: Risks, Rights and Responsibilities’, commissioned by the Australian Council of Superannuation Investors (ACSI) and prepared by KPMG, provides practical guidance to assess an organisation’s exposure to modern-slavery risks and the reporting of them under the new Modern Slavery Act.

Just released, ACSI’s guide is a valuable tool for raising awareness of modern-slavery risk issues, prompting and guiding boardroom discussions, and aiding engagement between companies and investors. The guide will also help companies report on this issue from 2020.

The Federal Government in November 2018 passed the Modern Slavery Act 2018 (Cth). It mandates that business and government report on modern slavery in their operations and supply chains. Organisations with $100 million or more of consolidated annual revenue must provide an annual public Modern Slavery Statement for board approval. The legislation commenced this year.

Previously, Australian companies were not required to assess or address their exposure to modern slavery or report on it. However, investor focus on modern-slavery risks has grown as part of broader environmental, social and governance (ESG) analysis and as ACSI has championed the issue this decade.

“Eradicating slavery is mainstream corporate responsibility,” says ACSI CEO Louise Davidson. “Every industry is exposed and every company has a responsibility to act.

The new law sends a clear message that Australian business must not unwittingly condone or facilitate slavery.”

Davidson adds: “Investors can play an important role in ending slavery. ACSI and our members consider labour conditions when forming investment recommendations and we do not want to be complicit in perpetuating slavery.

“We are ready to work with companies to identify and end forced-labour practices. We will call out companies that do not take this responsibility seriously, to enable the market to make informed choices about where to invest their capital.”

Modern slavery is an umbrella term that describes violations such as forced labour, bonded labour or debt bondage, adult or child sex trafficking, domestic servitude, forced child labour or the use of child soldiers. There are 40.3 million people in modern slavery, according to International Labour Organisation (ILO). About 71 per cent of those enslaved are women.

Of that total, 15,000 are living in Australia, estimates the 2018 Global Slavery Index.

Governance risks in modern slavery have intensified this decade as companies benefiting from labour “sweatshops” in supply chains, particularly in developing nations, are exposed. Scandals involving human exploitation have damaged corporate reputation and value as customers shun organisations that condone modern slavery.

ACSI’s report suggests five sectors are at risk of exposure to modern slavery: financial services, construction and property, mining, food, beverage and agriculture, and healthcare.

High-risk areas for financial service companies include procurement of goods and services to developing nations and facilities-management services, such as cleaning, in Australia.

In property, an estimated 18 per cent of modern-slavery victims globally work on construction projects, estimates the Walk Free Foundation.

Mirvac Group non-executive director, Sam Mostyn, says in the ACSI report: “Collectively we must acknowledge that modern slavery exists and property is no exception. Non-executive directors of all companies need to ensure our organisations are taking practical and accountable steps to reduce the risk of modern slavery. The property sector in particular must be one of the leaders in this regard.”

The mining sector, considered relatively mature in addressing social and human rights issues, is at risk of modern slavery because of its focus on projects in developing nations. “Key stages in the mining lifecycle such as project construction, development and product procurement, as well as logistics and transportation, carry high modern- slavery risk,” says ACSI.

Supply chains in food, beverage and agriculture have a high risk in production, processing, packaging and transport of food and fibre. An estimated 11 per cent of forced-labour victims worldwide work in the agriculture and fisheries sectors, estimates the ILO.

Healthcare companies are exposed to modern-slavery risk through procurement of medical equipment and supplies. Most Australian healthcare companies source goods from Asia, where low-cost labour is plentiful, according to the Australasian Centre for Corporate Responsibility.

There have been incidents of facilities used by Australian healthcare companies, in medical gloves production for example, that violate labour rights by forcing workers to meet severe production targets and providing sub-standard working conditions and pay.

How boards can respond

ACSI divides its modern-slavery guidance into four areas: entities and supply chains; risks present in operations and supply chains; actions take to address risks; and assessing the effectiveness of actions taken. Each section has core questions for boards and investors to consider and more detailed issues to take the conversation further.

In assessing entities and supply chains, the top three questions for boards are:

1. Is the company able to report at a group level on behalf of all subsidiaries and across all geographies?
2. Does the board receive regular updates on changes to the structure, operations and supply chain of the company?
3. Has the board determined whether it will meet leading practice in its approach to publicly releasing detailed information about its operations and supply chain?

With modern-slavery risks present in operations and supply chains, ACSI suggests boards ask:

1. Do board members understand what behaviours and practices constitute modern slavery and are likely risk factors for the business and sector?
2. Has the board included modern-slavery risks on its risk register?
3. Has the board established accountabilities for identification of modern-slavery risk through its committees or executive reports?

With actions taken in addressing modern-slavery risks, the top three board questions are:

1. Has the board established key performance indicators (KPIs) for managing modern slavery risk?
2. Does the company express its commitment to protect human rights, including modern slavery, through a board-approved public statement of policy?
3. Has the board introduced assurance measures for reporting on modern slavery due diligence?
   1. Does the board monitor and review its human rights policies and their implementation?
   2. Has the company benchmarked itself against leading practice examples to determine its current maturity and future ambition?
   3. Have the company’s management systems and controls uncovered any instances of modern slavery and, if not, are they robust enough to do so?
   • Oligopolistic industries where companies compete mostly on price.
   • Industries where pressure on short lead-times is high.
   • Industry where wage inflation is not keeping pace with general inflation, thus magnifying the risk of underpaid workers.
   • Complex and long supply chains that have multiple intermediaries.
   • Supply chains where workers are predominantly migrants or from minority/indigenous groups, which are typically more vulnerable to exploitation.
   • Industries where workers are illiterate or do not speak the local language.
   • Companies entering high-risk sourcing areas with no experience in them.
   • An absence of unions, lack of grievance mechanisms or workers paid in cash.

   O’Connor hopes Australian organisations required to report on their modern-slavery risks provide comprehensive, useable information for investors. “There’s always a risk with new reporting that companies provide information that is too generic at the start as they get used to the requirements and watch how their peers approach the issue. We strongly urge companies to provide nuanced, meaningful information on modern-slavery risks for investors and the public.”

   O’Connor adds: “Significant value can be destroyed when it emerges that modern-slavery practices are present in an organisation’s supply chain. But this is much more than an issue about investment returns and risks; as responsible investors we want to use the power of capital to end modern slavery once and for all and help millions of people worldwide.”

In assessing the effectiveness of action, boards should ask:

Practical insights for directors

Separately, the Responsible Investment Association Australasia (RIAA) has produced an insightful checklist for investors and boards on modern-slavery issues.

The report, ‘Investor ToolKit: Human Rights with Focus on Supply Chains’, takes an investor/ESG-focused approach to the issue and was prepared as a guide for RIAA members.

“Risks of modern slavery have been on the radar of the responsible-investment community in Australia for some time,” says RIAA CEO Simon O’Connor. “Many ASX companies have deep and long supply chains that extend into developing nations and are at risk of modern slavery. It is critical that investors and companies understand and monitor these potential risks.”

Boards can use the RIAA checklist to spot “red flags” in supply chains that include: