Why there may be slavery in investment portfolios… and what you can do about it

Slavery did not end in the 19th century. Instead it has evolved into more subtle and invisible forms, which are hard to detect but pervasive across many industries, and present in both developed and developing countries.
Forms of modern slavery include forced and ‘bonded’ (when a person is made to work to pay off a debt) labour, child labour and human trafficking, which present risks to companies across countries and sectors in their operations or extended supply chains.
According to the International Labour Organisation (ILO), an estimated 40.3 million people were victims of modern slavery in 2016. Aimed at tackling this, the 2015 UK Modern Slavery Act requires any company operating in the UK with annual turnover above £36 million to publish a slavery and human trafficking statement each year, setting out what steps have been taken to ensure modern slavery is not taking place in their business or supply chains. The UK Modern Slavery Act is not the first of its kind. California’s Transparency in Supply Chains Act (TISCA 2010) was one of the earliest efforts to combat modern slavery in supply chains; legislation has recently been introduced in Australia, and there is pressure to consider similar measures in other countries, including Canada.
As long-term investors, we encourage companies, particularly in high-risk sectors, to take steps to identify and manage modern slavery risks. Taking action can mitigate any reputational or regulatory risks that could adversely affect profits and, ultimately, our investments. In addition, working to tackle modern slavery directly supports the UN Sustainable Development Goals (SDGs) – specifically Target 8.7, which calls for “immediate and effective measures” to eradicate the various forms of forced labour and modern slavery.

Engagement action
Our engagement on modern slavery in 2018 has focused on UK companies and international companies with UK operations in high-risk sectors for modern slavery such as food, construction, textiles, retail, and hotels, leisure and restaurants. These companies have been obliged to publish modern slavery statements as a result of the UK legislation, giving us an invaluable source of information on company practices.
Our engagement focused on asking companies to ensure that their modern slavery policies cover the following key elements:

• Identify modern slavery risk areas, looking at operations, supply chain and business partners, and implement risk mitigation action plans
• Evaluate the effectiveness of these plans
• Educate all staff responsible for procuring services or products, and Human Resources teams
• Work with suppliers on mitigation of modern slavery risks down the value chain
• Educate staff and workers in supply chains and business partners on their rights

The Modern Slavery Act has been a catalyst for action…

Our engagement has confirmed that the Modern Slavery Act 2015 has acted as a catalyst for companies to tackle the risk of modern slavery to their businesses. The legislation has also done a good job at getting the topic of modern slavery to the attention of boards of directors and senior executives.In addition, we have seen a good response to our engagement on this topic and enthusiasm from companies to get investors’ perspectives on the issue. We found that they value the voice of investors on this issue, and say that they do not hear it enough on the topic of modern slavery.

…but implementation is patchy
Nevertheless, we were disappointed that many companies’ modern slavery statements and disclosures do not provide sufficient detail of the risks nor the actions taken to mitigate them.

Much like the Californian act, the UK legislation focuses on disclosures as opposed to mitigative action, and standards around responsive action to modern slavery controversies, and does not set any minimum quality standards for these disclosures. In practice, this has led to a wide variety of standards of the modern slavery statements. Our engagement has also revealed that some companies are sceptical about disclosing too much about their approach to modern slavery risks, as this puts them in the front-line for reputational damage should modern slavery be discovered within their business.
Stronger legislation would include benchmarking around the management of modern slavery risks, as well as financial penalties for not complying. Whilst there are leaders taking action now, it will take more robust legislation of this type to drive meaningful actions from the rest of the market to eliminate modern slavery in their operations and supply chains.

Human trafficking hits UK retailers
In January 2016, the owner of Kozee Sleep, a UK-based supplier of furniture to major UK brands including Next and John Lewis, was found guilty of human trafficking. Workers were brought to the UK from Hungary on a promise of good wages, housing and food, but in reality were paid as little as £10 per day, with up to 42 men living in a two-bedroom house, working between 10 to 16 hours a day for five to seven days a week.
Subsequent BMO Global Asset Management engagement with Next has covered in detail the steps the company is taking to protect workers in its supply chain from exploitation. A key part of the company’s approach is to employ its own local teams to oversee factories rather than just relying on third-party audits. Adding in this extra layer of checks, in our view, represents best practice in monitoring risk.
Modern slavery is a systemic issue in the apparel and retail industries, and despite strong mitigation systems, Next still fell foul of this. Companies must ensure they are constantly assessing the effectiveness of their modern slavery mitigation processes in order to find and eliminate previously undetected instances of modern slavery in their supply chains.

Conclusions
We support the introduction of the 2015 UK Modern Slavery Act and similar legislation in other regions, as these play a vital part in getting companies to address the issue. However, there is a risk that relying on disclosure alone may lead some companies to view it as a box-ticking exercise, that absolves them from addressing the underlying issues. We see it as our role, as investors, to hold companies to account for the commitments they are making, and encourage them to move from disclosure-only to the implementation of stronger policies to mitigate modern slavery risks.

Catherine Hoyle is an analyst in the RI team at BMO GAM.