Investors must be alert – a form of modern slavery has crept unseen into many companies’ supply chains

One remarkable side effect of the current pandemic has been to expose work practices in a number of major companies' suppliers. What unites meat packing plants in Germany, a major US chicken producer in Delaware, and the clothing factories of Leicester, UK, is the exploitation of cheap migrant labour that has led to outright descriptions of "modern slavery." In China the situation is even more concerning. What can the responsible investor do to ensure they are not financing this?

One of the many unsavoury memories of the current pandemic is the sight of infected workers at the Tönnies meat-packing plant in Germany being forcibly confined behind wire fences in their “dormitories.” Dormitories?

It soon emerged that Tönnies' largely eastern European workforce were living in unsanitary, cramped conditions, normally two/three to a room (though one employee spoke of sixteen people in his room). Working long hours in harsh, freezing conditions, it was little surprise that hundreds of them became infected with Covid-19.  The German food and catering union observed “Corona is just a magnifying glass, showing things that people already knew but had closed their eyes to.”

Except I’m not sure we did know. If you live in central Europe, Tönnies probably supplied the meat you had for dinner last night. But this enormous company, with sales of around seven billion euros, is little known to you because it is privately held. Clemens Tönnies (with a private fortune of $2.3 billion according to Forbes) normally only appears in the press when his football club is discussed, or he is photographed at the Opera. He once caused controversy in a rare public statement advocating German power plants in Africa by saying “when we give them electricity, they won’t be making babies (in the dark) anymore.”

Shocking. “But that is how some private companies behave,” I hear you say. “What can we do – government will sort it out.” The German government has acted, but I really don’t  think Mr. Tönnies himself will be losing much sleep over the proposed €30,000 fine for companies breaching labour regulations.

Is this a peculiarly German problem? Of course not.

“It’s slavery, baby” was one of the more controversial lines quoted in The New Yorker’s expose of practices at Mountaire’s Delaware chicken plant. The worker went on to say “thank God that this pandemic happened….it’s terrible in there. I want these people exposed.” She described working long hours in unbearably cold conditions, workers crippled by arthritis and breathing difficulties from inhaling antimicrobial chemicals such as peracetic acid. Workers who are paid barely half the average for manufacturing jobs, yet the cost of their gloves and aprons is allegedly deducted from payslips as “plant supplies.” Perks? Just one week’s vacation a year, and free chicken at Christmas. US government statistics show that a slaughterhouse worker lost a body part or was hospitalized every other day in the period 2015-18.

“Corona is just a magnifying glass, showing things that people already knew but had closed their eyes to.”

Like Tönnies, Mountaire is a largely unheard of private company. It took the virus to bring conditions in their plant into the light. But both Mountaire and Tönnies are major suppliers to a very large number, if not most of, the quoted food companies in the States and Europe respectively. Did their shareholders know what was going on in the supply chain?

In case you think this is just a slaughterhouse problem, the virus’s bright light also recently shone on UK textile manufacturing. An infection spike kept Leicester in quarantine and was attributed to the hundreds of clothing sweatshops operating in the city. An undercover investigation by the UK’s Sunday Times found appalling conditions, and exposed that machinists were being paid little more than £3 an hour, and packers as little as £2 (less than a quarter of the official minimum wage). Leicestershire MP Andrew Bridgen spoke of “a conspiracy of silence.”

In Leicester, a quoted company, fashion retailer Boohoo, was involved, and its share price was punished accordingly. Aberdeen Standard Life exited, describing Boohoo’s social policies as “inadequate.”

But how many other fashion retailers selling dresses for $10 have something to hide in their supply chains? It is time for responsible investors to examine all their investments’ supply chains carefully.

US authors Kendall and Funk warn that “one of the problems is a lot of companies have a beautifully worded code of conduct which they don’t even try to enforce.” They argue it helps when companies bring in compliance departments, which are used to the complex tracing issues around money laundering. The first step must be to request a supply chain map – there are plenty of companies to assist in this now. Sedex for example, as well as Sourcemap, FRDM and Tradeshift. There are also companies that conduct an external “ethics audit.” Common red flags these auditors look for are paying workers in cash, employment contracts that are not in a worker’s first language, the use of hiring agents, and worker accommodation on site (both of these last two were present at Tönnies).

Governments do have a role and there has been a lot of useful legislation to outlaw modern slavery in recent years. California’s “Transparency in Supply Chains Act (2010)” and the UK’s “Modern Slavery Act (2015)” are two good examples. But Leicester is a warning that infringements often happen where frightened immigrant workers are just too scared to go to the police. And policy-makers and investors need to go right to the end of supply chains.

For so many companies that end point is now in China (even Tönnies opened its only overseas plant there). When the virus struck China, more than 200 of the Fortune Global 500 firms reported a disruption to supply chains.

The Australian Strategic Policy Institute published a cornerstone report “Uyghurs for Sale” suggesting forced labour Uyghurs were working in the supply chains of at least 83 global brands including Apple, BMW, Gap, Huawei, Nike, Samsung, Sony and Volkswagen. In a now familiar pattern, workers live in segregated dormitories with limited freedom of movement. An added Chinese twist is that they have enforced Mandarin teaching, indoctrination and a ban on religious worship. The US’s “Uyghur Human Rights Policy Act (2020)” aims to ban imports into the States from Chinese suppliers involved in forced labour.

But China’s slave labour is not confined to Uyghurs. There have been numerous cases of children as young as 12 being employed in dubious conditions.  In 2018, 52 workers at one plant were shown to have been confined for six years and regularly beaten. They were given basic, meatless, meals, and not allowed to shower or even have a toothbrush. One worker struggled to remember his name – he’d only been referred to by his captors as “number 25” for years.

We often seem to forget the “S” in ESG. Now is a good time to remember it.

Christopher Walker writes on business and global issues. He ran a large equity fund and has many years of investment experience.