Corporate supply chains are bigger and more complex than ever. Wesfarmers recently reported it has relationships with over 15,000 suppliers in more than 20 countries. Consumer pressure for eco-friendly goods and services supports the argument that sustainable supply chains can be profitable supply chains.
Incorporating environmental, social and governance (ESG) factors into the company’s sourcing and purchasing practices is now being viewed as good business practice. If a supply chain activity results in the violation of an environmental, labour or human rights standard or regulation, there can be material negative financial and reputational outcomes. For example, the Economist Intelligence Unit 2015 global survey of 853 senior corporate executives found 62% of respondents think that:
”Avoiding repeats of the Rana Plaza factory disaster in Bangladesh is primarily the responsibility of multi-nationals that purchase products from these factories not the Bangladesh Government.”
It can be difficult to identify human rights risks given the complex nature of supply chains across many companies. However, changes in regulatory disclosure requirements are prompting asset managers to revisit human rights issues, including what is termed ‘modern slavery’. It is tempting to believe that modern slavery only exists abroad, but it is closer to home than many realise.
Modern slavery’s shape and form
Modern slavery affects the lives of millions globally. It encompasses all forms of human trafficking, forced labour, debt bondage, forced marriage and child labour which stem from cultural attitudes or human tragedies such as conflict, poverty or natural disasters. A global slavery survey by Walk Free Foundation estimates that 46 million people have been subjected to modern slavery between 2011 and 2016. Modern slavery is estimated to prevail across 167 of the most populous countries, the majority within our Asia Pacific region.
Slavery exists in Australia
Unfortunately, cases of modern slavery have been identified on our soil as well as through indirect forms, where Australian companies with offshore operations or sub-contracting arrangements have been linked to cases of modern slavery. The Walk Free Foundation survey suggests an estimated 4,300 victims of modern slavery exist in Australia. Individual cases have been cited with exploitation of workers - often migrants - being employed ‘off the books’ in labour-intensive work.
Modern slavery tends to be concentrated in food and agriculture production, textiles, retail and technology industries. These industries often feature the use of complex and constantly evolving global supply chains, making it difficult to monitor and manage, even for the companies involved. However, companies can ill afford to be complacent.
Historically, the absence of company data and regulation has meant it was difficult to assess the risk of exposure to modern slavery in corporate operations and across supply chains. However, a series of multi-stakeholder initiatives, legislation and engagement activity globally, including Australia, are changing the investment landscape.
Government actions
Legislation to address the issue of human rights violations and poor labour practices now exists in Canada, the US, the UK, France, The Netherlands and Switzerland. The UK is the most recent market to pass legislation through its UK Modern Slavery Act (2015). Enactment of the legislation has not only made a significant impact in promoting compliance but has put transparency on corporate agendas. Public entities in the UK are now required to report on measures taken to address modern slavery in their business and supply chain. Australian companies which operate in the UK such as BHP Billiton, Lend Lease, Qantas and Wesfarmers already report on their anti-slavery efforts under this regime, so a degree of harmonisation with Australian initiatives already exists.
Globally, some of the largest retailers and manufacturers are auditing their lengthy supply chains in response to growing scrutiny. For example, Woolworths, Wesfarmers and other retail operators in Australia established the Retail and Supplier Roundtable Sustainability Council to take action against abuses in their supply chains. Early evidence suggests the legislation on human rights and due diligence in the UK and US is working to improve the quality of disclosure practices. This in turn helps investors make better informed investment decisions and also supports stakeholder engagement with companies.
Developing a local regime that is effective
Many in the local investment community were encouraged by the announcement earlier this year by the Australian Government that it had commissioned a Senate Inquiry into the establishment of our own Modern Slavery Act. To date, over 180 submissions have been made to the inquiry, including from large Australian companies such as Wesfarmers, Woodside Energy, Rio Tinto, Woolworths, Qantas, Fortescue Metals Group and BHP Billiton.
As an investment manager, we believe failure to consider ESG factors in a company’s operations or supply chain can present potential financial impacts through reputation damage, litigation and operational risks which may ultimately harm a company’s social license to operate. Of course, the cost to society and the economy more broadly can also be significant and severe.
Growing power of the social conscience
Consumer preferences for eco-friendly goods and services mean the link between a company’s sustainability performance and consumer loyalty is growing. Studies like the Nielsen Global Survey on Corporate Sustainability (2015) which covered 30,000 consumers across 60 countries found that 73% of millennials are willing to pay more for sustainable brands, compared with 50% in 2014.
Slavery is often a hidden risk in a company’s operations and supply chain. This is not only a human rights issue, it is also a financial issue with potential material implications for investment portfolios. Violate human rights regulation and a company pays twice: the fine for the breach and the damage to your brand with a related drop in sales and possible funding.
Encouragingly, stakeholders (customers, shareholders and government bodies) are now actively engaging with businesses to take action to address their exposures. Companies that establish a whistle-blower policy, consolidate supplier arrangements and build loyalty through greater transparency will be recognised as industry leaders.
Meaningful disclosure of supply chain management when integrated with traditional financial drivers can contribute to a company’s competitive advantage and strengthen its long-term financial stability. The business case is strong for integrating social issues such as modern slavery into the investment decision process. Investor and consumer voices are louder and ignorance is no longer an option.
Edwina Matthew is Head of Responsible Investments at BT Investment Management.