clothing factory / Liuser

This article appears in the April 2021 issue of Investment ExecutiveSubscribe to the print edition, read the digital edition or read the articles online.

Companies with exposure to modern slavery in their supply chains face enormous reputational risks — and many companies may be at greater risk than they realize.

According to the International Labor Organization (ILO), a United Nations agency based in Switzerland, 25 million people were living in modern slavery — which includes slavery, forced labour, debt-bondage labour, child labour and human-trafficked labour — in 2016. The ILO estimates that forced labour generates more than US$150 billion a year in illegal profits.

There are numerous cases of high-profile companies facing a backlash for their connections to modern slavery — Nike Inc., for example, came under fire in the 1990s for its use of sweatshops in Vietnam. Today, companies with supply-chain exposure to the Xinjiang region of China, where there have been widespread reports of human rights atrocities such as forced labour, torture and forced sterilization committed against the Muslim Uyghur people, are under the microscope.

To avoid the type of headline risk that comes with exposure to modern slavery, companies must have an intimate knowledge of their supply chains. Companies with suppliers in emerging markets may be at risk, said Melanie Adams, vice-president and head, corporate governance and responsible investment, with RBC Global Asset Management Inc. (RBC GAM).

According to a report from RBC GAM, modern slavery is most prevalent in emerging markets, where it can be harder to detect due to weaker law enforcement, cultural differences and workers not necessarily identifying themselves as victims of modern slavery.

RBC GAM is vigilant for signs of forced labour in emerging markets. The firm’s emerging markets investment team has a checklist of questions it asks when meeting with companies and their suppliers to identify possible exposure.

“[The team] will visit the factories of the companies and talk to workers,” Adams said. “They want to talk to as many employees as possible while they’re there to get a sense of overall sentiment, employee engagement and to ensure that situations like modern slavery are not taking place.”

During factory visits, for example, RBC GAM’s emerging markets team will ask workers whether there’s been any evidence of their company cutting corners by using cheap labour or low-quality materials.

“Generally speaking, companies that are well governed want to be transparent about these issues,” Adams said. “They want to demonstrate how they are addressing these issues, especially if they have good processes and policies in place.”

While human rights abuses are especially common in sectors such as consumer goods, agriculture, construction and hospitality, the risk isn’t limited to those sectors, according to Nalini Feuilloley, director of BMO Global Asset Management’s (BMO GAM) responsible investing team.

“Generally speaking, we don’t believe that modern slavery is limited to certain regions and supply chains,” Feuilloley said. “We don’t think that this is a developing-­market issue or an issue that’s confined to certain sectors.”

BMO GAM engages with companies it invests in to make them aware of possible exposure to modern slavery. Companies must have a “robust framework of due diligence” and really know their suppliers in order to understand their exposure, Feuilloley said.

“The closer you are to your suppliers and your supply chain, the better positioned you are going to be to understand those risks,” Feuilloley said. “We think there are a ton of companies that don’t understand how widespread the issue [of modern slavery] can be and how exposed they might be in their supply chains.”

While certain companies — Apple Inc. and H&M, for example — have made headlines in the past for having forced labour in their supply chains, those companies aren’t doing as badly as many investors may think, Feuilloley said. Such companies are at least aware of the risks and have published human rights policies. Companies that claim they have no exposure to modern slavery — or don’t acknowledge that they could be exposed — are a bigger concern. “For us, that is a red flag,” Feuilloley said.

The pandemic has underscored supply-chain risks. For example, last July, U.S. Customs and Border Protection banned the import of medical gloves sold by Malaysia-based Top Glove Corp. after reports surfaced that the company was using forced labour.

“[Top Glove] is an example of a company facing higher modern slavery risks, given the region they operate in and the pressure to cope with soaring demand due to Covid-19,” Feuilloley said.

Toronto-based Northwest & Ethical Investments LP (NEI) published its annual focus list in March, identifying human rights as one of three broad themes NEI plans to address in its shareholder-­engagement efforts this year. NEI will be keeping tabs on companies with supply chains connected to Xinjiang, known for its cotton production, to understand how those companies are responding to the region’s human rights crisis.

“[Shareholder engagement is] our first real step in assessing whether a company is, in fact, exposed — and if they have indicated that they are exposed, how they’re responding to any potential risks,” said Michela Gregory, director of ESG services with NEI.

Not all jurisdictions require companies to provide disclosure on modern slavery, which can make identifying risks a challenge for asset managers.

Some countries, such as the U.K., Australia, France and the Netherlands, require certain companies to provide disclosure on modern slavery. France and the Netherlands both require companies to carry out due diligence on their supply chains; the European Union plans to introduce similar legislation this year.

Canada has no such legislation, although Canadian-headquartered companies operating in jurisdictions with modern slavery legislation may be required to provide disclosure. But some Canadian companies provide disclosure even if they aren’t legally required to, said Stephen Pike, partner with multinational law firm Gowling WLG in Toronto.

“There are a number of Canadian companies that are, on a voluntary basis, making disclosure on how they’re addressing human rights risks in their supply chains and in their business operations,” Pike said.

There is a bill before the Canadian Senate that would require certain securities issuers to publish an annual modern slavery report. While Pike described the legislation as “imperfect” — it would require companies to produce a report, but not undertake any due diligence, for example — it would be “an important first step,” he noted.

“Right now, not just asset managers but consumers and others don’t have access to the information they need to be able to understand what kind of business practices they may be supporting when they buy certain products,” Pike said.

Mandating disclosure would at least give asset managers insight into how companies are approaching human rights issues, Gregory said: “I think enhanced transparency and enhanced disclosure is a good thing. The more we know, the more informed we can be in terms of how we approach dialogues with companies.”

China lashes out

In March, Chinese consumers began boycotting goods made by Nike Inc. and H&M after both companies expressed concern about human rights abuses in Xinjiang. Both Nike and H&M have been in hot water in the past for their connections to modern slavery, but they’ve taken steps to restore their reputations and publish human rights policies on their websites.

Canada takes action — sort of

Last July, Canada banned the import of goods produced in whole or in part using forced labour as part of the U.S.–Mexico–Canada Agreement. In January, Ottawa introduced specific measures aimed at goods produced in China. But the efficacy of these efforts has been questioned; according to a story in the Globe and Mail in March, Canadian residents can still order goods made with Xinjiang cotton through Amazon and eBay.

What’s in your pension?

In February, NDP MP Alistair MacGregor introduced a private member’s bill that would have prohibited the Canada Pension Plan from investing in companies with poor track records on human rights, labour rights and the environment. That bill was defeated at second reading in March.