Why should it matter to investors?
Modern slavery 1 is one of the most pressing human rights issues that investors can and should take action on. The International Labour Organization has estimated that there are over 40 million victims of modern slavery2. Women and girls account for 71 per cent of modern slavery victims, while one in four victims are children.
Slavery impedes development in general. It reduces productivity and innovation, and encourages bribery and corruption.
Workers coerced into jobs will seek to leave if they can. If they cannot, productivity levels are likely to drop. They also have no reason to innovate knowing that they will not enjoy the fruits of such innovation. Furthermore, companies who use slavery often
disincentivise innovation fearing their exploitative practices will become harder if worker’s skill levels increase. Slavers on the other hand, would bribe and corrupt officials to protect the slavery system.
However, investors, regulators and businesses have an obligation to address modern slavery risks as a key aspect of their social responsibility too. Modern slavery and exploitation of labour is a pervasive part of global supply chains. Investors may be connected to several thousand companies through their investment portfolios, and those companies in turn may be connected to many more in supply chains.
Stewart Investors Sustainable Funds Group Conflict Minerals Collaborative Engagement
During the past year, the Sustainable Funds Group at Stewart Investors launched another collaborative engagement effort, supported by 160 investors with collective assets under management of US$6.59 trillion, focused on conflict minerals within the semiconductor supply chain.
Tantalum, tin, tungsten, gold and cobalt (referred to collectively as conflict minerals) are vital materials and building blocks of the semiconductor industry. The poor traceability of these minerals alongside complex supply chains, including smelting and refining, can obscure their provenance and lead to the inadvertent financing of armed conflict and human rights abuses.
Stewart Investors are long-term investors who believe that sound labour practices and good environmental management go hand in glove with shareholder returns. As regulators and consumers pay increasing attention to the challenges of mineral sourcing within the semiconductor supply chain, the Stewart Investors team believe there is an opportunity for companies to take a lead in the development of conflict-mineral-free supply chains. They wrote to 29 companies involved in the manufacture of semiconductors encouraging them to:
- Develop and invest in technological solutions to improve traceability,
- Increase transparency and reporting on minerals from mine to product,
- Encourage and participate in industry wide collaboration to improve industry practices,
- Impose and enforce harsher sanctions on non-compliance, and
- Reduce demand for new materials by improving recycling initiatives.
Stewart Investors are in the early stages of this engagement and intend to provide further updates on progress and company responses in due course.
Spotlight on the food and beverage sector
The food and beverage sector is another sector with products at risk of modern slavery, as identified by the Global Slavery Index 2018.
In 2020, KnowTheChain released its Food and Beverage Benchmark, which assessed 43 of the largest food and beverages companies globally on their efforts to address forced labour risks within their supply chains. The graph below shows their performance measured by KnowTheChain.
The size of the bubble indicates the size of our investments in companies across listed equites and fixed income in each of the score bands. With an average score of 28/100, there is room for significant improvement among these companies. A small number of companies score higher than 50/100, demonstrating some leading practices in two key areas of abuse: purchasing practices and worker voice, which the sector, on average, scores lowest on. First Sentier Investors had greater exposure to companies with an above average score (>40), but there is still significant scope for improvement, particularly as no companies score in the top band (80-100). For this reason, this sector has been an engagement focus for a number of teams, including the Fixed Income team (featured on the following page).
While it is difficult for benchmarks such as these to tell the full story of a company’s efforts to address these risks, they are a very useful input into our risk identification and engagement approach.
Overall KTC Score
Source: First Sentier Investors, KnowTheChain. Data as at 31 December 2021.
Fixed Income engagement with the retail sector
As part of their annual modern slavery risk assessment, our Fixed Income and Credit team identified high modern slavery risk in companies in the retail sector (particularly supermarkets), together with technology hardware, service companies and the oil sector. Of the 26 companies the team engaged with on modern slavery this year, three were in the global supermarket sector. The disclosure from these companies was above average and the progress they have made was promising, based both on the KnowTheChain assessment and the team’s own research and engagement with the companies.
However, the team remains concerned about the modern slavery risk within the suppliers of these companies, particularly below tier 1 of the supply chain, and where there are offshore suppliers, as audits continue to be affected by the pandemic.
The team will continue to follow up with these companies in 2022 and if it observes a lack of effective action on this issue, it will adjust ESG risk scores and ESG risk trajectories accordingly, which may lead to an adjusted view of the team’s assigned internal credit rating. The team will also seek to work collaboratively with the RI team and other investment teams within First Sentier Investors that have exposure to these companies, to help drive change.
This reflects the team’s preference to work with companies to continuously improve risk policies and processes, risk management systems and training, rather than exiting positions. We think this is a more effective approach for assisting victims of modern slavery.
In jurisdictions where modern slavery legislation exists (such as the UK and Australia) we are seeing more investee companies uncover instances of modern slavery. Whilst this is not a positive development in itself, we see it as a good sign that a company is genuinely looking for the issue. It puts the company in a position to provide or enable a remedy to the victim(s) and to put preventative measures in place to avoid further incidents.
These topics are already addressed in our Modern Slavery Toolkit, however, we have identified it as an area which requires further training, as there are complexities involved in how investors can enable a remedy, and what reasonable preventative measures look like.
In developing markets where supply chains are complex and labour standards are lower, we face different issues. Raising awareness is often the first step in addressing this important topic.