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.
Corporations which fail to manage human rights risks within their operations and supply chains may face reputational, legal or other consequences. As an investor in these businesses on behalf of our clients, it is important that we fully understand the risks both to corporations and to all people impacted and seek to mitigate them.
Investors, regulators and businesses have an obligation to address modern slavery risks as a key aspect of their social responsibility. 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.
What is First Sentier Investors doing?
Our approach focuses on human rights risks within the supply chain, in particular modern slavery and other forms of labour exploitation. It is where we see the greatest opportunity to have an impact within the current regulatory environment, and it can also be the starting point for identifying other human rights issues.
The Modern Slavery Toolkit, developed by First Sentier Investors’ Modern Slavery Investor Working Group in 2020, continues to be the key framework used by investment teams to identify and address modern slavery risks within their investment portfolios. At the beginning of 2021 the working group met to review the qualitative and quantitative metrics collected on the effectiveness of our approach in 2020, adjust our strategy for 2021 accordingly, and identify areas for collaboration amongst investment teams.
FSI has developed Modern Slavery portfolio analytics, which pull together a range of data sources to help teams visualise modern slavery risks at a portfolio level, and then drill down to different risks.
Individual company engagements increased significantly throughout 2021, however we also engaged at industry level, through our involvement in Investors Against Slavery and Trafficking (IAST) APAC, an investor initiative to promote effective action by companies to find, fix and prevent modern slavery, labour exploitation and human trafficking across the value chain. IAST APAC is convened and chaired by First Sentier Investors.
In 2021, IAST APAC launched a collaborative engagement with 22 companies from four sectors – Consumer Discretionary, Consumer Staples, Technology, and Healthcare across Asia.
For further information on the respective team’s progress on human rights and modern slavery, read our Responsible Investment Report 2021.
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.
Reporting on progress
The country map, taken from our Modern Slavery Portfolio Analytics tool, shows the levels of modern slavery risk across various countries where we invest in listed equities and corporate fixed income. The size of the bubble relates to our exposure to companies across these asset classes (expressed as percentages in the labels), and the colour of the bubble relates to modern slavery risk (darker green = higher risk). This data is taken from the Global Slavery Index 2018. As you can see from the map, our greatest risks are concentrated in Asia, hence why we decided to focus on this region as part of the IAST APAC initiative.
Source: First Sentier Investors, Walk Free Portfolio holdings data as at 31 December 2020
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.
To address the challenges raised above, we intend to focus on remedies and preventative measures as part of our annual training on modern slavery risks.
We will also update our risk assessments following the release of Walk Free’s updated Global Slavery Index in 2022, and look forward to participating in the review of the Australian Modern Slavery Act.
As we identify more leading practices and collect additional data and case studies to assess the effectiveness of our own approach, we will update our Modern Slavery Toolkit and guidance to ensure continuous improvement in this important area.
First Sentier Investors has developed a Human Rights Toolkit to help all investment teams globally better manage human rights risks in our portfolios. The toolkit provides research and guidance for each of the following steps:
- Identifying companies with a risk of human rights in their operations or supply chains
- Assessing companies’ approach to the issues identified
- Engaging with the companies identified as at risk of human rights violations.
- Internal reporting on our progress
This has formed the basis of our approach to addressing human rights risks within our investment portfolios, which we are required to report on in accordance with legislation in Australia.
Download our latest Modern Slavery Statement.
- Modern slavery includes crimes such as forced labour, debt bondage, human trafficking, child labour and forced marriage and disproportionately affects vulnerable communities.
- International Labor Organization, 2016