Modern slavery is embedded within the supply chains of almost every product and service we use every day. It is estimated that there are 50 million humans living in modern slavery conditions, with 29 million in the Asia-Pacific region.1 Modern slavery includes forced labour, human trafficking, debt bondage and child labour.
There is an increasing focus on modern slavery in supply chains from investors, companies and regulators.
Given the implications of modern slavery in Australian supply chains, there has been an increasing focus on finding, remediating and preventing modern slavery issues by investors, companies and regulators. From an investor perspective, modern slavery presents a significant reputational and financial risk in our portfolios. For example, the US has prevented the importing of goods with forced labour. In Australia, there are increasing reporting requirements including the Australian Commonwealth Modern Slavery Act 2018. The UK also has a similar Modern Slavery Act, as well as Canada and New Zealand. Additionally, the cost of remediation can be significant, and consumers can be vocal when they do not believe businesses are adequately seeking to minimise modern slavery risks in their supply chain. Failure to prevent instances of modern slavery can result in reputational damage, business disruption and earnings volatility.2 Typically, better conditions for workers drive higher productivity within businesses.
The Australian Commonwealth Modern Slavery Act 2018
In 2019, the Australian Commonwealth Modern Slavery Act 2018 (the Act) came into effect. This is a disclosure-based annual reporting requirement for companies. Under the Act, companies are required provide a description of their supply chain and identify areas of high-risk activities. The Act applies to companies that generate more than A$100 million in revenues. At this stage, there are no monetary penalties for non-compliance, nor does the Act require companies to engage in modern slavery due diligence.
Compliance with the Act came with various levels of disclosure and quality from Australian companies. A three-year review was undertaken to identify areas of improvement for the Act and to help the standard of modern slavery reporting in Australia. The review process and subsequent recommendation for the Act suggested that the revenue threshold for reporting should be lowered to A$50 million, which could result in double the amount of reporting entities. Increased disclosure requirements were also recommended, including reporting on any incidents or risks identified during the year, grievance and complaint mechanisms, consultations and due diligence activities.
Perennial Better Future’s Approach
Recognising the significance of modern slavery considerations in the investment process, the Perennial Better Future strategy has taken a proactive approach by undertaking an assessment of portfolio companies by applying a proprietary Human Rights & Modern Slavery Due Diligence Framework.
The creation of the framework has provided our team with a tool to identify companies most at risk of human rights and modern slavery issues in their supply chain and subsequently develop an engagement plan for these investee companies. We believe all companies in our portfolio should be assessing their supply chain for modern slavery risks and should have a remediation framework established, even if they do not meet the regulatory minimum revenue threshold for modern slavery reporting. Since all companies form a part of an upstream and downstream supply chain, with the increasing reporting pressure, we expect that all companies are going to be increasingly asked to disclose their approach to identifying, managing, mitigating and remediating issues in their supply chain.
Perennial Better Future Proprietary Human Rights & Modern Slavery Due Diligence Framework
The Perennial Better Future Human Rights & Modern Slavery Due Diligence framework has adopted learnings from the Corporate Human Rights Benchmark (CHRB) Core UNGP Indicators, OECD Guidelines for Multinational Enterprises, Human Rights Working Group Investor Toolkit on Modern Slavery by RIAA and learnings from IAST-APAC (Investors Against Slavery and Trafficking Asia Pacific), an investor-led collaborative project established in 2020, of which Perennial is a member.
Our process begins by assessing every portfolio company on a risk module. The risk module analyses each company based on sector, location, nature of work place and other risk-related factors. We score the business on each of these metrics. Where a company scores below our identified threshold, we consider them at “higher risk” of modern slavery and human rights issues in their supply chain.
The companies identified as “higher risk” are then assessed on three other modules: 1) Commitment & Communication, 2) Assessment & Identification and 3) Remedy. We score each company on its approach to various factors and review public company filings including modern slavery statements, code of conduct policies, annual reports, sustainability reports, as well as consider any specific engagements we have had on these topics with the company. A company’s performance on these three modules forms the basis of our engagement plan for the company. Creating and implementing an engagement plan allows us to have meaningful and productive discussions with investee companies, as we aim to help drive business improvements, with a focus on modern slavery and human rights issues.
Overall, we believe modern slavery and human rights issues are both a reputational and an investment risk for our portfolio. It is important for us as investors to help drive improvements in our investee companies’ approach to modern slavery, human rights and ethical supply chain, and ensure they are appropriately managing their ESG risks and opportunities more broadly. This is one of the tools we have developed as part of a broader toolkit used to support our investment and ESG analysis process.
1 IAST APAC
2 RIAA HRWG Investor Tool Kit
By Emilie O’Neill, Co-Head of ESG and Equities Analyst, Perennial Better Future
Disclaimer: Please note that these are the views of the writer and not necessarily the views of Perennial. This article does not take into account your investment objectives, particular needs or financial situation. Some small changes were made to this article, based on updated information. The contents of this article were prepared for information purposes only. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation and is not intended to constitute advertising or advice of any kind. The fact that particular securities may have been mentioned should not be interpreted as a recommendation to either buy, sell or hold those securities. Potential investors should consider the product disclosure statement and target market determination before deciding whether to invest, or continue to invest, in the fund(s). The product disclosure statement and more can be found on the Invest with us page.
