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What does the Modern Slavery Act mean for Australian investors?

The introduction of the Australian Modern Slavery Act will be confronting for many organisations across Australia. Investors need to be aware of what is legally required under the act and how to make an assessment on the company’s progress on supply chain mapping and reporting. We discuss the Act and how we will be engaging with companies on the issue.

We have used guides from the Responsible Investment Association Australasia (RIAA)  CLICK HERE.

The Modern Slavery Act

The Commonwealth Modern Slavery Act 2018 is new legislation that requires businesses with over $100 million of revenue to report their exposure to and management of modern slavery risks in their operations and supply chains starting from 2020. The Government has the power to publicly name entities that fail to comply and has authority to take remedial action. The legislation follows a similar Act out of the UK.

The introduction of the Act has intensified the focus on supply chain risks, including the recent shareholder proposal at Coles’ 2019 AGM. The ACCR put a proposal to shareholders, which would require Coles to meet “industry best-practice for supply chain due diligence and compliance.” We engaged with Coles and the ACCR on the proposal. The proposal was not passed at the AGM, however it demonstrates how supply chain management is gaining increasing investor attention.

Why does modern slavery matter?

It is estimated that there are currently 40 million victims of modern slavery around the world.

Ending modern slavery by 2025 is one of the targets under the United Nation’s Sustainable Development goal 8, Decent Work and Economic Growth.

Modern slavery and the management of the supply chain is a key aspect of the ‘S’, or Social component of ESG. We believe that companies that perform well on ESG metrics are better managed organisations and will provide superior risk adjusted returns.

Risks in the supply chain, including modern slavery have impacts on earnings volatility, brand, business disruption, productivity and increase the regulatory focus on labour rights.

In our view, this could have material financial implications and we therefore prefer those companies that have policies in place to manage these risks and are well progressed in their reporting requirements with the Act.

Which companies are implicated?

Modern slavery in supply chains is inherent and widespread across both Australia and globally. The industries flagged as having the highest supply chain risk are agriculture and fishing, apparel, industry construction & building materials, mining and electronics.

What are the key issues in supply chain?

Supply chain risks include issues like pay & living wages, working hours & conditions, health & safety, whistle-blower policies and modern slavery which can include human trafficking, slavery, forced marriage, forced labour, debt bondage and child labour.

How can I spot these issues?

Investors should look out for oligopolistic industries that have the power to exert influence on suppliers, those with complicated supply chains, where workers are migrants or from minority groups, are recruited by agents, paid in cash or are illiterate, and industries which have a lack of unions.

Engagement drives better outcomes

Engagement is one of the tools we use to assess ESG risks and drive improvement in both companies we hold and may hold in the future. The RIAA Investor Toolkit: Human rights with focus on supply chains CLICK HERE provides some key questions investors can use to engage with management on modern slavery risks. A few examples of questions that we have recently been asking companies include: What industry bodies or unions do you engage with on supply chain issues? Has management visited the company’s key strategic suppliers? Do you audit your suppliers, and how often? Do you publish your factory lists? How prepared are you for the disclosure on supply chain structure in relation to the Australian Modern Slavery Act?

How can I assess if a company is performing well on supply chain management?

Low risk companies in supply chain management and human slavery go beyond what is legally required. They typically have long term relationships with suppliers and reward them for improvements, adopt an ethical sourcing policy, are transparent on their supplier lists, implement grievance mechanisms through phone, email or social media that workers can use to report issues and provide training for staff.

Conclusion

In the Perennial Smaller Companies Sustainable Future Trust, we consider the management of supply chain in our stock selection process. We seek companies that are exhibiting leading ethical supply chain management, materials and processes. It is one of the reasons that we hold retailers Kathmandu and City Chic.

Kathmandu has committed to improving 50,000 lives in their supply chain and are working with suppliers to improve working conditions. As a result of audits in 2019, they issued 144 corrective action plans and exited 34 factories for poor practices. They received an A on the Ethical Fashion report, publish 100% of their tier 1 manufactures, and use LaborLink for workers to submit confidential surveys.

City Chic, a plus sized women’s fashion brand publishes its ethical sourcing policy, factory lists and the rules of engagement and T&C’s for vendors. It’s factory onboarding policy includes education on living wage, gender equality and eradiating modern slavery and child labour. It has a grievance hotline, training codes and published a roadmap to the living wage.

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.

Emilie O'Neill
eONeill@perennial.net.au