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Transparency in Supply Chains and the Modern Slavery Act

What investors need to know

By Sara Dix and Imogen Brennan

More than 45 million people around the world are trapped in some form of modern slavery, according to the 2016 Global Slavery Index.

This staggering figure involves a range of exploitative practices including human trafficking, forced labour, wage exploitation, child labour and debt bondage.

But how does this relate to us, as investors, and what can we do about it?

It’s an important question that was raised recently at a special briefing involving the Financial Services Council (FSC), Responsible Investment Association Australasia (RIAA), the Australian Council of Superannuation Investors (ACSI), Principles for Responsible Investment (PRI) and the Australian Centre for Corporate Responsibility (ACCR).

THE MODERN SLAVERY ACT

Earlier this year, the Federal Government announced an Australian first: a Parliamentary Joint Standing Committee inquiry is underway to determine whether legislation should be introduced to combat modern slavery and increase transparency in supply chains.

It’s investigating whether Australia’s laws could be improved to prevent modern slavery both in Australia, and in supply chains of businesses and organisations that operate in Australia and overseas.

The FSC will be making a submission to the inquiry on behalf of our members, with the inquiry due to report back on its findings later this year.

So why does Australia need a Modern Slavery Act?

The legislation, among other things, will increase transparency for investors by requiring companies to report on their supply chains.

This would highlight any potential areas where exploitative practices might be occurring, as well as giving companies the opportunity to rectify any problem areas.

As markets are increasingly globalised and consumers are more aware than ever of social issues around the world, developing this sort of transparency in supply chains is critical.

WHAT ARE THE RISKS?

One of the problems, as we learned at the recent briefing event, is the difficulty investors face when trying to accurately assess supply chains.

One of the world’s leading ESG analysts, Citi’s Elaine Prior, gave us great insights drawn from her research ‘Modern Slavery and Child Labour: Assessing Risks in Global Industries and ASX listed companies’.

This research investigated more than 40 ASX listed companies and assessed their levels of disclosure on policies and frameworks, as well as implementation (if any) relating to human rights in supply chains.

So what’s the risk if companies don’t investigate supply chains?

Ms Prior said as well as significant brand and sales risks, shareholder value would suffer, there would be controversy for Boards and Directors, and possible exclusions from corporate and government business opportunities.

UNSW’s Senior Lecturer in the Faculty of Law and Deputy Director of the Australian Human Rights Centre Professor Justine Nolan provided us with a number of examples of big business with risky supply chains.

Professor Nolan noted many Australian companies would have human rights issues within their supply chains and more transparency is required.

Nestle and Costco are two examples of international companies which have become embroiled in controversy because of issues in their supply chains under California’s transparency in supply chains legislation.

“Both lawsuits filed in California separately accuse the companies of knowingly supporting a system of slave labor in their supply chain to import seafood products into the US,” Professor Nolan said.

THE UK’S MODERN SLAVERY ACT

Australia's Ambassador for People Smuggling and Human Trafficking Andrew Goledzinowski gave us further details about the current modern slavery inquiry which is underway.

He said the Joint Parliamentary Committee is referencing the United Kingdom’s Modern Slavery Act 2015 and considering whether it should adopt a comparable Modern Slavery Act.

However Professor Nolan said the UK’s Modern Slavery Act is deficient is some areas and suggested improvements in any future Australian Act.

The UK Act requires some 13,000 UK companies to publish annual, Board-approved statements on their websites, disclosing the steps that were taken to ensure modern slavery does not take place in their supply chains.

However, consistency is lacking as there’s no requirement of single, uniform disclosure, meaning legally acceptable statements can range from a single sentence to detailed reports.

There is also no central repository for collection of these reports. A Government organisation could be involved in Australia to oversee and collect these standards.

AUSTRALIA COULD LEAD

We could be a world leader in this space if we develop best practice and get the legislation right. This will include balancing the burden on business in conjunction with the need for increased transparency.

The positive message to take from this, is that each investor can make a real difference to potentially millions of people around the world, by properly investigating company supply chains and carrying out fearless due diligence.

This process will enable improvement in investors’ risk management analysis and increase the ability to accurately assess the companies we invest in.

Investors that do establish this level of trust and respect with their clients will be rewarded in the long run, as our consumers continue becoming increasingly socially aware.

WHAT CAN YOU DO?

The UNPRI is coordinating a joint investor letter to the Inquiry, and we invite all of our members to sign the letter. Please contact Sara Dix (sdix@fsc.org.au) if you wish to sign the letter of support for the Act.

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