Chain of influence
Australia’s national modern-slavery reporting deadline is looming, on 31 March 2021. There are capital-market consequences, most notably that buy-side firms are taking steps to ensure they have appropriate modern-slavery risk controls in place.
Chris Rich Staff Writer KANGANEWS
Entering force on 1 January 2019, Australia’s Commonwealth Modern Slavery Act 2018 requires entities based or operating in Australia with annual consolidated revenue of more than A$100 million (US$77.5 million) to report annually on the risks of modern slavery in their operations and supply chains.
Modern slavery encompasses a range of practices where offenders use coercion, threats or deception to exploit victims and undermine their freedom, according to the Department of Home Affairs. These include human trafficking, slavery, servitude, forced labour, debt bondage, forced marriage and the worst forms of child labour.
The International Labour Organisation and Walk Free estimate that globally, more than 40 million people live in conditions of modern slavery. The COVID-19 pandemic is likely to increase this number.
Aligned with the UN Guiding Principles on Business and Human Rights, the global standard for preventing and addressing business-related human rights harm, the new Australian law requires reporting entities to describe the modern-slavery risks in their supply chains and operations, and the actions taken to assess and address these risks – including due diligence and remediation processes. Reporting entities also have to describe the effectiveness of their actions.
Entities that meet the criteria to submit modern-slavery statements to the Australian Border Force must do so within six months of when their reporting period ends. The legislated deadline for submission, 31 December 2020, was extended by three months because of the pandemic. While there is no penalty for noncompliance, the law also requires the federal government to maintain an online register of modern-slavery statements – a feature designed to ensure reputational risk compels entities to submit statements.
The new law requires entities’ statements to capture the risks of modern slavery in supply chains as well as operations – a scope that captures financial lending and investments. Investors say the effect on their industry, and therefore potentially on capital markets, is significant.
Even for smaller investors that do not meet the consolidated-revenue threshold, the guidance for reporting entities considers asset managers to be part of their clients’ supply chain.
Although it is not a requirement to monitor individual investees or loan recipients, the federal government guidance expects that reporting entities “assess at an overarching, thematic level whether they may be exposed to modern-slavery risks through their investment arrangements or financial lending practices”.
Indeed, ensuring that investors report on their portfolio links is a key objective for the Australian act after similar legislation in the UK in 2015 received little engagement from the investor community, says Måns Carlsson, head of ESG research at Ausbil Investment Management in Sydney. Carlsson is a member of the Department of Home Affairs’ modern-slavery reporting requirement advisory committee, which is working with the government on effective implementation of the act.
KangaNews understands the attention given to modern-slavery statements, and fundamentally the task of ensuring appropriate modern-slavery risk controls are in place, has significantly ramped up since mid-2020 for entities, reporting-eligible or otherwise, as the 31 March 2021 deadline looms. In particular, asset managers’ engagement with clients on the issue has risen substantially.
Several industry bodies have developed toolkits to provide a framework for investor reporting. The Australian Council of Superannuation Investors (ASCI) and Responsible Investment Association Australasia’s comprehensive guide is of particular note, buy-side firms say.
In November 2020, meanwhile, investors with a collective A$5.8 trillion (US$4.5 trillion) under management launched their own coalition to address the harm caused by modern slavery. Named Investors Against Slavery and Trafficking (IAST) APAC, the group sent a statement to 100 Australian Securities Exchange (ASX)-listed companies to guide their approach to modern slavery. IAST APAC was convened by First Sentier Investors (FSI), Aware Super, AustralianSuper, Fidelity International, Ausbil Investment Management and ASCI.
“As investors, we see modern slavery, human trafficking and labour exploitation as something that goes beyond ethics. Business models and value chains that rely on underpaid workers, weak regulation or illegal activities such as forced labour and other forms of modern slavery drive unsustainable earnings,” IAST APAC says.
The statement outlines the best-practice principles for modern-slavery reporting. It builds on CCLA Investment Management’s initiative, called “find it, fix it, prevent it” and is backed by the UN Principles for Responsible Investment, which established guidelines and expectations to stamp out modern slavery in response to poor engagement under the UK law.
This initiative provides the framework for which IAST APAC intends to collaborate with companies in buy-side portfolios. “As investors, we expect companies to meet their reporting and compliance obligations and in doing so encourage them to examine broader risks of labour exploitation as a leading indicator of modern slavery,” IAST APAC explains.
Although – and perhaps because – precise definitions of a company’s supply chain and operations are not explicitly enshrined in the Australian law, Andrew Hii, partner at Gilbert + Tobin in Sydney, says there is no limit on how far into its sphere of influence an entity needs to look. This is a particular issue in financial markets where investments can be at arm’s length. “The fact that a company can have a very long supply chain where it may not know who is sitting at the bottom of it is an indicator of modern-slavery risk. Companies are limited to what they can practicably discover and do due diligence on – but not knowing how far down modern-slavery risk potentially goes is in itself a modern-slavery risk,” Hii tells KangaNews.
Some companies are taking their reporting requirements more seriously than others, largely in line with their equivalent risk profile. “It is getting a lot of oxygen as one of the requirements is that modern-slavery statements must be approved by the board and signed by at least one director,” Hii continues.
Some companies have a few hundred suppliers in their chain, which is no insignificant number by any means. But others have tens of thousands – making oversight a challenging task. The key risk-mitigation measure, subject experts say, is having modern-slavery risk controls in place and a process of remediation when and if modern slavery is found in the supply chain.
“At a minimum we expect companies to run a risk-based mapping exercise of their supply chain, which would provide a good starting point for achieving better visibility. We use the global slavery index to identify high-risk countries, followed by a number of toolkits used to identify high-risk sectors,” Liza McDonald, Melbourne-based head of responsible investment at Aware Super, tells KangaNews.
Engaging with its nearly 80 fund managers since May last year, McDonald says Aware Super – like the superannuation industry in general – has sought to understand how modern-slavery risk is currently approached in the corporate sector.
“We have gone through a process of asking our asset managers whether they invest in any of the high-risk countries or whether they have companies in their portfolios with operations in the high-risk sectors,” she explains.
The most important aspect is how asset managers engage with underlying companies active in high-risk categories. “At the end of the day, if fund managers are investing in these areas and not engaging with companies we may identify those asset managers as high risk and work with them to improve their practices, including how they are conducting their ESG [environmental, social and governance] screening,” McDonald says.
FSI published its first modern-slavery statement in September 2020, though it has been engaged with the issue of human rights in the investment chain for more than five years. While it is not planning to change the way it manages modern-slavery risk as a result of the new law, structured mandatory reporting will provide it greater insight, Kate Turner, Sydney-based responsible investment strategist at FSI, tells KangaNews.
After forming a working group in early 2020, FSI created a modern-slavery toolkit that provides detailed background information on related risks as well as best-practice case studies. “We developed our toolkit based on previous work we had done on human rights. The general thesis behind it is that the first step if we find an incident of modern slavery in one of the companies we invest in is never to divest from the company – because our obligation is to ensure the victims receive remedy,” Turner explains.
“Our process starts off with working with the company to ensure there is adequate remedy for victims. If we feel they are not taking enough steps to do this we have an escalation process, often in collaboration with other investors, to speak about our views publicly and use our voting rights. Divestment is the last step.”
A focus on remedy is also central to how QIC is dealing with modern slavery-risk. “The legislation requires that, if we are found to have caused or contributed to the practice of modern slavery, we have to remediate – putting the victim back in the position of nonslavery and making sure processes are amended,” Marayka Ward, Brisbane-based senior credit and ESG manager, liquid markets group at QIC, tells KangaNews.
QIC released its first modern-slavery statement in December 2020. Ward adds that some of the issues the asset manager has come across have already been addressed by companies.
But it is important to be vigilant about where in supply chains modern-slavery risk can occur and to be proactive about it. “QIC’s real-estate team invests in shopping centres and our risk areas there are in security and cleaning services. One of the things we do to minimise risk is to require cleaning staff not to be subcontracted – they have to be employees – because this is where companies start to lose their chain of command,” Ward says.
SPHERE OF INFLUENCE
How far down the supply chain investors should go to be considered best practice is yet to be conclusively answered. Tier-one is broadly what has been settled on for the first batch of modern-slavery statements, though IAST APAC encourages companies progressively to expand beyond this.
“Starting at tier-one is acceptable but it is not good enough to stop there. Over time it is expected that companies will go down to tier-two and tier-three as well as developing how they assess their supply chain,” McDonald says.
For example, QIC, in conjunction with ESG data provider and professional services firm Fair Supply, undertook a baseline measure of exposure to modern-slavery risk to tier-10 of investees’ supply chains. “It does not identify instances of modern slavery but it helps us hone in on where we as credit analysts really need to look more closely at the potential risks and talk to companies about it,” Ward explains.
In fixed income, FSI seeks to integrate modern-slavery risk assessments through its credit-research process. “Our credit analysts produce an internal credit rating that integrates how a company is managing its exposure to ESG risk. There will not necessarily be a blanket screen not to invest, but there will be a hurdle for investment in a company with known issues of modern slavery,” Turner explains.
Underpinning the remedy process is the fact that, with 40 million victims globally, modern slavery is not an issue that will be fixed on day one of any reporting regime.
“We tell companies that they may not have all the answers but we expect them to be honest about where they get things and to show a concerted effort to improve over time. We expect companies to assess where modern-slavery risk sits within their operations and supply chains rather than just trying to meet the reporting requirements,” Turner says.
With COVID-19 as a huge conributor, Carlsson says many more people have fallen into slavery. He believes confronting modern-slavery risk is a chance for investors to engage further, if they are not already, with human-rights risk. “There is a very fine line between poor labour practices and modern slavery. As an investor, if you are not looking into human rights you are missing the point,” he says.
Regardless of how the harmonisation pans out, and while the Commonwealth law has no direct ‘stick’, reputational risk is on the radar. “I suspect as more and more modern-slavery statements get published investors and nongovernment organisations will start comparing what organisations are doing,” Ward says.
In its guidance to reporting entities, the federal government estimates the A$100 million consolidated-revenue threshold to apply to 3,000 organisations. As of 24 February, 324 statements had been lodged to the online register, covering 728 entities.
The mass publication of modern-slavery statements will also help establish best practice. “We have already commissioned research from a provider of ours to look at the statements of ASX 200 companies. We will get a sense of best practice from this, as well as seeing who the laggards are,” McDonald says.
Best practice will have to develop quickly if SDG target 8.7 – ending modern slavery by 2030 – is to be met. The Australian act requires entities to describe the effectiveness of their modern-slavery risk controls and investors are putting in place a series of KPIs to measure their own progress toward the 2030 goal.
Collaborative engagement between asset managers and companies will be key to moving the dial on modern slavery, Carlsson says. “Companies often use the same suppliers. They can learn a lot from one other as this is a systemic risk that applies to everyone, not a competitive one. The more we collaborate, the better off everyone is as companies are more likely to respond to 10 investors than just one.”
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