Australian public companies are failing to provide investors with enough information about their supply chain risks, particularly about how they are tackling incidents of modern slavery, according to recent research.
A February report by Monash University Centre for Financial Studies (MCFS) and ISS ESG that reviewed mandatory reporting under Australia’s Modern Slavery Act 2018 by ASX 300 companies found that statements typically contained little detail about the supply chain beyond the first link, or Tier 1.
In 59% of cases, statements did not disclose whether the company's supply chain disclosure extended beyond Tier 1 to include indirect suppliers. Research quoted in the report noted modern slavery non-compliance incidents were 18% higher in Tier 2 and 27% higher in Tier 3.
“The lack of visibility over indirect suppliers, coupled with the more frequent use of unauthorised subcontractors, often to meet the production cost and deadline terms of the ultimate buyer, creates vulnerabilities to modern slavery,” the report noted.
Three investors AsianInvestor spoke to either did not disclose the minimum number of layers through which they required supply chain reporting or said they had no minimum.
Anne-Maree O'Connor, head of responsible investment, at New Zealand superannuation fund NZ Super, said the fund’s stakeholders expected investigations of “second, third or even fourth order effects.”
“We rely on serious, detailed discussions with our managers on what they’re doing on modern slavery so we can report it at our level too,” Fiona Mann, head of listed equities and ESG at LGIA Super, told AsianInvestor.
“We don’t have a set number of ‘layers’ when it comes to scrutiny,” Dr Raphael Mertens, chief risk officer and head of ESG for Allianz Real Estate, told AsianInvestor.
Challenges of building a picture
Liza McDonald, head of responsible investments at Aware Super, told AsianInvestor that cultural differences complicated data collection on modern slavery.
“When we’re considering issues relating to modern slavery, we might instead refer to concerns around supply chains and potential human rights abuses,” she said. “There are cultural considerations you need to take into account in each region. Each one is different, and you need to adapt your approach accordingly to ensure you can get the most out of your engagement.”
Mertens said the measurement of social factors generally, not just the tracking of risks associated with modern slavery, was something investors found difficult. This could mean they may resist being leaders in shining a spotlight on the issue in future.
“From a pure investment perspective, what becomes particularly difficult within social is measuring impact. Whilst we have been able to develop a range of scientific measures reaching net zero and managing decarbonisation, one of the biggest challenges with the social aspect is measurement and benchmarking,” he said.
O'Connor referred to a gap between companies that reported modern slavery information well and those that managed the risk effectively. “What you really want is for the company to be well managed, not just [for the information] to be disclosed,” she said.
Mann and O’Connor pointed to improvements in modern slavery reporting in the wake of domestic regulations in Australia, such as the 2018 act.
“Modern Slavery will not be left behind as [it] is legislated for both in Australia and abroad. Each reporting period will improve the data available on this topic, as will the visibility of ESG as a vital part of business performance,” said Mann.
Mertens said the difficulties companies or sectors that scored poorly on social measures like modern slavery create for investors were increasing.
“We are cognizant of how our wider stakeholder base will increasingly react to our relationships with firms and tenants in sectors deemed to sit outside of an acceptable ESG profile. This also bridges into politics. We make such assessments already but, in the context of social and reputational issues, this is very likely to accelerate,” he said.