As large asset owners ramp up their research and engagement on a variety of environmental, social and governance (ESG)-related issues, the difficult subject of modern slavery is gaining greater focus.
“Modern slavery is the big one,” Russell Clarke, chief investment officer of Victorian Funds Management Corporation (VFMC) in Melbourne, told AsianInvestor.
“There’s tonnes of work still to do on climate, but the biggest issue in this current year is going to be modern slavery," he predicted. "Just getting our heads around how to assess this and how far to take it. How do we gauge it in the right way and what do we do if we get information we don’t like?”
Despite a blanket global ban on such practices, child labour and slavery generates an estimated $150 billion each year around the world, making it the third most profitable criminal activity, according to the United Nations. There are an estimated 40 million people in modern slavery.
“To bring this figure close to zero by 2030 – to meet the UN Sustainable Development Goals target 8.7 – we would need to reduce the number of people affected by around 10,000 individuals per day,” said Anne-Maree O’Connor, New Zealand Super’s head of responsible investment.
“Whether it’s by profit margin or volume, make no mistake, slavery is a business,” she added. “It channels its earnings through the financial system and its products into markets and supply chains.”
O’Connor acted as a commissioner on the so-called Liechtenstein Initiative, which produced a blueprint for collective action by the financial sector and professional service providers, to accelerate action to end modern slavery and human trafficking. The year-long initiative wrapped up in September last year.
The focus on the financial sector is simple: it has potential leverage on the entire global economy. O’Connor noted banks and investors can wield influence in multiple ways, from responsible lending and investment to financial inclusion and technology, compliance and regulatory regimes, remedy and international cooperation.
“Investors should use their leverage in these situations."
UNDERSTANDING THE ISSUE
The first challenge for asset owners is to understand what sort of exposure they might have in their portfolio and, if they find any, what action to take. Clarke said that VFMC believes the super can make the most meaningful impact by putting pressure on its underlying fund managers.
“The managers are coming under increasing pressure to consider this issue as part of their ESG policy,” he said.
Bolstering its efforts on ESG, VFMC last month hired Talieh Williams as head of investment stewardship. Williams was formerly head of governance and sustainable investment at Unisuper.
“Modern slavery is complex to fight, so requires action from all sectors, public and private,” said O’Connor. The initial challenge is to make people aware of it and to bring it to the forefront of discussions around ESG.
“It’s not that managers are deliberately going out and picking companies that are exploiting child labour, but there is a lack of awareness,” said Clarke.
Putting pressure on the managers means that they are more likely to ask tougher questions of the companies they in turn invest in, and actively seek out more information. “At the very least that means they will turn up the heat on companies and make it a topical issue,” Clarke added.
The issue is particularly acute in Asia, which has long been the sweatshop of the world. These risks are compounded at a country level. One example is the willingness of some Chinese companies to avoid US trade tariffs that have been levelled on the country by using labour in neighbouring countries.
“Look at the way that China is getting around some of the US tariff issues by outsourcing its supply chain to Vietnam for example," said Gabriel Wilson-Otto, head of stewardship for Asia Pacific at BNP Paribas Asset Management. "As that feeds through to the rest of Indochina, fund managers will face increasing pressure, because of the greater availability of data on how workers are being treated.”
Investors say the best way to get results is to make it clear the damage of association to modern slavery, at any point in their supply chains.
“An individual company is going to be given short shrift by investors in the future if it is found to have substantial issues in relation to modern slavery in its supply chain. There’s going to be a very high reputational penalty for individual companies, much more so than has been the case historically,” according to Clarke.
More effective analytics are also emerging to identify modern slavery and human trafficking risks. New digital tools such as smart employment contracts and blockchain apps for supply-chain provenance and chain of custody could improve businesses’ ability to know and show the risks in their operations and business relationships.
In November last year, the Responsible Investment Association of Australasia produced a modern slavery reporting guide for investors. Other groups in the region, such as the Mekong Club in Hong Kong, aim to mobilise the private sector into action specifically on this issue.
“Modern slavery risks can be obscured by layers of outsourcing, subsidiaries and opaque ownership structures,” said O’Connor. “We must work together as a sector to make risk mapping and due diligence real, routine and effective.”