With investigative journalism and legislation on forced labor and human trafficking on the rise, forced labor risks can translate into concrete negative impacts for investors, both reputational and financial. As an example, in 2015, the US marine-services company Signal International LLC went bankrupt after having to pay US $20 million in compensation to victims of forced labor, leaving two of the pension funds invested in the company with a loss of approximately US $70 million.(1) Are investors addressing these risks?
Here is what companies think: In 2016, the Ethical Trading Initiative (ETI) surveyed over 70 of its corporate members and found that investor interest has significantly increased. In fact, while in a previous survey from 2015 none of the companies surveyed recognised investor interest as a driver to address modern slavery (including forced labor), in 2016, 25% of companies acknowledged potential investor concerns as a driver to take action. However, “[f]or most companies, this is based more on considering how investors would react to a reputational crisis in the media, rather than receiving pro-active engagement from investors to understand their modern slavery approach.”(2) For example, one company mentioned the immediate fall in share price of a company that was implicated in a lawsuit regarding forced labor.
Evidence of investor action: The Interfaith Center on Corporate Responsibility (ICCR), a coalition of nearly 300 mainly US faith-based investors with over US $200 billion in assets under management, is actively engaging with companies to address risks of human trafficking. During 2015 and 2016, ICCR members engaged 57 companies across multiple sectors. Over half of the companies have implemented at least one out of three engagement asks (such as a ban on confiscation of worker passports). Further, ICCR launched a letter writing campaign in support of the Business Supply Chain Transparency on Trafficking and Slavery Act (proposed federal US legislation mandating corporate disclosure on slavery).(3)
In order to understand the extent to which large mainstream investors address forced labor risks in their portfolios, looking at the investor signatories to the Principles for Responsible Investment (PRI), which comprise over half of the world’s institutional assets,(4) can shed some light. The PRI reports that most of its signatories actively engage on environmental, social, and governance (ESG) issues with companies they are invested in, either through engagement dialogue or through proxy voting.(5)
Labor rights are high on the agenda of mainstream investors: In 2016, over 1,000 PRI signatory investors reported publicly on their responsible investment efforts.(6) When asked to provide examples of engagements with investee companies, labor rights were high on the investor agenda. In fact, labor rights were the most commonly cited topic for engagement, ahead of other ESG issues including climate change. While this is not an exact indication of action taken by PRI signatories (not all signatories are invested in listed equity, and reporting on this indicator was voluntary), it still provides a good indication that labor rights are a topic often addressed during investor-company dialogues. On the other hand, when it comes to proxy voting, a large number of proposals were related to governance issues, such as remuneration, with fewer proposals on labor rights.
Are investors also looking at forced labor risks more specifically? Out of those PRI signatories whom voluntarily report information on engagement examples (57% of those investors that are invested in listed equity), 12.5% reported engaging on forced labor or modern slavery. This included investors from all over the world, including Australia, Europe, Latin America, and North America. Notably, over 30% of investors engaging on the topic are from the UK, the only country which has a national disclosure legislation specific to modern slavery. And, just over half of the investors actively addressing forced labor in company dialogues have been a PRI signatory for a decade, which might indicate that engagement on the topic is more likely undertaken by investors with more experience of responsible investment.
Unfortunately, most investors didn’t publicly disclose details on their engagements. Those who did mostly reported on engagements which are undertaken either by service providers or collaboratively with other investors rather than individually (few also reported pushing the topic on the agenda of an investor coalition). A number of investors disclosed engaging food and beverage companies (e.g., following the media coverage of forced labor in the Thai seafood sector). This may be related to a PRI-coordinated investor engagement on labor practices in agricultural supply chains, which is supported by a statement of support from 32 global investors representing over US $1.5 trillion.(7) Investors further reported engaging governments in the UK and the US. Some mentioned engagement on forced labor as part of broader dialogue on the ILO Core Conventions or the UN Guiding Principles on Business and Human Rights. Positive engagement outcomes include commitments from companies regarding supply chain transparency, supply chain oversight, employee training, or the disclosure of statements under the UK Modern Slavery Act.
Investors should strengthen and disclose their efforts to safeguard their investments and ensure forced labor related concerns are heard by companies: It is encouraging that a number of investors are taking steps to support respect for labor rights, and some specifically address forced labor risks in their portfolios. Given over 60% of companies in the MSCI ACWI Index (an index which covers approximately 85% of the global investable equity universe) will be subject to the UK Modern Slavery Act, the California Transparency in Supply Chains Act, or the proposed US Business Supply Chain Transparency on Trafficking and Slavery Act,(8) forced labor should be high on the investor agenda. Lauren Compere, Director of Shareholder Engagement at Boston Common Asset Management argues that investors have, can, and should play a role in holding companies accountable for translating human rights commitments into practice.(9) Indeed, investors can play a key role in pressing companies to address forced labor risks today instead of waiting for regulatory requirements to tighten or scandals to blow up. Investors should be public about their expectations so that the next company survey might show that investor concerns are not merely a hypothetical consideration for companies, but a real one.
(1) ShareAction (June 2016)—Forced labour: What investors need to know.
(2) Ethical Trading Initiative (November 2016)—Corporate Leadership on Modern Slavery. Full report and case studies.
(3) Interfaith Center on Corporate Responsibility (2 September 2016)—Our Vision for Responsible Investing. 2015-2016 Annual Report.
(4) As of April 2015, the PRI had over 1,400 signatories representing US $59 trillion in assets under management. See Signatory base AUM hits $59 trillion. Accessed 18 January 2017.
(5) PRI—2015 Report on Progress: e.g., see p. 22: “98.5% of investment manager signatories practice active ownership (proxy voting or engaging with companies)”. Accessed 18 January 2017.
(6) PRI—Annual Report 2016. Accessed 18 January 2017. Transparency reports of PRI signatories can be found here.
(7) PRI – Investor Expectations on Labour Practices in Agricultural Supply Chains. Accessed 20 January 2017.
(8) MSCI (2015) – Slaving away in hiding.
(9) Huffington Post, 17 November 2016: Lauren Compere – Investors Must Hold Food Companies Accountable for Forced Labor in their Supply Chains.