Westminster legal policy forum on modern slavery and trafficking

On 2 December 2014, Matt Crossman (Rathbone Greenbank’s lead researcher on corporate engagement), participated in a panel discussion as part of a high-profile seminar on business best practice in the context of transparent supply chains, ethical sourcing and staff training.

The panel was chaired by Baroness O’Neill of Bengarve (Chair, Equality and Human Rights Commission) and also featured Paul Broadbent (Chief Executive, Gangmasters Licensing Authority), Cindy Berman (Head of Knowledge and Learning, Ethical Trading Initiative) and Giles Bolton (Responsible Sourcing Director, Tesco Plc).

Before an audience made up largely of academics and representatives from the NGO community, Matt spoke from the perspective of an investor when assessing companies exposed to human rights risks in their supply chains.

He explained that Rathbone Greenbank aims to be a responsible steward of the assets it manages on behalf of its clients, and believes that active engagement on non-financial issues can help to add resilience to company valuations in times of crisis.

Therefore, it is from the business point of view that Rathbone Greenbank has been interested in engaging with companies on human rights risks, and specifically as they relate to global supply chains.

Rathbone Greenbank has been talking to policymakers and companies for the past five years about how society can improve supply chain transparency as a means of reducing some of the economic incentives that drive human trafficking and forced labour. A major challenge has been the lack of motivation for companies to actively seek out cases of modern slavery or human rights breaches in their supply chains.

Conversations with companies tend to happen only when things go wrong, as in the case of the Rana Plaza building collapse or the horsemeat scandal. But it is difficult to make policy when only reacting to events; impulsive decision-making is not favoured by investors, who prefer companies to think strategically about long-term risks. How, then, can society incentivise a company to look for those risks before they actually crystallise?

One suggestion is to require companies by law to report on what action they are taking to address human trafficking and modern slavery, encouraging them to seek out this risk, then actively manage it and create a situation where they feel comfortable working with suppliers to rectify problems whenever they arise.

This amounts to a “win-win” situation for investors as it helps to protect companies in their portfolios from shocks to the system while also creating the conditions where people can be freed from the appalling conditions of modern-day slavery. 

Another challenge for companies is that they are often faced with an uneven playing field. Society has created a system of voluntary regulation in this area whereby companies that have been the focus of attention have consequently made considerable efforts to manage the risk of human rights abuses in their supply chains.

Management of this issue has therefore effectively been outsourced to the companies themselves, with business being asked to perform the dual role of investigating its suppliers and adjudicating on their compliance with standards. This has created a real burden for those companies that have chosen to ‘do the right thing’, and places them at a competitive disadvantage against those taking no action at all. This is not good for society – and it’s certainly not good for investors.

However, there are best practice examples of how can companies begin to deal with this issue in a way which protects their business interests and can safeguard investors from any negative impacts on long-term profitability. Companies tend to respond positively when the business case for managing human rights risks in the supply chain is well understood in the boardroom. Furthermore, companies that can demonstrate that they understand these risks, and have taken appropriate steps to mitigate them, may benefit from an increase in market share or represent a more attractive investment proposition.

To show how such a claim might be justified, an open letter signed by 25 global investors responsible for £940bn of assets appeared in the Daily Telegraph in November 2014, supporting the introduction of proportionate legislation covering transparency in supply chains in the Modern Slavery Bill. When companies begin to demonstrate real progress on this issue, they might reasonably expect their achievements to be recognised positively by their shareholders and the wider investment community.

In one respect, boards of directors can be likened to sub-atomic particles in that they tend to behave differently when closely observed. It can therefore be productive to create situations where investors can demonstrate effective oversight, but where mandatory reporting requirements can lend weight to their efforts.

The members of the investor coalition referred to above believe that the transparency in supply chains legislation included in the Modern Slavery Bill can be improved with a few minor amendments; this will ensure that the information provided by companies actually helps stakeholders to place the right sorts of demands on company boards to manage these risks effectively.