Is modern slavery a risk to your value chain?

By

Mathew Nelson

EY Global Climate Change and Sustainability Services Leader

Leading a purpose-driven team that shares a common passion for creating positive impact. Workplace diversity and equality advocate. Engineer. Father of two boys. Australian Football League fan.

9 minute read 13 Aug 2019

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Effective management of issues relating to modern slavery and human rights has become an urgent business priority.

Businesses today operate within a quickly evolving, and often conflicting, landscape of global regulations and investor and societal expectations relating to modern slavery (as defined by the Walk Free Foundation1) and human rights. Effective management of these issues is no longer simply a matter for governments, or optional – it is an urgent business priority. 

Today’s leading companies know that managing modern slavery and human rights is no longer simply a matter of following the laws in individual countries. With customer, societal and investor expectations increasing on this topic, companies should be able to demonstrate how they are managing and responding to modern slavery and human rights risks wherever they operate.

Modern slavery includes, but is not limited to, the forms at the right in the below spectrum, while other labor abuses to the left may indicate increased risk of slavery conditions.

Drivers to manage modern slavery

This article provides an overview of the current situation as it relates to human rights and modern slavery (including current and emerging regulations), and explores how organizations can fundamentally improve how they manage their human rights risks, and the livelihoods of the workforce in their value chain.

Will emerging regulation impact me?

In 2011, the United Nations (UN) Human Rights Council released the Guiding Principles on Business and Human Rights, which applies the ”Protect, Respect and Remedy” framework. Under this voluntary framework, businesses are expected to provide a public commitment to respecting human rights, conduct due diligence of human rights risks, establish a management approach and establish a process for remedying abuses.

In the intervening years, some jurisdictions have introduced regulation to support the concepts previously considered as part of the above voluntary framework. Laws have been passed in the US, the UK, France and Australia requiring mandatory disclosures or due diligence related to human rights or modern slavery. Related regulations have also been proposed in other parts of Europe. As these regulations cover risks across supply chains, the indirect effects have a much broader impact beyond just the jurisdictions regulated, having implications for companies operating in emerging markets as well as companies directly captured under the related legislation.  

A summary of key regulation is provided in the table below.

Legislation

Requirements

 

 

California Transparency in Supply Chains Act (2012)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Companies must disclose their efforts to eradicate slavery and human trafficking in their supply chains, across each of the following five areas:

  • Verification of product supply chains to evaluate and address risk of human trafficking and slavery
  • Supplier audits to evaluate compliance with company standards related to trafficking and slavery
  • Certification requirements of direct suppliers to comply with laws regarding slavery and human trafficking
  • Internal accountability standards and procedures to manage compliance
  • Training offered to relevant employees and management with respect to mitigating risks

UK Modern Slavery Act (2015)

Companies must publish an annual modern slavery statement on actions taken to prevent modern slavery in their supply chains and their own operations. The act does not dictate what should be included in the statement, but a list of recommended information to disclose is provided, including (but not limited to) the organization’s modern slavery-related policies, due diligence and remediation processes, and steps taken to assess and manage that risk.

The Act does not include penalties for failure to make a statement, but instead relies on external stakeholders, such as the public, NGOs, investors and the media to monitor the statement’s adequacy, with the reputational risks associated with failing to make a statement, or making an inadequate statement seen as a strong incentive to comply.

In October 2018, the UK Home Office wrote to senior executives of all companies regulated under the Act, reminding them of their obligations under the Act, and setting a deadline of 31 March 2019 for companies to get their statements completed. The letter also warned that the Home Office would publish a list of noncompliant companies following an audit of statements.

In March 2019, a tender for an audit of the statements was released and as of yet, no date for the release of the audit results has been announced.

France Corporate Duty of Vigilance Law (2017)

Companies must establish mechanisms to prevent human rights violations and environmental impacts throughout their supply chains. These mechanisms must be reported each year as part of a “vigilance plan.”

The plans must include:

  • Risk mapping to identify, analyze and rank risks
  • Monitoring of identified risks among subsidiaries, subcontractors or suppliers
  • Actions to mitigate risks or prevent serious violations
  • Development of a risk alert mechanism, with input from the company’s trade union organizations representatives
  • Monitoring scheme for evaluating the effectiveness of measures
Dutch Child Labour Due Diligence Law (2020)

The law will take effect on 1 January 2020, and will require companies to file declarations within six months of certifying that they have conducted due diligence within their supply chain (to confirm their goods and services have not been produced with child labor).   

Australian Modern Slavery Act (2018)

Requires businesses to prepare and publish an annual Modern Slavery Statement on the risks of modern slavery in their operations and supply chains, and actions to address those risks. It is broadly aligned with the requirements of the UK Modern Slavery Act, however key differences include: the Act mandates the topics that must be included in the statement, including how they assess the effectiveness of their measures; and the statements must be submitted to the Government for publication on a central online registry. The Commonwealth Government will also need to produce a statement. 

New South Wales (Australia) Modern Slavery Act (2018)

This act is very similar to the Australian Modern Slavery Act (above) in terms of requirement for disclosure; however, it applies to organizations at a lower threshold of revenue and with employees in the state. It also has provisions applying to government departments and agencies, and can impose financial penalties for non-compliance. The New South Wales Act will not apply to organizations who are covered by the Australian Modern Slavery Act.

Going beyond compliance

Although the regulation in Australia and the UK mandate annual reporting, the way in which entities address modern slavery and human rights abuses within their supply chains is unregulated. Increasingly, investors, shareholder activists, employees, media and nongovernmental organizations (NGOs) are demanding more than just the minimum transparency required by the regulations. Some of these organizations (including Corporate Human Rights Benchmark (CHRB), Know the Chain, Oxfam’s Naughty and Nice list, and Baptist World Aid’s Behind the Barcode reports) are monitoring and evaluating modern slavery statements being published to identify good and bad performers to drive improvement and establish best practice frameworks. Such comparisons provide a dual benefit, providing investors, consumers and the public with information to assess corporate performance, as well as assisting companies to understand how they compare with sector peers, and highlight areas for improvements. An increase in litigation for misleading advertising against companies where supply chain issues have been exposed has also driven an improvement in both disclosure and action.

The publication of ISO 20400, an international standard that provides guidance for sustainable procurement, is also a driver for organizations to integrate sustainability into their procurement process and supply chain management. The standard emphasises the importance of setting up a due diligence process, especially within the context of human rights, to identify the risk of adverse impacts, with the aim of avoiding and mitigating them.

Due to these external pressures, like many other core human rights issues, modern slavery needs to be considered beyond pure compliance. It is an inherently commercial, reputational and investor-related issue that should be managed through sound business practices and ethical accountability. On the other hand, it can also be transformed into opportunities for increased sales, stronger and long-term relationships with suppliers and customers, and easier access to capital.

Drivers to manage modern slavery

Drivers to manage modern slavery

Advancing technologies, software developments and greater digital connectivity are also creating new opportunities to address some of the challenges of visibility and trust in supply chains. Similarly, some businesses are starting to recognize the opportunities for eradicating modern slavery by investing in new tools, programs and collaborative initiatives.

Where to start

Organizations can start by focusing on the following:

Deciding what to do

No entity can manage and mitigate risks throughout their full value chain on day one. Establishing a road map will usually require stakeholder engagement and an agreed risk-based approach. Levels of due diligence and commitment to remediation will need to be determined based on the risks that are present, and prioritized based on other factors relevant to the entity, such as ability to directly influence those risks. While the greatest focus of effort should be where your organization is directly causing or contributing to modern slavery, you should also consider how you may be indirectly causing or contributing to modern slavery beyond first-tier suppliers.

A focus on due diligence

Historically, many businesses have limited their supply chain and human rights management approach to a requirement that their suppliers provide a current certification; an audit report; a signed commitment to the buyers’ and retailers’ “supplier code of conduct”; or even merely referencing compliance with local laws in the contract terms and conditions. More recently, there is growing acceptance that this approach has done little to improve standards in supply chains, and has often been ineffective at driving real change. Further, there is a tendency of companies to focus their efforts on their first-tier suppliers, whereas research is showing the greatest modern slavery risks are present in outsourced sub-tiers of supply chains. There is, therefore, work to be done for businesses to revisit what controls are in place to manage the supply chain risks and to appropriately design and resource the related due diligence processes. 

Undertaking these tasks should help organizations to comply with current and emerging global legislation, as well as meet more demanding and constantly shifting customer, investor and community expectations. Companies that recognize the commercial opportunity and take a proactive and strategic approach could achieve benefits too. Specifically, they may profit by offering low-risk, transparent supply chains or certified ethical products to meet customer demands. They are also likely to generate other rewards, such as avoiding disruption; building strong, productive supplier relationships; employee engagement; customer loyalty; and investor and regulator confidence. But perhaps most importantly, they will contribute to finally reducing modern slavery in our global supply chains

EY Climate Change and Sustainability Services (CCaSS) teams can support organizations’ management of their human rights risks and the livelihoods of the workforce in their value chain.

Certain services and tools may be restricted for EY audit clients and their affiliates to comply with applicable independence standards. Please ask your EY contact for further information.

Summary

Today’s leading companies know that it is not sufficient to simply follow the laws in individual countries, but they are expected to meet international human rights standards – together with societal expectations wherever they operate. This article provides an overview of the current situation as it relates to human rights and modern slavery (including current and emerging regulations), and explores how organizations can fundamentally improve how they manage their human rights risks, and the livelihoods of the workforce in their value chain.

About this article

By

Mathew Nelson

EY Global Climate Change and Sustainability Services Leader

Leading a purpose-driven team that shares a common passion for creating positive impact. Workplace diversity and equality advocate. Engineer. Father of two boys. Australian Football League fan.