LCP clarity:
Many investment portfolios are likely to have exposure to slavery, and it may not be long until prices of exposed assets are impacted.
LCP insight:
There are a growing number of investment initiatives that focus on social issues – check out this article on modern slavery for suggestions on how even small institutional investors can contribute to both combatting slavery and to protecting the value of their exposed assets. Ask us to help you draft relevant policies which you can share with your fund managers.
“If it’s not too complex, tell me how many Africans died for the [diamonds] on your Rolex?”
Ms. Dynamite
It Takes More
This may seem like a confrontational question, but how many children were paralysed or killed in the making of your shiny new gadget (a similar question was posed by Ms Dynamite in her Top 10 hit from 2002 ‘It Takes More’)? If you care only to the point of having something to discuss with colleagues/friends on a coffee break and you wouldn’t let it affect your purchasing decision to obtain the latest product, then you’re far from alone.
I tried to write an investment article about it many years ago in a previous job and was told that it wasn’t relevant then. But it feels as though now is the right time to ask the question.
You might not know it, but sadly modern slavery is present in many supply chains. Modern slavery takes many forms but can cover human trafficking, forced labour, debt bondage (all of which have been exhibited in Qatar’s preparations to host the 2022 FIFA World Cup) amongst others. It’s defined as being forced to work by threats or violence for little or no pay and/or having no power to control what work you do or where you do it. The complexity and opaqueness of model supply chains, stretching across many, many countries and jurisdictions makes it almost impossible for some companies to even know what is going on. But the evidence is building that the worst kinds of labour practices are far more common than we would like to think - a 2016 report from Hult International Business School found that...
acknowledged there was a likelihood of modern slavery in their supply chains
What’s more is these practices hit certain communities and groups of people far more than others: people in developing countries, non-white groups and females.
The International Labour Organization estimates that globally around 25 million people are trapped in forced labour and the Global Slavery Index estimates that over $350bn worth of imports to G20 countries are considered at risk of modern slavery and notes that governments are applying very little effort to regulate labour conditions.
Deaths of children in other countries are extreme examples of the effects of modern slavery. This is not a new revelation. It has been highlighted in the media repeatedly over many years; for example, through the Washington Post article on deadly cobalt mining used in electronic equipment batteries; or through Ross Kemp’s investigation of the brutal war in Congo. Modern slavery in supply chains of our favourite brands has generally not mattered to consumers and, therefore, it has been an accepted risk for investors.
While modern slavery primarily affects people in developing nations (and, in particular, females) it is not only an overseas issue: a Sunday Times report in 2020 found evidence of the cheap fashion brand, Boohoo, using illegal work practices in Leicester.
How will modern slavery affect investments in the future?
While modern slavery controversies involving the likes of Apple, Boohoo and Walmart don’t appear to have had more than short-term blips on their investment prices in the past, there are signs that this may change, due to actions by select corporations and governments. But will the first wave of major companies taking a stance be impacted negatively in terms of corporate and investment performance?
Adidas, H&M, Nike and a number of other companies expressed concern about the conditions of the minority Uighur population in Xinjiang, China, who are allegedly being forced to work and are experiencing torture and physical abuse at the hands of the state. As a result, these companies are expected to see an impact on sales in China through both interference from the state and through nationalistic consumers unquestioningly boycotting their products.
So where are the risks of investing in modern slavery and will companies be rewarded in the future for tackling modern slavery?
Well, investors have tended not to look at the big picture in the past; monetary returns were sought even when they caused issues that could be detrimental to the prosperity of the beneficiaries – that’s partly due to fiduciary duty but that’s an issue for another article. We’re in the early days of a huge shift away from this way of thinking. Modern slavery is one area that will receive some attention. Apart from short-term reputational risk and volatility, the main risk surely comes from government intervention and regulation – modern slavery legislation is expected to expand across Europe and some other prominent territories over the next few years. Even politicians who don't particularly care about the ethical aspect of slavery should acknowledge that slaves are not particularly productive and they earn/spend very little, which is a drag on economic output.
In terms of government intervention, we can look to the decline of the companies involved in prison labour in the US as a harbinger of what may come. This decline was not born about by investors gaining a conscience, but through the threat of government action, as it was clear it would not allow the racially unjust system to continue. This is part of a broader theme of unsustainable business practices being highlighted as risks to investment returns. The understanding of the importance of a healthy society and environment to the economy and long-term investment returns are increasing rapidly. And there is a trajectory towards sustainable investing.
The financial world does not operate in a silo and returns are now being impacted by the environmental and social factors it has long overlooked. Modern slavery is just one of many social factors, but it is an area that, whilst plenty of companies have a policy on, are they doing enough about it?
The UK Government has just closed a call for evidence to assess whether, and how, the consideration of financial risks and opportunities from social issues is being taken into account by occupational pension schemes. My colleague Laasya Shekaran recently observed that social factors have been largely overlooked. However, environmental, social and financial issues are interconnected. The existence of modern slavery contributes to poverty which makes it more difficult to mitigate systemic risks such as climate change (people in poverty have other concerns than helping with climate mitigation), which we know is likely to have a hugely detrimental effect on economies across the world.
So, whether or not consumer choices or investment strategies support modern slavery, it appears as though government and regulatory scrutiny of social investment issues is increasing. For institutional investors looking to address modern slavery along with some broader sustainability issues they could:
- put in place a policy outlining that companies involved with modern slavery controversies should be subject to targeted engagement by fund managers – use this policy as a starting point for building out further sustainability policies in a “do no harm” or “aim to do good” policy – it is important that such policies are communicated to fund managers
- ask fund managers how they vote on this issue and if they have recently submitted shareholder resolutions on the issue at AGMs
- become an investor signatory to ShareAction’s Workforce Disclosure Initiative (or ask fund managers to sign), which aims to improve workforce reporting from corporates on a range of social issues, including modern slavery
- focus on private markets allocations where there is less transparency but also more power to influence good standards
- get involved with direct engagement with companies (or ask fund managers to take part) through the “Find It, Fix It, Prevent It” campaign, which aims to encourage more effective corporate action on modern slavery
- and watch out for a human rights equivalent to Climate Action 100+ that the UN PRI is due to launch.
Hear more from Shyam Gharial on the Investment Uncut Podcast series
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