5 min read 6 Oct 20
The hidden nature of slavery today means it can be easily overlooked. Yet it was estimated that in 2016 there are 40 million people living in modern slavery worldwide.
Within this total, 25 million people are in forced labour, being work or service exacted under the menace of any penalty and not voluntarily. More than two-thirds of victims are women, and a quarter are estimated to be children.
Modern slavery takes many forms, and also includes human trafficking, forced marriage, child labour and debt bondage – where a person is tricked or forced into working for little or no money to repay an endless cycle of debt.
It is important to understand that modern slavery is a truly global problem. Although most prevalent in countries marked with conflict and in emerging markets, we have seen that it happens in developed economies, sometimes within the communities where we live.
In the summer of 2020, UK fast-fashion retailer Boohoo was subject to high-profile allegations relating to its domestic supply chain. The allegations exposed concerns that workers in Leicester making clothes sold by the company were paid much less than the minimum wage, while working in cramped factories that might have helped spread coronavirus in the city.
Even where it may not directly be a local issue, modern slavery can be imported through what consumers buy. The global nature of supply chains means there is often a risk that modern slavery has played a hand in products that reach their final market.
The G20 group of nations imported US$354 billion of at-risk products in 2018, according to the Global Slavery Index, $18bn of which were to the UK. Although certain sectors, including electronics, garments and cocoa, are most at-risk, modern slavery can affect and involve companies irrespective of sector, size or location.
Research conducted with leading UK retail brands suggested that 77% of companies, when interviewed anonymously, thought it likely that modern slavery occurred in their supply chains.
It is believed that over US$150 billion is made from forced labour each year. This is clearly morally unacceptable.
Yet there is a danger that it plays a role, however small, in the supply chains of companies. This matters for investors not only as an ethical issue, but also because it amplifies investment risk.
One element of this is the risk of reputational damage arising from association with controversial practices such as forced labour. Consumers are more empowered than ever to boycott brands which don’t align with their values, meaning reputational damage can have a swift impact on sales.
Reputational damage can wipe billions off the market value of a large business in an age when the value of global brands is estimated to be around US$7 trillion. Indeed, much – and, in many cases, most – of companies’ value is derived today from intangible assets like reputation and brand. In 2019, intangible assets accounted for 84% of the value of stocks in the S&P 500 Index of the largest listed US companies.
Companies that are implicated in modern slavery also face the risk of litigation, which itself carries the risk of financial losses for investors.
In the UK, for example, the Modern Slavery Act was introduced in 2015 to give law enforcement the tools to fight modern slavery and ensure perpetrators can receive suitably severe punishments. Businesses with a global turnover of £36 million or more that supply goods or services in the UK must publish an annual slavery and trafficking statement that sets out what it has done to ensure there is no slavery within its business, including its supply chains. Punishment for failure to comply could ultimately result in an unlimited fine.
While M&G does not consider itself the moral compass for our clients, there is a basic universal expectation that investors will not profit from modern slavery.
M&G has a policy of engagement with companies that we invest in to face the issue head-on. In practice, this means we seek a constructive dialogue with company management on the topic, supporting and encouraging them to find and remedy instances of slavery.
Given how widespread the problem is, we expect companies to find cases of modern slavery in their operations or their supply chains. Where it is uncovered, we encourage transparency.
This allows our investment teams to better understand our exposure to potential risks, as well as to learn more about how companies are monitoring and addressing the related issues in practice.
We believe that engagement is a more effective way to encourage better corporate behaviour than ‘naming and shaming’ – an approach that has discouraged companies from being transparent on these issues in recent years. As well as encouraging issues to be swept under the rug, perpetuating cycles of abuse, opacity also creates risks for us as investors as there are likely to be hidden risks in company supply chains.
Modern slavery is a global systemic issue which requires collective action to address. To this end, M&G has joined “Find it, Fix it, Prevent It”, an initiative made up of investors, charities and academics to tackle the issue.
Using their engagement framework, we ask companies four high-level questions:
Based on our engagement with companies about modern slavery – including the case study below – we can see clear examples of best corporate practice, as follows:
There is a higher risk of instances of modern slavery in businesses with high labour intensity and less regulatory focus. We believe sectors that are more likely to be affected therefore include agriculture, hospitality, apparel and footwear, construction, food and beverage, manufacturing and mining.
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