UK: Slavery in supply chains remains a major legal, reputational challenge for businesses

01 Feb 2017

UK: Slavery in supply chains remains a major legal...
  •   Since the Modern Slavery Act was introduced in October 2015 there remains some confusion among companies over its implementation, particularly with regards to the drafting of annual slavery statements. 

  •   Although industry standards are still being set, there are at least some minimum obligations companies must meet in order to demonstrate their commitment, including securing board approval and making the statement publicly accessible.

  •   Adopting a longer-term approach that acknowledges the complexities of supply-chain risks and devises suitable policy measures will be key in ensuring that companies avoid reputational damage and consumer and investor scrutiny. 

The introduction of the Modern Slavery Act in the UK has increased the compliance obligations of major global firms to reduce the exposure of their operations and supply chains to slavery. The law – which includes a provision on transparency in supply chains – requires companies with a turnover of GBP 36 mn operating in the UK to publish an annual slavery and human trafficking statement at the end of every financial year. The reporting requirement affects an estimated 12,000 companies.

In their statements, companies are required to clearly state actions they have undertaken to address problems related to modern slavery – a broad term that encompasses crimes including forced labour, human trafficking, bonded labour, child labour, sexual exploitation, domestic servitude, and slavery. Guidelines published by the Home Office set out three basic obligations for the statement, including that they must have the approval of the board, be signed off by a company director, and be published so that it can be easily accessed by the public, typically on the company website. However, more than a year after the Act came into effect, there is still uncertainty among companies about how best to approach the statements and their obligations under the law. 

Corporate response  

The response from businesses to reporting requirements has been mixed, with differing approaches to the annual statements. Compliance has been patchy even in the case of the three basic obligations, mainly due to the lack of penalties for transgressors. With regard to annual statements, companies have simply outlined standard best practices, not necessarily specific to slavery risks, and general codes of conduct, because of the absence of government-mandated guidelines. 

The broad guidance from the UK government recommends that firms focus on six aspects: a detailed organisational structure of business operations and supply chains; anti-slavery policies; due diligence; identifying areas that have weak labour practices and outlining measures to address them; and effectiveness and training. Firms have the flexibility to interpret these guidelines widely and are not legally obligated to provide in-depth information on their supply chains or the specific risks they face.

This scenario has resulted in companies making broad statements that condemn poor labour practices but provide little detail on efforts to address the problem. A joint analysis by the Business & Human Rights Resource Centre and the Corporate Responsibility Coalition (CORE) of 75 annual statements in March 2016 found that only 22 met minimum legal requirements under the Act and just nine reported on all six criteria in the statutory guidance.

Many firms have also used generic text in their annual statements, rather than publishing content based on the assessment of risks specific to their own operations and supply chains. The analysis of more than 230 statements in May 2016 by the consultancy Ergon Associates showed that several companies from a range of sectors had used identical wording in certain paragraphs and detailed the same training procedures and performance indicators, raising concerns about blanket solutions for varying levels of exposure to slavery risks. 

Such an approach would suggest that companies are not taking their obligations seriously, given the absence of an immediate backlash. However, opaque annual statements and the perceived failure of due diligence measures will expose companies to reputational risks and scrutiny by activists and civil society groups.

Consumer goods sectors such as textiles, footwear, and cosmetics are especially vulnerable. These industries tend to rely substantially on contractors and third-party providers in their supply chains and have repeatedly come under pressure from civil society groups that continue to name and shame transgressors, many of whom are household names. For instance, companies such as L’Oréal and Proctor & Gamble have faced severe criticism over the use of mica, a mineral primarily produced in Indian mines where an estimated 20,000 children work in extremely poor conditions. The automotive paint industry has also come under criticism for its reliance on tainted mica mines, bringing negative attention to vehicle makers such as BMW and Volkswagen, prompting them to review their supply chains. 

Best practices 

In this context, publishing annual statements that demonstrate clear compliance with minimum requirements and provide detailed information on the specific slavery risks that companies face will be essential to avoid reputational risks. Firms will need to eschew the one-size-fits-all tactic in favour of investing in fully understanding the supply chain risks specific to their business operations and devising relevant strategies to address them.  

A select few companies have adopted the latter approach and garnered a positive response from civil society groups, which have hailed their efforts as a step towards establishing best practices. For instance, the Business & Human Rights Resource Centre (BHRRC) praised Intel’s annual statement which highlighted the manner in which the technology firm engages with major suppliers “to create a risk profile which includes slavery and human trafficking” and works with them to build their capacity to identify and prevent these risks.  

A focus on devising training programmes at multiple levels of business operations, including external suppliers, would also be beneficial. M&S has been regarded as faring well on this count by providing tailored training programmes to its food suppliers. Other measures could include active engagement with civil society groups such as ETI and CORE in order to address problems identified in annual reporting, as seen at technology firm Hewlett-Packard. 

Adopting a top-down approach to policy-making to address the problems of slavery and human trafficking in business operations would help companies ensure compliance with the minimum criteria outlined by the government. This means, the involvement of the board and senior management in identifying labour-related risks and devising a strategic approach to mitigate them. The requirement that a director-level employee sign the slavery statement ensures some measure of accountability, while the public nature of the statement on a company’s website facilitates investor and consumer scrutiny. The latter precondition presents reputational risks in the event of non-compliance by companies.

The annual slavery statement will also serve as a public record of company performance that will allow consumers, investors, and civil society groups to track a firm’s progress in tackling slavery. The Business & Human Rights Resource Centre, for instance, has already created a central registry to track the annual slavery statements of companies in an attempt to highlight bad practices and identify companies that consistently fail to abide by their commitments.

Furthermore, civil society groups advocate mapping business operations, functions, and supply chains and referencing them against various risk factors such as the use of outsourced labour or sub-contractors, and a lack of clear national laws in the jurisdiction of a given business. Such an approach would help firms identify key areas and the extent of exposure to the risk of slavery, and formulate appropriate mitigation strategies.

Many companies have so far relied solely on third-party certification from organisations such as Fairtrade International, which some civil society groups consider a bare minimum. This approach also raises the risk of short-term solutions and a lack of oversight over efficiency. Investing in measures that aim to address the root causes of exploitative labour practices will prove beneficial to companies in the long run.

A lasting solution will require companies to strengthen internal controls, engage with local stakeholders – including those in government, labour groups, and civil society – and undertake strict vetting of suppliers, third-party contractors, and local industry conditions. Accountability is also crucial to mitigate reputational risks, and will require corporates to put in place a well-defined plan for corrective and remedial actions. 

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