Modern slavery: It’s time to move beyond transparency and disclosure
By Måns Carlsson OAM, who recently participated on the panel, “Modern slavery risk and reporting: Where to from here?” at the RIAA Conference Australia 2024.
There is little evidence that Australia’s Modern Slavery Act 2018 (Cth) has contributed to reducing the prevalence of modern slavery, which the UN estimates affects 50 million people globally. With the proliferation of regulation internationally, it’s time for Australia to ask hard questions about the success of its modern slavery reporting regime.
The shortcomings of the Act
The Modern Slavery Act 2018 (Cth) (the Act) imposes mandatory reporting of modern slavery risk by companies and other large organisations. This approach – focused on improving transparency – sought to bring the issue of modern slavery to the forefront, and provided a valuable reporting framework that sets a good foundation for future progress. But transparency only works to reduce undesirable conduct if there’s real action taken by an entity which has identified ‘risk’. Now is the time to consider the next logical step – a human rights due diligence framework.
Professor John McMillan’s statutory review of the Act in 2023 – otherwise known as – The McMillan Review – made 30 recommendations for change. Critically, Prof. McMillan concluded that there is no hard evidence that current reporting requirements have caused any meaningful change for people living and working in modern slavery conditions. He states that, while the quality of modern slavery statements has improved, “the change is not significant enough. It resembles a tick-box exercise by a number of entities – a race to the middle!”
An alternative cynical view of the Act to date is that it has simply resulted in yet another compliance exercise for businesses, and that its main beneficiaries are likely not those trapped in modern slavery conditions, but those who profit from providing services to help with modern slavery statements.
According to the Attorney General’s Department, approximately 14,385 entities are captured by the mandatory reporting requirement, of which only 9,553 statements covering 60 countries had been lodged. Some 599 voluntary statements have also been lodged, indicating that the understanding of the material risks of modern slavery in supply chains go beyond those required to report. However, these are not the most important numbers:
According to the 2023 Global Slavery Index, on any given day in 2021, there were 41,000 individuals living in modern slavery in Australia. This equates to a prevalence of 1.6 people in modern slavery for every thousand people in the country. Appallingly, within Asia and the Pacific, Australia is ranked 26 out of 27 countries in terms of prevalence of modern slavery, and 149 out of 160 countries globally.
Generating the thousands of modern slavery statements that have been uploaded to the Federal Government’s Modern Slavery Statements Register is not, and should not be, the end goal. To some extent, the Act’s simple disclosure regime misses the original purpose envisaged: to assist the Australia’s business community to take proactive and effective actions to actually reduce instances of modern slavery. Given numbers are going up, not down, it is clear the Act is not working.
Moving beyond disclosure
If we as a society, want to be serious about tackling modern slavery, the next step should reach beyond mere disclosure and progress towards human rights due diligence.
The guidance for the Act makes specific reference to the UN Guiding Principles (UNGPs) on Business and Human Rights. Under the UNGPs, which are supported by the Australian Government, “entities have a responsibility to respect human rights in their operations and supply chains. This responsibility includes taking action to prevent, mitigate and, where appropriate, remedy modern slavery in an entity’s operations and supply chains.” With this, it could be argued that the Act has laid a foundation for the implementation of the UNGPs and, with it, some form of mandatory human rights due diligence framework. Current developments in the European Union (EU) around mandatory due diligence seek to do just that.
On 24 April 2024, the European Parliament passed new legislation that requires supply chain audits: the Corporate Sustainability Due Diligence Directive (CSDDD), with the backing of a majority of European governments.
Unlike a general ‘risk assessment’ as currently required under the Act , a risk assessment under a human rights due diligence obligation (like the CSDDD) would require a business to identify, assess and, crucially, to address actual or potential adverse human rights impacts resulting from its business activities.
By contrast, simply continuing with Australia’s annual reporting requirements will not result in discernible improvements to people living in modern slavery conditions.
Using due diligence is not a foreign concept in combatting global issues. For example, the finance industry has increasingly introduced KYC (Know Your Customer) in combatting terrorism funding, money laundering and other crimes. A mandatory human rights due diligence equivalent could be equally effective through a KYS (Know Your Supplier) approach.
Modern slavery is more than an ‘ethical’ concern for investors
While modern slavery is morally reprehensible, it can also have financial ramifications for investors and markets. Generally speaking, investors prefer stable and predictable earnings, with less risk.
Modern slavery can significantly distort company earnings. For example, the existence of modern slavery and other human rights abuses can damage assets such as brand and goodwill which can be costly and time-consuming to restore, and lead to loss of sale. There is also an increased risk of regulatory action in the current global climate where a company, knowingly or unknowingly, relies on a supply chain of underpaid workers, weak regulation or even illegal practices like slavery to generate earnings.
The introduction of human rights due diligence requirements, as opposed to simple annual reporting on risk, could lead to better earnings predictability, and lower earnings risk. There are clear financial incentives for eradicating modern slavery. Companies would need to demonstrate that they are adhering to human rights across their supply chains and demonstrate the remedial actions they are taking to address such risks.
What can institutional investors do?
Institutional investors are a key stakeholder group under the Act as both users and preparers of modern slavery statements where the risk of modern slavery is disclosed in both company supply chains and in investment portfolios.
Investors who just focus on modern slavery risk assessments are unlikely to move the dial on reducing modern slavery. All companies have some level of modern slavery risk due to the nature of global supply chains, and supply chains to supply chains. Thus, constructing a modern-slavery free investment portfolio is highly challenging. Investors can, however, act as positive influencers on companies to encourage best practice to identify, assess and address modern slavery risk. Capital carries significant power to influence change in this regard.
In the responsible investor community, groups such as RIAA’s Human Rights Working Group and Investors Against Slavery and Trafficking – Asia-Pacific are collaborating together This has led to formalising effective engagements with companies and identifying global leading practices to encourage the adoption of higher standards, such as the ‘investor toolkits’ published by RIAA’s Human Rights Working Group, which investors can use to encourage the adoption of better practices.
The increased awareness that the Act has brought is welcome, but we need to move on from treating it as another compliance exercise, with little improvement on the actual incidence of modern slavery. With 30 recommendations from the McMillan Review to consider, as well as regulatory developments in the EU, a next logical step for Australia could be to consider mandatory human rights due diligence as a means by which we can start to improve the lives of those living in modern slavery.
Måns Carlsson, Head of ESG, Ausbil Investment Management and Chair of RIAA’s Human Rights Working Group
Måns leads Ausbil’s ESG team who take an active approach to engaging Australia’s listed companies on environment, social and governance issues. Måns also leads Ausbil’s integration of proprietary ESG scoring, research and ratings within Ausbil’s top-down bottom-up valuation approach. Måns has been with Ausbil since 2015. Prior to Ausbil, Måns held senior ESG positions at AMP Capital, and worked at Carnegie Investment Bank, Macquarie Bank and Accenture. Måns is well known for his advocacy, research and leadership on key ESG issues, including modern slavery, climate change, human rights, governance and stewardship, and many other ESG issues. In 2022, Måns was awarded an Order of Australia Medal (OAM) for contribution to the responsible investment industry. He has also received a letter of commendation from Anti-Slavery Australia in 2019. Måns also holds a number of leadership positions in the industry, including: Director of RIAA (Responsible Investment Association Australasia); Chair of RIAA’s Human Rights Working Group; and is on the steering committee of IAST-APAC (Investors Against Slavery and Trafficking – Asia Pacific). Måns holds Bachelor of Science (Major in Business Administration) and Master of Finance degrees from Gothenburg School of Economics, an MBA from Griffith University, and is graduate of the Australian Institute of Company Directors (AICD).
Disclaimer: The views and opinions expressed in this article are solely those of the author(s) and do not necessarily reflect the view or position of the Responsible Investment Association Australasia (RIAA). This article is intended as general information and should not be considered investment advice. It is recommended to seek appropriate professional advice before making any investment decisions.