Human Rights: Disclosures, Practices & Insights

Benjamin Colton is Global Head of Asset Stewardship, Holly Fetter is Assistant Vice President of Asset Stewardship, and Vidhyaa K is a Senior Associate in Asset Stewardship at State Street Global Advisors. This post is based on their SSgA memorandum.

Guidance on Human Rights Disclosures & Practices

As signatories to the UN Global Compact, State Street is committed to upholding human rights, and we expect our investee companies to as well given the reputational, regulatory, legal, and operational risks that human rights violations can pose to a company. We expect all investee companies to regularly identify whether there are risks related to human rights [1] in their operations and manage any risks that emerge, providing relevant disclosures to investors and other stakeholders in alignment with international standards such as the UN Guiding Principles on Business and Human Rights.

Our Expectations For Human Rights Disclosures

We expect all companies to disclose:

  1. What processes exist for identifying whether risks related to human rights are material to the company’s operations and supply chain.

If risks related to human rights are material to the company, we expect further disclosures on

  1. How the board oversees risks related to human rights;
  2. Which human rights-related risks the company considers most material;
  3. How the company manages and mitigates those risks; and
  4. How the company assesses the effectiveness of its human rights risk management program

Some best practices for enhancing human rights-related disclosures include describing:

  • Specific geographic regions, industries, resources, or types of workforce where the risk is highest;
  • How workers, civil society organizations, and other stakeholders are involved in identifying and mitigating issues;
  • Which mechanisms exist for workers to raise grievances without fear of retaliation; and
  • How the company supports impacted individuals in providing restorative remedy.

Engagements

Incorporating Our Expectations Into Conversations with Companies

We will engage companies on this topic, prioritizing companies with the highest risk of human rights violations. When assessing the risk level of a particular company, we will consider the company’s industry, region, and business model; any history of human rights violations; and client and stakeholder input. In 2021, we initiated a targeted engagement campaign on modern

slavery, and in 2022, we will undertake another series of proactive engagements on human rights, targeting companies who are noncompliant with the UN Global Compact. We will also request reactive engagements with specific companies if we are made aware that they have been accused of human rights violations.

Thought Leadership

Addressing Modern Slavery in Supply Chains

In Q3 2021, we initiated a series of targeted engagements on the topic of modern slavery. We relied on existing frameworks including SASB, the Global Slavery Index, and the International Labor Organization to identify high-risk sectors, and reached out to our largest holdings in those sectors to request in-depth engagements. We focused on companies in industries where modern slavery poses an outsized risk, especially given the increasing reputational and regulatory risks associated with forced labor in the supply chain. Through this process, we gleaned insights into companies’ best practices to inform our ongoing stewardship efforts in this space. To review our insights from this campaign, please see below.

Voting

Incorporating Our Expectations into Our Proxy Voting Practices

As is our standard practice, we will first approach this issue through engagement. If we identify laggards that are not adequately managing risks related to human rights, we will consider taking voting action against directors and on relevant shareholder proposals. When voting on shareholder proposals related to human rights, we will assess a company’s alignment with the five expectations outlined above and vote accordingly. While we plan to address human rights through voting and engagements, we believe that the responsibility of managing these risks lies with a company’s board and management.

Investment and Research Activities

State Street Global Advisors also incorporates human rights into investment and research activities. Our firm allocated significant resources toward building our ESG data architecture which gives our portfolio managers and researchers access to a variety of best-in-class data vendors. Our colleagues have access to best-in-class data on companies’ human rights practices. Additionally, our R-Factor™ scoring system measures the performance of a company’s business operations and governance as it relates to financially-material ESG challenges facing the company’s industry. These financially material issues are based on SASB materiality framework which captures the issue of human rights within the “Human Rights & Community Relations” issue area. We use R-Factor™ data to help prioritize engagements, target laggards, and create products for clients and consumers.

Conclusion

We encourage companies in our portfolios to align their disclosures and practices with our expectations.


Human Rights Insights: Addressing Modern Slavery in Supply Chains

Key Takeaways 

  • Modern slavery risks can vary across sectors and geographies. Factors like size of the business, nature of operations and complexity of supply chains can determine the types of risks a company is exposed Most of the companies we spoke to identify geographic regions, industries, resources, or types of workforce where the risk of modern slavery is the greatest.
  • Conducting due diligence beyond the first tier of the supply chain is the biggest challenge that companies we spoke to face when it comes to identifying modern slavery risks.
  • Coordination of different functions including procurement, human resources, external affairs, ethics and compliance, and sales and marketing is essential when it comes to establishing strong standards and monitoring compliance.
  • Companies must work in collaboration with stakeholders, civil society, and human rights groups to identify salient risks, ensure alignment with evolving regulation, and understand the expectations of customers, investors, and other stakeholders.
  • Employees are the first line of defense in identifying signs of modern slavery. Implementing a training program for workers that is specifically geared towards detecting signs of slavery or trafficking will empower them to identify and mitigate risks. Companies should establish mechanisms to enable employees to share concerns about modern slavery with management without fear of retaliation.

Background

The International Labor Organization (ILO) estimates that 40 million people are victims of modern slavery worldwide. [2] Modern slavery constitutes a number of human rights violations including servitude, forced or compulsory labor, child labor, and human trafficking. [3] Companies across sectors are facing increased pressure to address the potential operational, financial and reputational risks associated with modern slavery in their operations and supply chains.

In recent years, the development and implementation of more stringent regulations regarding the management and disclosure of modern slavery risk — including Australia, the United Kingdom, the European Union, the US and Canada — has created heightened regulatory risks for companies.

Engagement Campaign

Modern slavery is an emerging area of focus for the State Street Global Advisors’ Asset Stewardship program. In 2021, we initiated a series of targeted engagements to learn more about this important dimension of ESG risk. We relied on existing frameworks including those from the Sustainability Accounting Standards Board (SASB), [4] the Global Slavery Index, [5] and the International Labour Organization [6] to identify high-risk sectors, and reached out to 17 of our largest holdings across those sectors to request in-depth engagements. We also reached out to 12 of our largest holdings in Australia from high-risk sectors, given the heightened regulatory and reputational risk related to modern slavery in that market. (Please see the Appendix for a list of companies engaged and priority sectors.)

We conducted 24 engagements as part of this campaign, and our conversations with companies centered on topics including:

  • risk assessment and management;
  • supplier due-diligence;
  • remediation;
  • the role of workers’ voices in risk management;
  • the shifting regulatory context; and
  • board oversight of modern slavery-related risks.

In addition to the companies in our portfolios, we also engaged with external experts including the Australasian Centre for Corporate Responsibility (ACCR) and Investor Advocates for Social Justice (IASJ) to understand their perspectives on managing risks related to modern slavery.

Engagement Insights

As a result of our engagements, we identified the key challenges that companies face and some potential best practices they have adopted to address modern slavery risks in their supply chain.

Identifying and Mitigating Risks Beyond the First Tier of Supply Chain

It is important for companies to have visibility into the procurement policies and practices of their suppliers. Conducting due diligence by using tools like Supplier Assessment Questionnaires, analytics software and regular audits, and sharing audit results across the different layers of the supply chain is one way to improve visibility. We encourage companies to adopt multiple systems like efficient grievance raising mechanisms for employees, input from local sources of expertise (e.g., labor unions and human rights stakeholders), and engagement with different stakeholders in addition to regular audits to identify issues related to modern slavery in their supply chain.

Our engagements with companies illuminated best practices in managing risks throughout the supply chain.

Supplier Categorization Supplier categorization can help companies focus their due diligence efforts and prioritize action. During our engagement with Rio Tinto, the Anglo-Australian metals and mining company, we learned that, among other factors, the company considers the country the supplier operates in and vulnerability of the workforce (construction, PPE, transport etc.) to arrive at the risk categorization for suppliers.

Supplier Engagement Wesfarmers, the Australian retailer, has various divisions, and each of them has complex multi-tiered supply chains that span across different countries. During our engagement with the company we learnt that Wesfarmers regularly engages with suppliers to clearly communicate that the company is concerned about the supply chain as a whole, and where its suppliers source from (tier 2 or tier 3 suppliers). The company discloses findings from the ethical sourcing audits in the modern slavery statement [7] along with case studies detailing actions taken to address identified modern slavery risks.

Addressing Systemic Issues Nestlé, the Swiss food processing company, identified priority raw materials that present a higher level of risk and mapped its supply chain to the farm level to conduct risk assessments. During our engagement, the company highlighted the importance of working together with suppliers, peers, governments and NGOs to address systemic issues and find a long-term solution to managing human rights-related risks in its supply chain.

Adopting a Comprehensive, Preventative Approach Mirvac, the Australian property group, told us about advice they received from external consultants that robust policies to address issues like health and safety and diversity and inclusion can help prevent modern slavery and other human rights-related risks in an organization.

Certification Schemes During our engagement with McDonald’s, the American fast food company, we learned that the company’s supplier standards are applicable to the entire global supply chain, including franchise restaurants. The company leverages commodity certifications to ensure that products are being sourced through a sustainable value chain. Certification schemes help to provide human rights assurances deeper within the supply chain.

We also encourage companies with high-risk supply chains to disclose the number of modern slavery incidents identified and remediated. For example, the modern slavery statement [8] of Woolworths, the Australian retailer, identifies the number of grievances raised and the number of cases investigated. The company also provides details about remediation mechanisms.

Effectively Engaging on Remediation

After discovering an incident of modern slavery in the supply chain, many companies engage with suppliers to find a solution together. Effective remediation should include key performance indicators (KPIs), time-bound action plans, follow-up audits at the supplier site and clear commitment from the supplier to change their practices. The company might choose to end its relationship with the problematic supplier if there is a fundamental misalignment in values; for example, in cases where the supplier does not allow audits or if the supplier attempts to bribe the auditor.

We identified some companies with best practices regarding effective remediation. For example, the 2020 modern slavery statement [9] of Telstra, the Australian telecom company, includes detailed case studies, audit findings and remediation procedures. The company conducts benchmarking around leading modern slavery statements in the market to ensure adequate disclosure. To increase visibility within the supply chain, Coles Group, the Australian retailer, established a framework to review and assess the modern slavery statements of the highest spend suppliers. The company has a remediation framework [10] to help individuals or groups affected by labor issues.

Establishing Effective Whistleblower Mechanisms

For companies with complex supply chains spread across different countries, language barriers and access to technology can be a challenge when it comes to establishing effective whistleblower mechanisms. Channels to register grievances should be locally available, multilingual and easily accessible. They should also be independent from the company or the supplier, and allow for anonymous reporting. Marriott International, [11] the American hotel company, has multiple avenues for employees, associates, and guests to report unethical behavior, harassment, and other human rights concerns, including human trafficking.

Measuring Success

Establishing KPIs that measure the effectiveness of initiatives to combat slavery and trafficking can help companies monitor the impact of the steps they are taking. KPIs can include the number of audits conducted and issues identified, the number of issues remediated, the number of grievances raised, the number of personnel trained, etc. For example, Archer-Daniels-Midland Company, [12] the American food processing company, identified KPIs and targets to track the progress of initiatives to combat human rights-related risks.

Conclusion

Companies are taking steps to address risks related to modern slavery in their supply chain, but there are a number of challenges they face while identifying and remediating these issues. We will continue to engage with companies to inform our ongoing efforts in this space.

Endnotes

1As defined in the Universal Declaration of Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work.(go back)

2wcms_575479.pdf (ilo.org).(go back)

3These terms are each defined in detail by the UK government in Annex A of “Transparency in Supply Chains : A practical guide.”(go back)

4Exploring Materiality — SASB.(go back)

5Global Slavery Index.(go back)

6Forced labour, modern slavery and human trafficking (Forced labour, modern slavery and human trafficking) (ilo.org).(go back)

7https://www.wesfarmers.com.au/docs/default-source/sustainability-documents/2108261641-wesfarmers-2021-modern-slavery-statement.pdf?sfvrsn=387a12bb_32(go back)

8195996_modern-slavery-statement-2021.pdf (woolworthsgroup.com.au).(go back)

92020 Modern Slavery Act Statement (telstra.com.au).(go back)

1003.02.03. Ethical Sourcing Remediation Framework.pdf (colesgroup.com.au).(go back)

11Marriott International Modern Slavery Statement.(go back)

12https://assets.adm.com/Sustainability/2020-Reports/2020-Human-Rights-update.pdf.(go back)

Appendix: Companies Engaged as Part of Modern Slavery Engagement Campaign

Company Name Market/Country Sector
Archer-Daniels-Midland Company United States Agricultural Products
BHP Group Limited Australia Metals and Mining
Carnival Corporation United States Cruise Lines
Coles Group Limited Australia Food Retailers and Distributors
Dexus Australia Real Estate
Fortescue Metals Group Ltd. Australia Iron and Steel Producers
Honeywell International Inc. United States Electrical and Electronic Equipment
Hormel Foods Corporation United States Meat, Poultry and Dairy
Marriott International, Inc. United States Hotels and Lodging
McDonald’s Corporation United States Restaurants
Mirvac Group Australia Real Estate
Nestle SA Switzerland Processed Foods
NIKE, Inc. United States Apparel, Accessories and Footwear
Northern Star Resources Limited Australia Metals and Mining
Nucor Corporation United States Iron and Steel Producers
NVIDIA Corporation United States Semiconductors
Rio Tinto Limited Australia Metals and Mining
Scentre Group Australia Real Estate
Stockland Australia Real Estate
Telstra Corporation Limited Australia Telecommunication Services
Tesla, Inc. United States Automobiles
Verizon Communications Inc. United States Telecommunication Services
Wesfarmers Limited Australia Food Retailers and Distributors
Woolworths Group Limited Australia Food Retailers and Distributors
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One Comment

  1. James N Johnson
    Posted Monday, February 21, 2022 at 10:50 am | Permalink

    I looked at the article content several times and I didn’t see a definition of what is considered “modern slavery.” I have an idea of what it could be but it would help understand the content of the article if that was stated.

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