The role of investors at identifying, preventing, mitigating, and remediating modern slavery in global supply chains is getting more attention.
On June 1st, the European Parliament voted in favour of the Corporate Sustainability Due Diligence Directive (CSDDD) which would require companies to undertake human rights due diligence. Whether this should also apply to institutional investors is now a key issue under discussion, with international normative frameworks— such as the United Nations Guiding Principles (UNGPs) and the OECD Guidance for Institutional Investors—clearly stating the responsibility of investors for addressing adverse human rights impacts along their investment value chain. In the UK, the Government has developed a new Pension Fund Taskforce to support institutional investors in the identification of reliable data sources to better address modern slavery in business supply chains.
But, to what extent can investors influence companies to address modern slavery in global supply chains? This is the subject of a research project, carried out by the Modern Slavery PEC consortium partner, the Bingham Centre for the Rule of Law, in partnership with the Finance Against Slavery and Trafficking Initiative (FAST) at the UN University Center for Policy (UNU-CPR) research commissioned by the UK Foreign, Commonwealth and Development Office (FCDO).
The first part of the project, a rapid review and analysis of existent publicly available evidence, is now finished. In our analysis, we looked at institutional investors, such as banks, pension funds, development finance institutions (e.g., World Bank), insurance companies, as well as investment managers, who allocate their money in a range of businesses across sectors and countries worldwide through capital markets. For instance, they invest in publicly listed companies in stock exchanges by buying stocks (equity) or debt (bonds). They also invest in non-publicly listed companies (private equity), use their money to provide loans or credits to businesses, or finance specific ‘development’ projects in the Global South.
It is important to note that most of the publicly available evidence is anecdotal, that is, it is not collected or analysed systematically, and is usually self-reported. It is also mostly coming from the Global North and tends to disproportionally focus on ‘successful’ stories.
However, this is what we know so far:
1. Institutional investors and stock exchanges are using a range of different policies and practices at their disposal to address forced labour in businesses:
- Institutional investors are engaging in dialogue with companies, setting forced labour related clauses or requirements for providing loans or credits, filing shareholder proposals (e.g., Domini Impact Investments), exercising their voting rights, excluding companies from investment (e.g., The Government Pension Fund Global of Norway (GPFG) Guidance for Exclusions) and divesting from companies involved in modern slavery.
- Stock Exchanges are starting to use their influence too by developing modern slavery specific guidance (e.g., Thai Stock Exchange) and delisting companies from ESG indexes (e.g., Bursa Malaysia).
2. The influence investors can have on business depends on several factors and thus, we cannot expect all investors to exert the same influence across all their assets, for example depending on:
- Their investment strategy: Investors have more influence when they invest actively (take decisions on when to buy and sell depending on market behaviour) than when they invest passively (buy and track an index).
- Asset class: Investors have more influence in their private equity assets, than in their fixed income or public equity, as they are likely to be majority shareholders and sit in the company’s board of directors.
- Management involvement: Investors have more influence over assets they manage internally than those managed externally. The longer the chain of external managers the less influence they have.
- Size of investment: The larger their investment the more influence they have over an investee company.
3. Investors motivations for addressing modern slavery in global supply chains range from financial, moral (impact), regulatory, and reputational, but these are not mutually exclusive.
Depending on how motives are prioritised they might influence the extent to which investors act. Prioritisation might vary across types of investors and countries due to the normative and regulatory environment.
4. Are there any promising practices?
Yes, when institutional investors collaboratively engage in dialogue with companies through investor coalitions, they can influence businesses to:
- Develop policies related to fair compensation and living wages (e.g., Platform Living Wage Financials) and foreign labour recruitment (e.g., Robeco/UNPRI engagement with CP Foods in Thailand).
- Increase company disclosure of instances of modern slavery in business supply chains (e.g., Find It, Fix It, Prevent It initiative) and compliance with transparency regulation (e.g., Rathbone’s Votes Against Slavery).
- Increase company awareness of labour rights (e.g., Dutch Pension Fund in Peru), and commitment by joining anti-slavery related international initiatives such as the UNGC (Robeco/UNPRI engagement with CP Foods in Thailand), and anti-slavery national associations (e.g., Domini engagement with Nucor in Brazil).
- Improve due diligence processes on the ground such as supply chain mapping and auditing (Robeco/UNPRI engagement with CP Foods in Thailand).
5. Whether investors’ efforts influence corporate behaviour does not depend only on collaboration. Other factors might be at play, but we need more evidence to understand what makes some efforts more successful than others.
- Company engagement efforts might be more likely to lead to changes in company behaviour when investors build trust with companies through partnering with local NGOs and holding engagements for a longer period of time.
- Investors might be more likely to file shareholder resolutions in countries where there are lower barriers for doing so and where there is political support for ESG issues.
- Reporting-oriented shareholder resolutions are more likely to receive majority support by asset managers.
6. In order for investors to take effective action, they need appropriate data and knowledge.
- Investors mostly obtain corporate data from ESG rating and data providers. However, this data can be unreliable due to inconsistent measurement across agencies, a narrow conceptualisation of human rights risks, and a limited weighting given to these risks.
- Emerging efforts to regulate ESG data providers in the UK, Europe and Japan could help improving data reliability.
- Multi-stakeholder engagements such as that of the Dutch Pension Fund with a company in Peru, might be a promising way of obtaining reliable information on the ground, not only corporate but also contextual.
- Most institutional investors face capacity challenges, especially related to knowledge of human rights, their relevance across ESG factors, and how to implement human rights policies and due diligence.
7. So far, investors’ efforts have not been informed by people with lived experience of modern slavery.
Future research should provide evidence to investors on the role of incorporating the views of people and communities affected in the design and implementation of their policies and practices. This type of qualitative data could complement the existing range of data available for investors.
8. More research is necessary to better understand the role of investors.
The second part of this research project, a study gathering empirical evidence, is underway and will help to fill some of the existing gaps in the evidence by engaging in conversations with investors, banks, and stock exchanges in the Global South. The Modern Slavery PEC and FAST expect to publish the findings of this research later this summer.
Dr Sofia Gonzalez is a Research Fellow in Business, ESG & Modern Slavery at the Bingham Centre for the Rule of Law, based at the British Institute of International & Comparative Law (BIICL). She leads the Modern Slavery PEC's research work strand on business and modern slavery. Follow her on Twitter @sofiadeaguinaga.