Incorporating Modern Slavery Issues in Portfolios: Industry Roundtable

23 September 2022

9 min read

Addressing the contemporary scourge of modern slavery is becoming a growing imperative across the asset-management industry. In this roundtable, three asset owners from the US, UK and Australia share their insight and talk about the challenges of incorporating modern slavery issues in investment portfolios.

Q: What are some of the drivers that have made human rights/modern slavery a priority for your organization?

Marcelo Jordan, Senior ESG Specialist, World Bank Pension (US): From a fiduciary point of view, systematic violation of human rights (including through modern slavery) may undermine the long-term value of a company where the World Bank’s plan is invested, given the increased potential for social discontent, social unrest and consequent disruptions in supply chains. Human rights violations also have the potential to seriously damage a company’s reputation and as a result, negatively affect customer preferences. For investors, the reputational damage may also be serious and erode their capacity to engage with stakeholders and other responsible investors.

Will Findlay-Wilson, Senior Portfolio Analyst, Brunel Pension Partnership (UK): Strategically, human rights are a priority theme within Brunel’s RI philosophy. From the perspective of systemic risk, research demonstrates that modern slavery is endemic in global society. Whilst modern slavery is more prevalent in certain geographies and industries, it is a significant issue that all investors should consider.

Modern slavery can lead to increased litigation and reputational risks. Research also suggests that climate change is exacerbating modern slavery. In some portfolios, Brunel’s pivot to climate change technology investments has raised difficult questions around human rights trade-offs. For example, the solar energy industry has been tarnished by links to modern human slavery, particularly in the polysilicon supply chain. In some cases, our clients have a lower tolerance for modern slavery risks than their portfolio managers may have.

Susannah Lock, Head of Responsible Investing, Hostplus (Australia): Certainly, the regulatory environment in Australia has been a key motivator following the introduction of Australia’s Modern Slavery Act (2018). Large superannuation funds such as Hostplus are required to produce an annual Modern Slavery Statement describing how we identify and manage our exposure to modern slavery risk across our operations and investment portfolio.

We have a young and potentially vulnerable member base (hospitality and tourism industries, which attract many casual workers and immigrants) and recognize that even in Australia there are modern slavery risks. As a large global investor in a broad range of sectors and regions, we feel we (and the wider superannuation industry) have a responsibility and important role to play in helping to protect vulnerable workers from modern slavery.

Consumer surveys indicate that human rights abuses are consistently in the top social and environmental issues consumers want to avoid in their investments. Our own member surveys reveal similar sentiment.

It is the right thing to do! We want to generate great returns for our members, but not at the cost of human suffering. I doubt any of our members would feel good about their nest eggs growing and living comfortable retirements at the expense of vulnerable people struggling to make a very basic living and working in deplorable conditions.

Q: How do modern slavery considerations form a part of your organization’s corporate responsibility objectives?

Will Findlay-Wilson: Modern slavery is a component of our broader focus on human rights and social issues, informing our stewardship strategy as we identify opportunities for change through our voting and stewardship activities. Collaborative engagements are identified alongside other investors to further these goals. A good example is the CCLA-led engagement in the United Arab Emirates; another is our engagement with Rathbones on its modern human slavery statement.

We engage with our investment managers on areas of heightened risk related to companies, industries or geographies. We have engaged AB on some of these issues ourselves. Regard for these issues forms part of our due diligence on investment managers, and other third-party suppliers, ensuring our own operations are sound.

Marcelo Jordan: The World Bank Plan’s ESG approach favors ESG integration, so we expect fund managers to be aware of potential risks stemming from modern slavery and other human rights violations. As long-term investors, we also expect fund managers to understand that these types of underlying ESG risks should not only be viewed on a short-term horizon, but also with a long-term perspective in their financial analysis.

On the responsible ownership side, we work through a service provider to undertake corporate engagement. We also consistently promote the monitoring and incorporation of modern slavery as part of our biannual corporate engagement plan and objectives. Such efforts are undertaken with a financial fiduciary mindset, where engagement around these topics aims to enhance the long-term value of the companies.

Susannah Lock: Hostplus is committed to eliminating modern slavery from all our business dealings (internal operations, external operational supply chain and investments) as well as to continuous improvement in addressing modern slavery risks.

Our board-approved Modern Slavery Policy sets out responsibilities for the organization and employees, including how to report any incidents of modern slavery. We have an established Modern Slavery Working Group which includes employees from our Risk & Compliance and Investments teams. Our priorities include conducting periodic risk-based assessment of suppliers (including investment managers), continual review of relevant policies and governance, and supplier engagement to further understand controls in place and their effectiveness and providing internal training and communication to staff around modern slavery risk to improve awareness.

Q: Describe some of the challenges that you have faced in formulating and implementing a human rights framework across your investment portfolios.

Susannah Lock: As all our investment management is outsourced to external fund managers, we really rely on them to implement their own frameworks and policies to identify and manage modern slavery risks. However, this still presents challenges, as we have a large number of managers all with different approaches, priorities and ESG focus areas. For example, there are differing requirements on modern slavery reporting in different countries, as well as difficulty collecting data on risk exposure for some unlisted/alternative asset classes, such as private equity and venture capital.

As we have a large, diverse portfolio across many asset classes, regions and industries with a complex supply chain, it is quite difficult to form a detailed view of where all the potential exposures really are. And company-level data on modern slavery risk is quite scarce. Developing metrics to track progress in our management of modern slavery also presents several challenges.

Marcelo Jordan: As a fully externally managed pension fund, the World Bank Pension investment team does not select individual securities. So, our ESG due diligence process focuses on assessing external managers’ capacity to identify, manage and adequately report on such issues throughout their investment processes. This includes understanding the manager’s awareness with internationally recognized human rights standards (e.g., UN principles on human rights, UN Global Compact and others); their systems and processes for conducting effective social due diligence at the investment analysis stage; and the capacity to monitor and identify human rights issues during the holding period (ownership) after investment.

So far, the main challenges we’ve encountered refer to the availability of easily accessible and transparent ESG metrics to monitor human rights abuses at the portfolio (fund manager) level. We currently rely on data providers to flag and identify controversies. However, these are not easy to compile at the fund manager/portfolio level for a high-level overview on a regular (monthly) basis. We also rely on information from our corporate engagement service provider to enhance our awareness of human rights issues in companies within our managers’ portfolios. These are discussed with the service provider, when warranted, and engagement efforts to address such issues are typically reported on a regular basis by our service provider.

Will Findlay-Wilson: One big challenge is that there are different human rights standards across geographies and different cultural and political attitudes, particularly relating to the role of the individual versus the role of the state. It’s important not to project Western or Western European views onto all cultures but, at the same time, we need to have solid standards, especially in areas where engagement is challenged.

Often these issues are vast in scope and require a step-by-step process to make progress. Some companies are reluctant to make public disclosures. For others, we aim to change the narrative around supply chain due diligence and to identify problems as part of a positive process of improvement, and not simply as a basis for criticism. In some instances, there is a divergence of short-term investment return objectives and human rights goals.

Q: What expectations do you have of your asset management partners in this space?

Marcelo Jordan: As previously mentioned, we expect asset managers to develop the capacity to identify these issues early in the investment analysis process and properly incorporate such concerns when determining the relative value of a given company, including over a long-term horizon. During the holding period, we expect managers to exercise “responsible ownership,” which includes engaging with corporations around such concerns and promoting greater corporate transparency and disclosure on human rights issues across value chains; this is crucial for enabling investors to properly price in such controversies and determine a truly “fair” market value. We believe all investors, regardless of their investment objectives and fiduciary responsibilities, will benefit from more corporate disclosure and transparency.

Will Findlay-Wilson: We expect asset managers to show awareness of potential risks beyond basic materiality and issues flagged by ESG rating agencies. Investigations should be diligent where allegations are serious and credible. Managers should exhibit a willingness to investigate their companies’ claims, and to challenge their companies when they exhibit disengaged boilerplate responses. They should also demonstrate awareness of emerging regulation, such as the Uyghur Forced Labor Prevention Act in the US. Openness and transparency around engagement timescales, objectives and the credibility of outcomes is essential.

Susannah Lock: We don’t want to be too prescriptive and generally want our managers to develop a risk management approach that works for them. But we expect some formal process for consideration of modern slavery risk in their investment decision-making and a willingness to comply with our reporting requirements. We require all our managers to report to us each year on their modern slavery risk management via a vendor questionnaire covering both their internal business operations supply chain and their investment portfolio.

We also expect managers investing in higher-risk sectors or regions to have well-developed modern slavery policies, and to complement their own research with third-party tools and data where available to assess risk exposure. For companies operating in high-risk sectors, regions or known to employ vulnerable people (such as low-skilled and migrant workers), managers should be prioritizing company engagement, especially if actual incidents occur, and particularly where the manager is a large investor in the company. We’d also expect managers to use their voting power (where applicable—i.e., where we invest in pooled funds and the managers vote on our behalf), or where we retain voting rights, to provide us with relevant information so that we can form an informed view and vote accordingly.

Q: What are your highest priorities when it comes to incorporating human rights in your investments?

Marcelo Jordan: The key issues within human rights that we have observed include modern slavery (including at private prison systems and detention centers), child labor, forced labor and different types of discrimination. However, the field is continuously evolving, and there may be other issues to be included to the list in the near future. We would be happy to collaborate further in identifying the most material issues for investors.

Will Findlay-Wilson: Brunel adopts a top-down approach. Firstly, there is action that can deal with this issue systemically and at global scale. For example, working an appraisal of these risks into a company’s agreed responsibilities, within their own risk controls (audit of climate, modern human slavery, cyber risk). At the manager level, we work with managers who are philosophically aligned with us, and endeavour to collaborate. Idiosyncratic country or sector issues also warrant attention. For example, confronting emerging human rights issues in particular geographies or industries, such as mining, apparel and agriculture) requires a higher level of engagement. Finally, at the company level, we aim to identify companies where there are risks that are not well-managed for engagement.

Susannah Lock: We are focused on maintaining a responsible investment policy that includes a commitment to respect human rights and address modern slavery risk in our investment portfolio. It’s also important to make sure that portfolio managers are aware of our responsible investment policy and reporting requirements and that we continue to engage with them. We will continue to monitor our managers’ management of modern slavery risk and will work with managers who we have identified as being laggards with regard to their modern slavery risk management to emphasize our expectations and to help and encourage them to progress their processes.

We aim to maintain an awareness of company or industry controversies so that we can engage promptly with managers on these issues.

Finally, we continue to work with our asset consultants and other partners such as the PRI Association, Australian Council of Superannuation Investors and Responsible Investment Association Australasia to seek guidance and further educate ourselves to better understand the landscape.

The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.