Forced labor is a risk that can affect shareholders drastically, in light of increasing regulation, litigation, media and consumer attention. Take the case of Signal International, a US marine-services company, which went bankrupt following compensation payments to victims of forced labor –leading to a US$70 million loss for two Alabama public pension funds that held shares in the company.
Reputational risks of forced labor are particularly high in the supply chains of consumer-facing companies. In Malaysia, for example, nearly a quarter of workers employed in the production of electronic goods are working under conditions of forced labor. Non consumer-facing companies may still come under scrutiny as business partners of consumer-facing companies. In May this year, US Customs and Border Protection seized imports from PureCircle, a Malaysia-based supplier of sweeteners to companies such as Coca-Cola, under a new law banning imports of products produced with forced labor. News of the seizure reduced PureCircle’s market value by almost US$100 million, and forced Coca-Cola to respond to the issue.
The US Customs legislation is just the latest in a growing number of regulations on this issue. As many as 62% of companies in the MSCI ACWI Index will be subject to the UK Modern Slavery Act, the California Transparency in Supply Chains Act, or the proposed Business Supply Chain Transparency on Trafficking and Slavery Act in the US.
In order to make informed investment and active ownership decisions, investors need access to information on how well companies are addressing forced labor risks. However, the information provided by many companies is patchy at best. This is worrying considering the size of corporate supply chains. Global corporations impact millions of workers through their supply chains – for example, Apple alone reported that since 2008 its suppliers have trained over nine million workers.
Benchmarking companies can help fill this gap. KnowTheChain, an initiative of Humanity United, in partnership with Business & Human Rights Resource Centre, Sustainalytics and Verité, has ranked the policies and practices of 20 global information and communications technology (ICT) companies to address forced labor and human trafficking in their supply chains. This will be followed by sector benchmarks in the food and beverage, and apparel and footwear sectors later in 2016.
KnowTheChain has already led to increased corporate disclosure, supporting investors’ decision-making. By engaging companies ahead of the ICT benchmark analysis, many companies increased their disclosure, and others are using the benchmark to evaluate gaps in their policies and practices. By creating a race to the top, KnowTheChain hopes to drive increased corporate transparency and action on forced labor over time. This allows companies to understand how they are doing in comparison to peers, and provides investors information on, say, how IBM and Microsoft compare to each other (with 57/100 in the ICT index, Microsoft is scoring 12 points higher than IBM).
Benchmarking can influence companies in all regions. While Asian ICT companies on average scored lower than their Western peers, many responded during the engagement process and disclosed additional information. Benchmarking is also used in countries such as China to encourage cities to improve air and water quality.
More specifically, investors can use the KnowTheChain benchmarks to:
- Identify which companies in their portfolio are taking appropriate steps to address risks and comply with legislation (and which don’t);
- Identify company-specific gaps and opportunities for improvement;
- Understand which policies, processes and practices a company should have in place to address forced labor – including in areas such as recruitment practices, worker empowerment, and purchasing practices.
Investors themselves can also help accelerate change, and fill the information gap they are currently facing by engaging investee companies on their efforts to address forced labor in the supply chain.
With an average company score of 39/100 in the ICT benchmark, much improvement is still needed across the sector. Even among 20 of the largest global ICT companies, six either did not have a public supplier code of conduct in place, or the code did not require suppliers to adhere to international standards prohibiting forced labor.
That said, some companies are taking notable action. For example, Apple has ensured that more than US$25 million in recruitment fees were paid back to supply chain workers. HP reduces high-risk purchasing practices by establishing multi-year agreements with its major suppliers. Its Foreign Migrant Worker Standard requires that supply chain workers are employed by the factories rather than agencies, reducing the risk of exploitation.
KnowTheChain’s ICT benchmark demonstrated that across the sector, awareness of forced labor is already high. The benchmark can be a tool for investors to leverage this awareness, encourage companies to take action and improve disclosure and practices, and to make better decisions and safeguard the value of their investments by reducing the risk of exposure to forced labor.
Felicitas Weber is KnowTheChain Project Lead, Business & Human Rights Resource Centre. Prior to joining KnowTheChain in May 2016, she worked for the ESG Engagements team at the UN supported Principles for Responsible Investment (PRI). In her role, Felicitas was responsible for managing the PRI’s investor-company engagements on social issues.
 ShareAction 2016 – “Investor briefing June 2016: Forced labour: What investors need to know”
 ShareAction 2016.
 MSCI (2015) – “Slaving away in hiding”.
 The New York Times: Edward Wong (7 July 2016): “China to Pillory, or Praise, Cities Based on Water Pollution”.