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A recent survey by The Economist found that 71% of 853 top executives believe their companies’ responsibility to protect human rights extends beyond compliance with labor laws. Yet, similar companies have few Key Performance Indicators that correlate with how they address forced labor in their supply chains. A recent survey by CERES found that only 40% of 600 top companies had a policy that explicitly prohibits suppliers from using forced labor.

Unlike environmental issues, few companies have instituted measurable practices that relate to social issues to which they could be connected. For many companies, quantifying improvements on environmental targets, such as a reduction of greenhouse gas emissions, correlate directly to cost reduction and can be easily measured. Measuring social indicators is still an extremely nascent effort, which contributes to weak associations between improving labor conditions and the financial benefit for business to do so.

When measuring their social impact, companies are stuck in an infinite loop, where they don’t manage what they cannot measure and they cannot measure what they aren’t managing. However, the emerging trend of regulated transparency may break this cycle.

In 2012, the little-known and underreported California Transparency in Supply Chains Act took effect. It required 2,600 companies doing business in the state, with global sales of over $100 million and classified as retail sellers or manufacturers, to report on how they manage their supply chains to prevent slavery. Today, the law is influencing similar reporting efforts around the world. Since 2012, three other transparency and reporting measures have been introduced or have passed: the UK Modern Day Slavery Act, the EU Directive 2013/34/EU, and the US Federal Business Supply Chain Transparency on Human Trafficking and Slavery Act.

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Sustainable business practices are based on the concept of resilience. The ability to create economic value over the long term requires companies to understand the full costs and opportunities of their activities so they can effectively manage their risks. Companies are increasing their focus on ESG measures as a result. However, measuring the impact of social issues is particularly difficult – for now.

Human trafficking is a pervasive global issue rarely discussed during company board meetings, until recently. According to the International Labor Organization, this crime contributes nearly $150 billion in illegal profits to the global economy each year. Any multinational company with a globalized supply chain has some degree of exposure to this human trafficking. Recent reports of trafficking have disrupted the production of seafood caught in Thailand, palm oil produced in Indonesia, and electronics manufactured in Malaysia. For companies like Costco, implicated in sourcing shrimp from Thailand, or Flextronics, associated with abusive conditions in Malaysia, the financial and reputational impact of these disruptions can be significant.

Today, a single product may include components manufactured around the world. To compete in a globalized world, multinationals forgo direct oversight of their entire production in favor of outsourcing and contracting, often to locations or suppliers where little is known and less is managed. With such globalized production, it is not surprising that multinational companies like Costco can be as outraged and incensed as the general public when they learn that slave labor occurs in their supply chain.

A recent survey by The Economist found that 71% of 853 top executives believe their companies’ responsibility to protect human rights extends beyond compliance with labor laws. Yet, similar companies have few Key Performance Indicators that correlate with how they address forced labor in their supply chains. A recent survey by CERES found that only 40% of 600 top companies had a policy that explicitly prohibits suppliers from using forced labor.

Unlike environmental issues, few companies have instituted measurable practices that relate to social issues to which they could be connected. For many companies, quantifying improvements on environmental targets, such as a reduction of greenhouse gas emissions, correlate directly to cost reduction and can be easily measured. Measuring social indicators is still an extremely nascent effort, which contributes to weak associations between improving labor conditions and the financial benefit for business to do so.

When measuring their social impact, companies are stuck in an infinite loop, where they don’t manage what they cannot measure and they cannot measure what they aren’t managing. However, the emerging trend of regulated transparency may break this cycle.

In 2012, the little-known and underreported California Transparency in Supply Chains Act took effect. It required 2,600 companies doing business in the state, with global sales of over $100 million and classified as retail sellers or manufacturers, to report on how they manage their supply chains to prevent slavery. Today, the law is influencing similar reporting efforts around the world. Since 2012, three other transparency and reporting measures have been introduced or have passed: the UK Modern Day Slavery Act, the EU Directive 2013/34/EU, and the US Federal Business Supply Chain Transparency on Human Trafficking and Slavery Act.

By mandating disclosure, these measures place an emphasis on supply chain social management practices, extending companies’ responsibility into their supply chain operations. This trend towards transparency should result in companies extending their oversight of their supply chains deeper into the production process of the products they sell. It should also make it easier for interested stakeholders to compare actions taken by companies among industry peers, companies with similar market size, or those with analogous supply chains.  The increase in accessible data will improve the ability of investors to analyze and compare practices of possible investments.

At Humanity United we are working to make it easier for companies and investors to identify strong practices that go beyond simple reporting or compliance requirements. Our KnowTheChain.org unit provides insights, based on compliance analysis, and endeavor to identify resources that help companies go beyond compliance to appropriately manage their risk.

Some environmental indicators correlate directly with efficiency and cost reduction. When a company reduces its carbon footprint, it likely also reduces its costs. Unfortunately, direct correlations among social indicators are currently weak, if they exist at all.  In fact, identifying social practices that correlate to cost reduction will take time and research. While transparency regulations alone will not lead to such discoveries, they will make it easier to determine if specific practices can be correlated to better business decisions.

Without a robust set of data or multiple points of comparison, it is difficult to identify the efforts that might be connected to improved company business practices.

Regardless, by the end of 2016, nearly every multinational company will be required to comply with at least one transparency regulation, either in the United States or Europe. The trend towards annual reporting requirements provides investors interested in comparing companies on social risk with unique insights previously unavailable to them. Alone, these regulations cannot bridge the gap that exists between measuring the “environmental” component in ESG and the “social”, but they do provide a path towards improved measurement and reporting. By breaking the vicious cycle of underreporting and under-management, these regulations can begin to inform investors who have not previously had the tools to measure and compare practices.

Ed Marcum is Vice President for Investments at Humanity United. Previously he was the deputy executive director of World Links, where he oversaw programs focused on improving educational outcomes and economic opportunities for youth in developing countries through the use of information and communications technology.

Kilian Moote is a global expert in supply chain transparency and legal disclosure. He is the Project Director for KnowTheChain, a Humanity United project dedicated to helping businesses and investors understand and address labor abuses within their supply chains. In this role he oversees all aspects of KnowTheChain’s strategy, publications, and business engagement.

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