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We must invest to eliminate slavery

BY SUZY YOON | FRIDAY, 14 JAN 2022   4:24PM

The financial sector has a sad history of association with the business of slavery. A few hundred years ago, financial instruments were utilised to support transatlantic trade for items such as sugar, cotton and most tragically, slaves.

Merchants found the trade across the Atlantic, while lucrative, was slow and unreliable.  As a solution, they issued credit notes that could travel relatively quickly and safely across the seas in exchange for the 'goods', including slaves. In addition, to expand their business, plantation owners would borrow money by using slaves as collateral.

Fast forward to today and while such practices are considered outrageous, 'modern' forms of slavery still exist along operational and supply chains. Modern slavery is estimated to be worth $200 billion a year. It occurs in every region of the world, with at least 40 million victims enslaved worldwide, according to the International Labour Organization - including here in Australia. In an effort to eradicate this serious global issue, international organisations and governments are starting to work together to stamp out the practice, leading to the adoption of Australia's Modern Slavery Act (the 'Act').

The objective of the Act is to reduce the "risk to people"; however, addressing modern slavery can also reduce the risks to the value of investments. Modern slavery risks can have impacts on reputation and brand, and also cause disruptions to business operations.  All these can have material financial implications, which companies will need to manage with appropriate policies and strategies.

We expect that companies that manage ESG risks such as modern slavery, are likely to deliver better social and financial outcomes in the long run. It is also important to highlight that it is in the best interests of investors to think about modern slavery risks given the overall benefits of the eradication of modern slavery through strengthened social systems on which capital markets and their investments rely.

Given this legislative requirement, we can expect an increased focus on private capital and investments tackling sustainability issues such as modern slavery. Investment managers ('managers') and asset owners can play a pivotal and influential role in how global capital can be utilised to confront modern slavery risks.

The Act requires impacted entities to report on their operations and supply chains. Where a reporting entity invests in an external manager, the entity must outline how it works with the manager in identifying any risks. This includes assessing the nature of the investments and ensuring these managers consider modern slavery risks when managing investments on their behalf.

Consequently, many Australian managers have undertaken an assessment of potential modern slavery risk exposure across their operations and investment portfolios.

The Global Slavery Index developed by Walk Free estimated that $470 billion of at-risk products are imported by G20 countries each year. The industries identified as having the highest supply chain risks to modern slavery are agriculture and fishing, apparel, industry construction and building materials, mining and electronics.

Modern slavery is also a risk in relation to the lending, investing, advisory and financing activities of financial services companies. Financial institutions should also be aware of the potential for modern slavery in their outsourcing arrangements, especially internationally, through services such as catering, cleaning, office construction and hardware manufacturing.

The challenge with identifying modern slavery risks in portfolios comes down to the far-reaching and complex nature of supply chains across varying sectors. Supply chains can be broken down into "tiers", based on the closeness of a company to the final product or service. Supply chains of goods and services involve different stages of production and are typically described in a tier system. In these tiered supply chains, Tier 2 companies supply goods and/or services to companies in Tier 1, while Tier 3 companies supply goods and/or services to Tier 2 and so forth.

While the Act does not set a minimum requirement for how many tiers of the supply chain must be examined, modern slavery risks are generally found deeper down the supply chain tiers. Managers that are proactive in combatting modern slavery must look beyond tiers 1 and 2 into tiers 3 and 4 and beyond, where workers are most vulnerable to exploitation.  The risks of modern slavery are particularly prevalent at the lower tiers of global supply chains, particularly in developing countries where there is less regulation, oversight or enforcement.

JANA recognises that it is in a position to greatly influence positive change for the millions of victims of modern slavery by explicitly engaging with managers in relation to how they factor modern slavery risk into their investment processes.  We expect our managers to, at minimum, comply with the relevant regulations in their jurisdictions, understand modern slavery issues and risks and undertake the appropriate measures to combat those risks, such as diving deeper into their supply chains.

JANA developed a modern slavery questionnaire for all our managers to complete annually.  The questionnaire was developed to understand how each manager considers modern slavery risks at both the organisational level and as part of their investment activities, to manage modern slavery risks. We engage with managers if improvements are required and expect them to engage constructively with their investee companies to effect positive change.

The inaugural questionnaire identified that all JANA's managers domiciled in countries with explicit legislative reporting requirements fulfilled their obligation to produce a modern slavery statement.  We also saw a few managers voluntarily submitting modern slavery statements, despite not being a required reporting entity under the Act.  This is indicative of the importance these managers are placing on the risks of modern slavery and their commitment to combat it.  Some managers have also developed proprietary models to assess modern slavery risk on their investment portfolios and utilise this as a tool for engagement with their investee companies.

JANA has also recently engaged with Fair Supply, a specialist modern slavery data provider, to undertake a modern slavery risk analysis of our operational supply chains and our implemented investment trusts.  Fair Supply analyses our holdings through their proprietary technology, which links global trade flow data and international standards to identify any potential risk areas.  We will be utilising the information as an additional data source and tool for engagement with our managers.

If risks are uncovered, prudence is required in addressing them. Divesting from investee companies or terminating supplier relationships may not generally lead to a systemic reduction in modern slavery risks.

A better outcome is when engagement leads to changes that lessen and eventually discontinue the risks encumbered upon the most vulnerable victims of modern slavery.

We would expect divestment to occur when engagement does not lead to any practical changes, although there may also be some situations where the risk is so high that immediate action is warranted.

We don't want to encourage a mere adherence to anti-slavery regulations, but instead a genuine commitment to reduce and eradicate modern slavery and exploitation of human rights. Investments can play a significant role in reducing the "risk to people", the primary objective of the Act.

It is important for the industry to work cooperatively to administer the changes necessary in combating modern slavery across investment portfolios, with the aim of finally consigning slavery to the books of history.