In the ESG world, there is as much focus as ever on results.
Transparency on objectives and outcomes is requested by the Financial Reporting Council in Stewardship Code reporting, and clients want to see results and not just warm words in policies. Such a focus on transparency is welcome but how does it help when it comes to engaging with systemic issues that are not so easy to measure and results and outcomes that are hard to come by.
As far as systemic issues go, modern slavery is a big one. Our organisation has a long-standing affiliation with groups seeking to end such exploitation of people, and of our leading engagement work on the topic. But at a certain point it becomes a little awkward – how long is too long to have been engaging on a single issue? Shouldn’t we have made more progress by now?
The ‘S’ issues are the really tough nuts to crack in ESG, at least in terms of the theory of change required. Climate change is the defining issue of our times, but at least the science on its causes is clear. In modern slavery the root causes are many and varied and the involvement of the criminal ‘community’ makes policing, regulation and company responses an increasingly frustrating form of ‘whack-a-mole’. Which is why investors here must also grapple with policy makers if they hope to deliver the kind of outcomes fit to grace a Stewardship Code report.
It’s almost 10 years since a group of investors played an important role in getting transparency in supply chains legislation included in the Modern Slavery Act; 7 years since we took our first steps in challenging reporting at three FTSE100 companies; and 5 years since the Votes Against Slavery coalition was formed – bringing together investors to oppose company reporting falling below standards set by government, using the vote on the report and accounts as the main lever. In truth we never thought we would still be talking about this issue.
In 2020, we found 22 FTSE350 companies non-compliant with Section 54 disclosure requirements of the Modern Slavery Act (2015). Far from this successful engagement being a mopping up exercise, the next year saw 61 listed companies falling short. It was – and is – hard to fathom; why do companies still seemingly fail to prioritise action on this issue?
Perhaps it’s best to restate the robust business case for fighting modern slavery. As the Stewardship Code points us towards working on the big, cross cutting issue, modern slavery is a $150m a year illicit trade affecting at least 50m people. Working back from those figures, whilst some companies might be more exposed than others, all sectors are potentially affected in some way – whether it be through lower paid contract staff in offices or the supply chains of the digital devices that define the new hybrid working age.
All companies are potentially exposed which means all companies can cascade down their supply chain higher expectations of due diligence and assessment. Supply vulnerability is a crucial factor for so many businesses – dealing with modern slavery addresses that issue and has the potential to unleash the lost productivity of millions of people. Action on modern slavery remains the ultimate win/win, quite apart from the unarguable moral case.
A recent report by Justice and Care and the Centre for Social Justice highlights the need to act fast to address new and emerging forms of modern slavery, including ‘cuckooing’ (where criminal gangs target vulnerable people, gradually taking over their property for criminal purposes and exploiting their weakness.
But it also calls out investors and business, asking them ‘to shift the balance of risk and reward on modern slavery.’ Compliance with the reporting requirements of the modern slavery Act was always the bare minimum. In an increasingly fragmented world where supply chains are ever more vulnerable, now is the time for a new drive towards eradicating exploitation, for the sake of the vulnerable people affected and the risk it embodies to global stability.
Investors must also ask how they can escalate involvement on engagement with big issues like modern slavery – evidence of escalation being another key ask of stewardship regulators. Here we need to be aware of the unintended consequences of the much-needed crackdown on greenwashing which was seen throughout 2022. We cannot let the abuses of the few stem the passion of the many.
It’s quite right we should make only ESG claims that are backed by rigorous evidence and involve all the correct caveats – because we need to make sure we are presenting our investment products in the truest light. But there is a risk that we become too timid, too afraid of doing or saying anything in the public sphere. It would be an own-goal if the investment management industry failed to escalate engagements or work with policy makers in fear of being called out for over-reach.
The moment we live in calls for renewed effort on all aspects of ESG – from climate and modern slavery all the way to governance. Votes Against Slavery has had a positive effect, but was born of an experiment – trying out a theory of change we weren’t sure would work.
Creativity and innovation aren’t often words you see much in the typical ESG exam syllabus, but impact and outcomes will be scarce without them. As the spiritual leader Bill Johnson once said – “if you live a cautious life, people will call you wise – but you wont move many mountains”.
