Business And Human Rights – Analysing Modern Slavery Risks In Portfolio Companies: Practical Considerations For Investors – Corporate/Commercial Law

In May 2021, the International Federation for Human Rights (FIDH) released a report outlining a series of tools investors can use to identify and address human rights risks, including modern slavery risks, in their portfolio companies. The report includes a sectoral analysis of modern slavery rights across four sectors – tourism, construction, food and drink, and textiles and footwear – and adds to the growing toolbox of ESG resources available to investors (see, for example, our Asset Managers briefing: Controlling Non-Financial Risks – The Evolution of Human Rights Due Diligence).

The sector analysis shows that there is still a significant gap between companies’ human rights policies and their practices. Companies in certain sectors (e.g. tourism and construction) have demonstrated awareness of some key human rights concepts, including human rights due diligence, but also a general lack of appropriate integration of these concepts into corporate governance and supply chain practices. In other sectors (e.g. food and drink, textiles and footwear), there was an apparent trend of gaps between commitments to modern slavery and the risk mitigation measures adopted by parent companies. The report suggests that it is not enough that investors simply evaluate policies, codes of conduct or other commitments at face value; investors should “assess the congruence of policies and practices“- which requires much more analysis.

Each sector faces its own set of human rights risks. For example, in tourism unrealistic work targets, unfair dismissals and difficulties accessing unions are more common. In construction, precarious working conditions, human trafficking and unpredictable wages are more acute problems. In food and drink, there are increased links to child labor and exposure to chemicals and pesticides. In the textile industry, greater risks are presented by unacceptable working conditions, long hours and a wage below the minimum wage (see our recent blog post on a proposal for a living wage in the clothing industry). There are also lessons here beyond the four profiled sectors.

Human Rights Risks – Practical Considerations for Investor Decision Making

To help investors analyze the policies and commitments of potential holding companies and the congruence between state policies and practical impacts, FIDH has identified a list of cross-cutting areas that investors should pay attention to when analyzing how companies approach the risks of modern slavery, namely:

1. Location – Investors should analyze the locations of a company’s operations to identify high-risk countries (e.g. countries with weaker labor laws) and, in this context, assess the company’s commitments to human rights and the effectiveness of its human rights due diligence processes.
2. Supply chains – Investors should consider whether the companies in their portfolio are mapping their supply chains, tracking commodities and disclosing data. Investors should also look for evidence showing how companies are actively trying to mitigate the risks of forced labor along the supply chain (for example, by applying company standards across the entire value chain). ).
3. Human rights commitments – Investors should think about how companies put in place effective measures to implement their human rights commitments and prevent and mitigate the risks of modern slavery. The report criticizes preventive and mitigation measures based exclusively on audits and certifications – “Certifications and audits should not be the only measure (sic) implemented by companies to ensure that human rights are respected throughout the supply chain “. Investors should seek to understand how companies work with suppliers on the ground to find more effective, participatory and sustainable solutions to human rights risks.
4. Reflection on own business practices – Investors should consider whether the company reflects on its own purchasing practices and business procedures in assessing human rights impacts. This reflects the analysis of a recent report released by the American Bar Association, which proposed new standard contractual clauses to protect workers in international supply chains that incorporate factors such as human rights due diligence. human rights, responsible sourcing and purchasing practices and stakeholder remediation (see our blog post).
5. Engagement with civil society – Investors should consider whether the companies in their portfolio engage in meaningful ways with organizations that can provide support and advice (such as civil society organizations).
6. Complaints Mechanisms – Investors should think about the access to justice mechanisms made available by the companies in their portfolio and ensure that the complaints mechanisms are available and effective (see more in our blog article).
7. Ethical recruitment – Investors should look for indicators that show how companies have implemented their policies and practices on the ground as part of the recruitment process, especially if recruitment is carried out across borders.

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