Modern slavery: confronting the Lernaean Hydra

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Articles by Efua

Efua Irabor

Research Associate

21 June 2024

In 2013, Rana Plaza, an eight storey clothing factory in Bangladesh, collapsed, killing 1,134 workers. This event was a tragic reminder to society in general and to shareholders in particular of the risks – including human rights and labour risks – embedded in extended supply chains.

The disaster catapulted the S in ESG into the spotlight. These social factors include human capital, education and training, fair pay, inequality, working conditions, labour rights, health and safety, community engagement and many more.

The pernicious evil of modern slavery takes many forms. The most prevalent are forced labour, human trafficking and bonded labour.

Forced labour is any work or services participants are forced to perform against their will, often under the threat of violence. Human trafficking refers to the use of violence, threats or coercion to transport, recruit or harbour people in order to exploit them for a wide range of purposes such as forced prostitution, labour, criminality, marriage or organ removal. Bonded labour is the world’s most widespread form of slavery: the Global Estimates of Modern Slavery (2022) report estimates it has ensnared almost 28 million people worldwide. Under bonded labour, people trapped in poverty may borrow money or hand over personal assets in exchange for a job. They then become locked into a fixed-period contract to pay off the loan or regain their assets, often working in appalling conditions at the mercy of employers.

Modern slavery has implications for society and economies at large. Furthermore, the possible health consequences, limited educational opportunities and lack of regulation often spill over to victims’ families and wider communities, binding them in a cycle of slavery which can last for generations.

But it can also have severe implications for a company’s market value, beyond the reputational harm. Companies found to have used forced labour may experience practical problems, such as sudden supply chain disruptions as they look for alternative sources, leading to higher costs and delays. Moreover, they may face lawsuits from workers in the supply chain seeking redress for poor pay and conditions.

Here are just two notable recent examples. In February 2024, Porsche, Bentley and Audi cars were impounded in US ports after a supplier to their parent group, Volkswagen, discovered a Chinese subcomponent in the vehicles that breached laws against forced labour. In 2022, workers from a Thailand-based clothing factory lodged a case against Tesco in the UK, alleging effective forced labour, as they were working 99 hour weeks for low pay in appalling conditions. The UK’s Modern Slavery Act 2015, one of many such laws and regulations globally, allows legal cases to be lodged against companies in their country of domicile.

Ruffer does not tolerate modern slavery, in any form, in its supply chain or its business activities.

As part of our ESG due diligence and stewardship processes, we consider modern slavery as one of many human rights and labour-related risks that require policy, oversight, management and reporting. However, investigating modern slavery in supply chains is challenging due to intricate and lengthy supply chains, our resource constraints, companies’ concealment efforts and the various forms modern slavery takes, each requiring a distinct analytical approach.

Ruffer relies upon data and insights provided by MSCI ESG Research and uses the SASB frameworks to identify material factors which may impact company value. Companies’ annual and sustainability reports provide insight into if and how companies consider modern slavery as part of their business operations, including whether they see the issue as a material risk.

We also engage with companies where necessary on this topic. For example, when we picked up on a report by an NGO which claimed Sony was using forced labour in its supply chain, we sought a response from the company. Sony provided reassurance by stating it had audited its suppliers and found no evidence of unacceptable practices – which does not mean with 100% certainty that its supply chain is free of modernn slavery.

Similarly, when MSCI downgraded its rating on Volkswagen for its alleged involvement in hiring Uyghurs as forced labour in China, we questioned the car maker. We have long held Volkswagen in the portfolio and have engaged with the company over many years. This dialogue continued in 2023, when we met with Volkswagen’s investor relations team to voice our concerns about governance and its extensive supply chain. We discussed at length the responsible sourcing of critical raw materials and how Volkswagen keeps its supply chain monitored.

With over 60,000 suppliers, Volkswagen has a certification process for all of them but focuses its efforts on those providing most of the purchasing volume. We were concerned about ongoing allegations of the use of forced labour, specifically the hiring of ethnic minorities in China through so-called labour transfer programmes. In early 2023, MSCI deemed the issue a failure to comply with the UNGC, which can have negative ramifications. Although Volkswagen confirmed an internal review had been conducted, MSCI always requires a third party audit before revisiting its assessment. Given China’s strategic importance to Volkswagen, the company is sensitive to maintaining good relations with the Chinese authorities and so is unlikely to submit to a third party assessment. We discussed the company’s wider relationship with MSCI and other ESG ratings agencies and its intention to provide enhanced disclosure.

The gold standard for company activities related to modern slavery emphasises proactiveness and proper procedure. Nevertheless, it is important to recognise the difficulty in regulating and controlling modern slavery, given varying labour laws and standards across the world, globalisation and the lack of a clear chain of custody on intermediate products. Rising international regulatory pressure, including making company directors liable for malpractice, should aid moves towards ending modern slavery.

We recognise that addressing modern slavery through portfolio holdings is a challenge for investors. However, each of our engagements on forced labour in 2023 helped to sharpen our due diligence process, and we look forward to enhancing our capabilities in this area as we further expand our social metrics.

Articles by Efua

Efua Irabor

Research Associate

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Modern slavery: confronting the Lernaean Hydra