Business and Human Rights – Analysing modern slavery risks in portfolio companies: practical considerations for investors

In May 2021, the International Federation for Human Rights (FIDH) published a report setting out 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 in four sectors – Tourism, Construction, Food and Beverage, and Textile and Footwear – and adds to the growing toolkit of ESG-related resources available to investors (see, for example, our briefing Asset Managers: Mastering Non-Financial Risk – The Evolution of Human Rights Due Diligence).

The sectoral analysis shows that there is still a big gap between companies’ human rights policies and their practices.  Companies in some sectors (e.g. Tourism and Construction) demonstrated an awareness of certain key human rights concepts, including human rights due diligence, but also a general lack of proper integration of such concepts into corporate governance and supply chain practices. In other sectors (e.g. Food and Beverage, Textile and Footwear), there was an apparent trend of discrepancies between modern slavery commitments and risk mitigation measures adopted by parent companies.  The report suggests that it is not enough for investors to simply assess the policies, codes of conduct or other commitments at face value; investors should “assess the congruence of the policies and the practices” – which requires a much more extensive analysis.

Each sector faces its own set of human rights-related risks.  For example, in Tourism, unrealistic working targets, unfair terminations and difficulties accessing unions are more commonplace. In Construction, precarious working conditions, human trafficking and unpredictable wages are more acute issues. In Food and Beverage, there are heightened links to child labour and exposure to chemical and pesticides.  In Textiles industry, greater risks are presented by unacceptable working conditions, long hours and below minimum wage pay (see our recent Blog post on a proposal for a living wage in the garment industry).  There are lessons here also beyond the four profiled sectors.

Human rights risks – Practical considerations for investor decision-making

To assist investors in analysing the policies and commitments of prospective portfolio companies and the congruence between states policies and practical impacts, the FIDH identified a list of transversal areas that investors should pay attention to when analysing how companies address modern slavery risks, namely:

1. Location – Investors should analyse the locations of a company’s operations to identify high risk countries (e.g. countries with weaker labour laws) and, in that context, assess the company’s human rights commitments and the effectiveness of its human rights due diligence processes.
2. Supply Chains – Investors should examine whether their portfolios companies are mapping their supply chains, tracing raw materials and disclosing the data. Investors should also seek evidence that shows how companies are actively trying to mitigate the risks of forced labour throughout the supply chain (e.g. by cascading company standards throughout the whole value chain).
3. Human Right Commitments – Investors should consider how companies put in place effective measures to implement their human rights commitments and prevent and mitigate modern slavery risks. The report is critical of preventative and mitigating measures based exclusively on audits and certifications – “Certifications and audits should not be the solely (sic) measure put in place by companies to make sure that the human rights are respected throughout the supply chain”.  Investors should look 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 if the company reflects on its own buying practices and business procedures in assessing human rights impacts. This reflects analysis in a recent report published by the American Bar Association, which proposed new Model Contract Clauses to protect workers in international supply chains that “bake in” factors such as human rights due diligence, responsible sourcing and purchasing practices, and stakeholder remediation (see our Blog post).
5. Engagement with civil society – Investors should determine whether their portfolio companies meaningfully engage with organisations that can provide support and guidance (such as civil society organisations).
6. Grievance mechanisms – Investors should consider what access to justice mechanisms are made available by their portfolio companies and ensure that grievance mechanisms are available and effective (see more in our Blog post).
7. Ethical Recruitment – Investors need to 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 done cross-border.

Read more of our coverage on Business and Human Rights.

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