How Prepared are Australian Companies for the Modern Slavery Act?

Posted on October 30, 2018

Enrico Colombo
Enrico Colombo
Associate Analyst, Research Products Sustainalytics

Australia is being scrutinized for lagging on climate action and for a string of scandals in its financial sector, but the country will soon be a leader in fighting human rights abuses and modern slavery practices, as it is set to become one of few countries in the world to adopt a historic Modern Slavery Act (MSA).

This article addresses the importance of the issue within the region and internationally, explores how well Australian companies are prepared to address the MSA requirements, and what these requirements mean for companies and investors.

The Modern Slavery Act in brief

Following a 2017 parliamentary inquiry and landmark report “Hidden in Plain Sight,” a Modern Slavery Bill is currently under debate. The Bill is expected to pass by the end of 2018, after similar legislation was passed in June in the state of New South Wales.

In summary, the MSA would require approximately 3,000 entities with AUD 100 million (USD 71 million) in revenues to provide information about potential modern slavery risks in their operations and supply chains, as well as the actions taken to address these risks. A dedicated Business Engagement Unit in the Department of Home Affairs would promote best practices, provide training and support for companies, and administer a central repository of the Modern Slavery statements (see key features and requirements here).[1] Government entities will also be required to report under the Act.

While there have been calls for the bill to introduce penalties for non-compliance with reporting obligations and establish a compensation fund for victims, the legislation is a significant step forward and will likely be strengthened over time.

Regional and international context

Slavery and conditions akin to it, including forced labour, debt bondage, human trafficking and forced marriage, often arise from the exploitation of vulnerable people and communities.[2]

According to the International Labour Organization and the Global Slavery Index by the Walk Free Foundation, at any given time in 2016, an estimated 40.3 million people in the world were in modern slavery,[3] their work worth the equivalent of USD 150 billion in annual profits – more than the 2017 combined profits of Apple, Samsung, Toyota, Microsoft and Facebook.[4] [5]

Subjecting a person to slavery or conditions akin to bondage, breaches fundamental human rights and is a crime under international law as well as most national jurisdictions, including Australia. (Learn more about the legal framework from Anti-Slavery Australia) Other legislative initiatives around the world addressing modern slavery include: the UK Modern Slavery Act (on which the Australian bill is modelled); some provisions of the US Tariff Act (banning import of forced labour goods) and US Dodd-Frank Act (conflict minerals reporting); the California Transparency in Supply Chains Act; a European Union regulation on conflict minerals; and human rights due diligence laws in France and the Netherlands, and under consideration in Germany and Switzerland.

Are Australian companies prepared for the MSA?

Our research shows over half of the top 300 Australian companies currently do not publicly disclose social and labour standards for suppliers. Codes of conduct signal transparent commitments from companies and are often the basis for implementing targeted measures to manage risks and impacts.

Modern Slavery:

hiding in plain sight

  • 24.9 million people experience forced labour and 15.4 million are in forced marriages
  • 16 million people are exploited in the private sector
  • One in four victims are children
  • Two-thirds of slaves, or about 25 million people, are in the Asia Pacific region
  • An estimated 15,000 people in Australia are in slavery

Scope of Supplier Standards Among Top Australian Companies (Percentage of n=282 companies)

Figure 1 – Assessment of indicator S.2.1 Scope of Social Supplier Standards; n. of companies = 282
(Source: Sustainalytics ESG Research)

One-quarter of companies disclose vague statements, and only one in 20 companies has adopted and communicated comprehensive policies addressing all relevant issues and referencing international conventions and frameworks.

Australian companies show the weakest supplier requirements compared to companies in other countries with legislation like the proposed MSA. Only one in five companies has standards that we consider at least adequate, compared to one-third in the UK and France, and to over half in the Netherlands.

Comparison of Supplier Standards in Australia, UK, France and the Netherlands (as a percentage)

Figure 2 – Comparative analysis of indicator S.2.1 Scope of Social Supplier Standards for companies based in Australia, UK, France and the Netherlands (Source: Sustainalytics ESG Research)

Companies with policies and systems in place may be better prepared to face the reporting and transparency requirements of the upcoming MSA, and more importantly to align with the spirit of the law, which is to take concrete actions to eradicate slavery.

Companies in sectors such as retailing (apparel, electronics, food and department stores), agriculture, food processing and telecom have the highest exposure to human rights issues in their supply chains. A closer look at these 40 Australian companies reveals the majority currently do not report on supply chain monitoring and due diligence. Only a handful report on having implemented programs to systematically consider suppliers’ social performance during procurement, audit and engage with suppliers, and provide grievance mechanisms. Notably, no company in our coverage provides evidence of having a social supply chain management system that extends to and is applied to tier-two suppliers and beyond (which is best practice). This is noteworthy because, in many cases, controversial practices and illegal abuses are nested in the deeper levels of the value chain.

Strength of Supply Chain Management

Figure 3 – Assessment of indicator S.2.2.2.1 Supply Chain Management; n of companies=41
(Source: Sustainalytics ESG Research)

Additionally, our Controversy Research has captured an increasing number of social incidents (such as human rights, labor standards, and health and safety, etc.) for Australian companies in recent years (see graph below). Patterns in incidents, such as their number, frequency and severity, can provide useful signals to companies and investors. For example, since 2015 Sustainalytics has maintained a Category 3 assessment (Category 5 being the most egregious) of a significant controversy involving supply chain-related incidents at Woolworths. Woolworths is now facing a shareholder resolution on the issue at its upcoming AGM in November 2018.

Number of Social Incidents

Figure 4 – Number of incidents 2013-2017 with tags such as: Human Rights, Health & Safety, Labour Relations, Discrimination & Harassment etc. (Source: Sustainalytics Controversy Research)

Implications for investors

If passed, the reporting requirements of the MSA would likely come into effect in July 2020, giving companies time to implement policies, processes and procedures in their operations, and to adapt and strengthen existing ones. Failure to adequately manage modern slavery issues would not only result in reputational damage, but may also have operational impacts and pose legal risks (for example for failing to conduct appropriate due diligence, remedy victims and implement corrective actions). Recurrent issues and unresponsiveness from a company may also trigger shareholder resolutions as well as regulatory actions.

It remains unclear whether investors will be required to report on modern slavery in their portfolio holdings, and if they do, to what extent. Either way, to mitigate their own reputational, regulatory and financial risks, investors may want to take a closer look at their portfolios and engage with companies that have faced previous incidents and that are exposed to modern slavery risks. On the positive side, Australian and global investors can leverage their expertise and lessons learned to meaningfully and constructively engage with companies across regions.

This is a watershed moment for businesses and investors as they have a key role to play in fighting modern slavery. The Australian MSA will likely be a test on whether they are up to the task.

Recent Content

scope 3 emissions shareholder voting

Investors Seek Meaningful Scope 3 Emissions Targets to Evaluate Climate Transition Plans

Climate concerns continued to dominate proxy voting in the 2022 proxy season. With more clarity on sectoral commitments required to achieve the global net zero goal, shareholders’ requests have become noticeably more specific. A larger number of resolutions asked companies to adopt and report on emissions reduction targets and transition plans that reference the latest forward-looking guidance.

Biodiversity COP15 Sustainalytics

Post-COP15 Outlook: Evolving Investor Responsibilities in Biodiversity

Awaiting COP15’s Global Biodiversity Framework negotiation outcomes, financial market participants could face new regulatory pressure sooner than expected to integrate biodiversity assessment into their investment, decision-making processes.

2023 Outlook ESG

In 2023, Expect Europe’s Asset Managers to Gain Ground on ESG Regulations, Morningstar Sustainalytics President Says

Sustainalytics at COP15 Biodiversity Conference

Danish Delegation Engages Sustainalytics’ Biodiversity Expert, Enabling Front Row Access to COP15 Negotiations

Finance Day within the U.N. Biodiversity Conference (COP15) is fast approaching, and Morningstar Sustainalytics’ team members will be in attendance, each focusing on different investor biodiversity considerations related to active ownership.