There is a growing recognition of business risks related to modern slavery within a company’s operations and supply chains, as well as increasing regulatory expectations. As a result, this important issue is increasingly front of mind for many companies and investors.
Modern slavery generally refers to situations of forced labour or child labour. It is both a human rights and employee rights issue and occurs when a person faces a situation of exploitation and cannot refuse or leave due to threats, violence, coercion, deception, and/or abuse of power.1
Business risks related to modern slavery may include reputational risks (e.g., boycotts, protests or customer backlash), legal risks (e.g., fines, criminal charges, litigation, depending on jurisdiction), financial risks (e.g., supply chain disruption, increased operating costs, decreased productivity, higher cost of capital, loss of market share), and/or supply chain risks (e.g., disruption in the flow of goods and services, lack of efficiency, and performance of supply chains).
For their part, investors can consider the exposure of companies to these risks and the actions they are taking to prevent, manage, or mitigate them as part of their investment decision making. For example, investors can assess the policies and practices companies have in place to identify, mitigate, and prevent human rights abuses in their supply chains. This may include policies or practices related to adherence to fair compensation or foreign labour recruitment, compliance with modern slavery or supply chain transparency regulations, knowledge of and support for labour rights, and due diligence related to supply chain mapping and auditing.
Understanding modern slavery and supply chain risks
According to the Global Slavery Index, in 2021 an estimated 50 million people were living in modern slavery on any given day, which is an increase of 10 million people since 2016. The same report found that those fleeing conflict, natural disasters, or repression of their rights, or seeking to migrate for work, are particularly vulnerable to exploitation. While often thought to be more prevalent in developing nations, modern slavery occurs in every country in the world and many instances in low-income countries are in fact linked directly to demand from higher-income countries.
Regulatory expectations and context
The United Nations (UN) established the UN Guiding Principles on Business and Human Rights (UNGPs) in 2011 to establish common human rights expectations for governments and corporations. While the UNGPs are not binding, since their establishment various countries have put in place legislation to specifically address modern slavery. These laws typically require companies of a certain size to prepare and publish an annual statement outlining the actions they are taking to address modern slavery in their operations and/or supply chains. The first country to enact this type of requirement was the United Kingdom through the Modern Slavery Act 2015, followed by Australia in 2018. In the United States, at a state level, the California Transparency in Supply Chains Act came into effect in 2012, and applies to all retail sellers and manufacturers that do business in the state. In the European Union, there are multiple regulatory initiatives that cover human rights-related disclosures and due diligence. This includes the Corporate Sustainability Due Diligence Directive, which was passed in February 2024 and requires in scope companies to undertake human rights due diligence. Canada is one of the most recent countries to put in place its own act to address modern slavery in supply chains (the Act), which was passed in 2023 and came into force as of January 2024.2 Corporate entities covered by the Act must publish and submit to the government a report regarding modern slavery risks and mitigating actions by May 31, 2024. Unlike in some other jurisdictions, failure to adhere to this Act comes with a fine of up to $250,000 per offence and may lead to personal liability for board members.
While most of the regulatory actions for corporations focus on transparency and disclosure, these statements on their own are not sufficient to address modern slavery. They do however provide investors and others with insights on the policies and practices companies have in place to identify and address the risks of modern slavery in their operations and/or supply chains. They can also serve to inform engagement with companies on these issues.
Company exposure to supply chain risks
We live in an increasingly globalized world where companies located in one country also operate within the borders of others. Each of these operations may have its own network of suppliers providing goods and/or services to the company. The sourcing of raw materials and the manufacturing, packaging, and transportation of goods often create complex and opaque supply chains. Some of the products imported by developing countries that are most at risk of involvement in modern slavery include electronics, garments, palm oil, solar panels, and textiles.3
The operational structure of a company, the regions in which it operates, and the products or services that it requires may all contribute to modern slavery and supply chain risks. For example, companies that rely on offshore manufacturing in countries with weak labour standards or limited enforcement capacity may be more at risk. In some countries such as India where there are lower operating costs, even with adequate labour laws there may still be inadequate resources to monitor or enforce these laws. 4 5 Moreover, there can also be increased risks when companies use labour recruiters or intermediaries to recruit, hire, or manage their workforce abroad due to gaps in regulation and monitoring of the recruitment industry in those countries. This can lead to the exploitation of jobseekers, particularly foreign migrants.6 Although modern slavery can happen in any supply chain, companies with offshore manufacturing in Africa – specifically South Sudan, Somalia, and the Central African Republic – may be more susceptible as the region is considered to be the most vulnerable to modern slavery risks. The Asia-Pacific region is another region with higher risk, given that it has been assessed as having one of the weakest government responses to modern slavery.7
Characteristics of products or services that are potentially indicative of greater risk include:
Low-skilled labour |
Sectors that rely on low-skilled labour, such as agriculture, construction, extractives, mining & metals, fishing & aquaculture, and forestry may have a higher risk of forced labour. These jobs often have high occupational health and safety hazards such as repetitive manual labour, long hours, and/or dangerous environmental or chemical exposures.8 |
Seasonality |
Sectors with sharp seasonal fluctuations in labour demand, such as agriculture and textiles & apparel may be at risk of forced labour. Given the time-sensitive nature of these production changes, companies may employ labour recruiters or intermediaries in specific regions to recruit needed workers. Forced overtime can also be an issue with sharp seasonal fluctuations.9 |
Low margin |
Sectors with low margins that require continual downward pressure on prices such as agriculture, extractives, mining & metals, electronics & electrical, fishing & aquaculture, and textiles & apparel may have a higher risk of forced labour. Companies are more susceptible to modern slavery risk if other input costs outside of labour have been minimized, leading labour cost reductions to be the main way to increase competitiveness.10 |
Addressing modern slavery and supply chain risks
Despite the complexities of supply chains and the challenges associated with addressing issues of modern slavery, there are actions that companies can take to manage and mitigate related supply chain risks.
Governance and Policy |
Companies should establish policies and procedures to identify, manage, and address potential and actual modern slavery risks throughout their supply chains. This should include determining accountability for managing the strategy, policies, and procedures. It is also important to ensure the policies and procedures are being adequately implemented through sufficient communication with required parties. This can be through relevant operations procedures, contracts with suppliers, or company training. If an incident occurs or is suspected of occurring, it may also be prudent to conduct an independent third-party audit to determine the effectiveness of the company’s policies and procedures on modern slavery throughout its supply chain. A third-party audit may help prevent these issues from reoccurring and help manage this risk moving forward. |
Risk assessment and due diligence |
Companies should conduct risk assessments of their operations and supply chains to determine where and how they may be exposed to elevated risks. This should include assessments of their own employment practices across all operations and regions. For example, confirming whether employees’ ages have been documented and verified, and/or wages and benefits paid on time. Both initial and ongoing due diligence of suppliers or other business relationships is also important. This may involve supply chain audits, training, and contracts specifying actions taken if violations occur. |
Grievance mechanisms and remediation |
Companies should enable employees and workers both in their operations and supply chain to raise issues without fear of recrimination. Grievance mechanisms and supporting policies and practices should be in place, with appropriate actions identified to respond or remediate situations. Accountabilities related to the response and remediation are important here as well.11 |
Investor perspectives on modern slavery and supply chain risks
For investors, the consideration of material environmental, social, and governance (ESG) factors as part of investment decisions enables the ability to both identify and address issues that may affect long-term risk-adjusted returns. ESG factors that may be material include issues such as human rights, modern slavery, and supply chain risks.
In sectors that may be at a higher risk of modern slavery, understanding how a company is identifying, managing, and mitigating these risks is important. Enhanced transparency and disclosure from companies, such as that which is required through various modern slavery laws, can help investors gain insights in this regard. Investors may also use active stewardship as an avenue to collect information, raise issues, or address actual or potential risks with companies. This may include direct engagement, whereby investors may meet with the management or the board of a company, or proxy voting for equity investors. Shareholders may submit or vote on proposals related to modern slavery. For instance, if a modern slavery controversy at a company has been identified, and shareholders believe the company is inadequately managing the associated risks, a third-party audit of its policies and procedures throughout its supply chain may be requested through a shareholder vote.
What is RBC Global Asset Management (RBC GAM) doing?
As described in the Royal Bank of Canada’s (RBC) Approach to Human Rights,12 RBC and its subsidiaries, including RBC GAM,13are committed to respecting human rights, and taking actions to meet businesses’ responsibility to respect human rights, as set out in the UNGPs. As part of this commitment, RBC has particular regard for those rights set out in the Universal Declaration on Human Rights; the International Covenant on Civil and Political Rights; the International Covenant on Economic, Social and Cultural Rights; the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work; and the United Nations Declaration on the Rights of Indigenous Peoples. In addition, RBC has published an annual Modern Slavery Act Statement every year since 2016, and does not tolerate slavery or human trafficking in its organization or in those of its suppliers and sub-contractors.14
At RBC GAM, investment teams consider material ESG factors when making investment-related decisions within the portfolios that they manage, for applicable types of investments.15 Material ESG factors may include human rights, employee relations and working conditions, discrimination, modern slavery, and/or supply chain risks. The extent to which an ESG factor is considered material depends on the issuer, the industries and geographies in which it operates, and the nature of the investment vehicle for which it is purchased. As active stewards of our clients’ capital, our investment teams may engage with issuers on topics that they deem to be material to their investments.16 Through proxy voting, we generally support shareholder proposals that call on companies to respect internationally recognized human rights and comply with relevant international agreements regarding the protection of those rights. For example, we will generally support shareholder proposals that call on companies to disclose their practices, policies, and oversight for assessing, preventing, and mitigating human rights risks. This includes within the company’s investments, operations, and/or activities in countries with historical or current evidence of labour and human rights abuses.
Proxy voting case study |
In 2023, a multi-national technology conglomerate received a shareholder proposal requesting the Board of Directors commission a report assessing the siting of its Cloud Data Centers in countries of significant human rights concern, and the company’s strategies for mitigating the related impacts.17 Reviewing the company’s disclosures, we believed there was an opportunity for the company to provide enhanced disclosure on how it was managing its human rights-related risks in high-risk countries. For example, additional disclosure on the company's human rights due diligence process for its data centers would help alleviate shareholder concerns regarding this risk and allow shareholders to comprehensively assess how the company is managing human rights-related risks in its supply chain. After our review, we voted to support this shareholder proposal. |