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Companies Aren’t Identifying Sourcing Decisions as Risks For Forced Labor

Companies focusing solely on government mandates around forced labor and modern slavery may be missing out on other human rights related risk factors in the supply chain.

The United Nations Guiding Principles on Business and Human Rights say states should “encourage, and where appropriate require, business enterprises to communicate how they address their human rights impacts”—but just how much further should a business go to ensure its supply chain is free from human rights violations outside of a government mandate?

As legislatures have become more involved in sourcing, passing new laws like the 2015 United Kingdom Modern Slavery Act and the Australian Modern Slavery Act in 2018, businesses have more reasons than ever to maintain proper supply chain reporting practices.

According to KPMG, one of the largest auditing companies in the world, more than 400 mechanisms in 64 countries now exist for the purpose of regulating human rights reporting and corporate social accountability.

However, the International Corporate Accountability Roundtable (ICAR) and Focus on Labour Exploitation (FLEX), the authors of the newly-released report, “Full Disclosure: Towards Better Modern Slavery Reporting,” argue that government mandates are just the beginning if an organization wants to limit its liability and participation in human rights issues like those associated with modern slavery and human trafficking.

“Where companies are reporting under existing legislation, they speak more vaguely about general risks of forced labor and human trafficking in supply chains, rather than speaking about the specific risks of forced labor and human trafficking in their own supply chain,” the report reads. “Analysis of company statements to date show that many failed to report on risks associated within specific sectors or in relation to specific products.”

In the report, ICAR and FLEX revealed that two-thirds of businesses operating in sectors that source materials and labor with a high probability of modern slavery and human trafficking—like the apparel industry—failed to even make reference to the specific factors that could threaten its supply chain in their reporting despite the recent uptick in reporting legislation.

Instead, organizations typically opt to make general statements that often just scratch the surface of the risks involved, following the letter of the law but failing to understand the spirit.

“Companies generally do not identify their business practices and sourcing decisions as drivers of risks of forced labor and human trafficking in their supply chains,” researchers noted. “Additionally, most companies do not address how the countries from which they source and in which their products are manufactured may present risks of forced labor and human trafficking in their supply chains, specifically where operating countries have weak legal structures.”

The report explains that internal and external stakeholders directly benefit from improved reporting via improved public relations, greater operational efficiency and access to a larger pool of capital. For example, a business interviewed by ICAR and FLEX researchers said its budget on ethical trade had expanded as a result of greater interest from shareholders who wished to bolster its reporting practices. As a result, the business was able to fund a supply chain mapping initiative that had previously been deprioritized.

According to the report, $1 out of every $4 invested in professional management was spent on socially responsible investments in 2018, representing an increase of 38 percent over the past three years. Interviews with investors suggested that companies that do not address modern slavery in their supply chains will “increasingly face scrutiny from investors for not doing so and may face barriers in accessing capital.”

“Companies that conduct thorough human rights due diligence will improve their own understanding of the risks their business and sourcing practices may pose to workers and other stakeholders in their global supply chains,” researchers said. “When a business understands these risks, it will be better equipped to prevent them from materializing, mitigate them when they are identified, and remedy harms that have occurred. Thus, better reporting may potentially reduce human rights violations in a company’s supply chain and, ultimately, result in better business human rights performance.”