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Modern slavery epitomises the “S” for “Social” in ESG. The UN and the Walk Free Foundation estimate that there are approximately 40 million victims of modern slavery around the world, many of whom are intertwined in our global supply chains. This is a serious issue for communities and investors alike.
This article provides an overview of the Australian Modern Slavery Act 2018 and outlines some observations from the first year of modern slavery reporting under the Act.
The Commonwealth Modern Slavery Act 2018 (the “Act”) was passed by the Australian Parliament on 29 November 2018 and came into effect on 1 January 2019 with the aim of combatting modern slavery in global supply chains. To help achieve this aim, the national Modern Slavery Reporting Requirement (“Reporting Requirement”) was established under the Act.
This article outlines:
The Australian Act was the first national legislation in the world to define the term modern slavery. Modern slavery is defined as including the following types of serious exploitation:
Modern slavery can occur in every industry and sector; however, it is difficult to identify at the investee company level given the often deep and complex nature of global supply chains. Evidence from the UK Modern Slavery Act, which came into effect in 2015, indicate that instances of modern slavery are typically identified at tiers three and four of the supply chain rather than at the investee company level.
The Reporting Requirement aims to improve modern slavery transparency across large businesses and other large entities such as superannuation funds. Under the Reporting Requirement, reporting entities are required to produce an annual Modern Slavery Statement addressing seven mandatory criteria:
In accordance with the Act, the Modern Slavery Statements must be updated and published on an online, central register (modernslaveryregister.gov.au) each year by a specified deadline, typically six months after the reporting entities’ financial year end.
An entity is required to produce and publish an annual Modern Slavery Statement if the entity:
AND IS EITHER
Given the size of their investment portfolios and associated investment related income (e.g. coupon payments, dividends, distributions etc.), large superannuation funds typically qualify as reporting entities under the Act; however, this isn’t always the case as we outline in the next section.
As an industry with approximately $3trn invested globally, Australian superannuation funds can have a material influence on the fight against modern slavery. As a result, they have an opportunity to use their collective size and influence to advocate against modern slavery and thereby strengthen the social systems on which capital markets and their investments rely.
We have reviewed the first round of Modern Slavery Statements produced by 20 large superannuation funds that are published on the central register. We note that the majority of Modern Slavery Statements produced by superannuation funds focused explicitly on modern slavery from a “risk to people” perspective rather than the risk to the value of investments. This is a pleasing outcome given the Modern Slavery Act focuses on the impact on individuals rather than impact on investments. That said, there is a distinct link between the two. For example, the prevalence of modern slavery risk in an investee company’s supply chain could lead to reputational risk which in turn could lead to a negative impact on the company’s share price.
We have assessed the sample of Modern Slavery Statements against a number of criteria set out in the table below. The assessment was made from an investment perspective and was based on information provided in the Modern Slavery Statement only.
|Was modern slavery risk acknowledged as an investment risk?
|Was a modern slavery risk assessment carried out on the assets?
|Had modern slavery training been carried out internally?
|Is there a standalone Modern Slavery Policy?
|Is the modern slavery risk assessment mostly delegated to the investment managers?
|Was the modern slavery risk assessment carried out beyond tier 1 of the assets?
|Were any instances of modern slavery identified?
JANA makes the following observations in relation to the Modern Slavery Statement assessment:
A final observation is that less than 50% of the 20 superannuation funds analysed by JANA actually qualified as reporting entities under the Modern Slavery Act over the reporting period on the basis that they did not meet the $100m revenue threshold. This was driven by the “net change in fair value of financial instruments” component of the revenue definition which was mostly negative for the reporting period given the COVID-19 related market sell off in Q1 2020. It was pleasing to see that the majority of large superannuation funds elected to produce Modern Slavery Statements despite not meeting the revenue threshold in the first year of the Reporting Requirement.
There was a wide range in the level of detail provided in the first round of Modern Slavery Statements across superannuation funds and other reporting entities in general. Given that the Act encourages progress over a period of time rather than perfection right away, we expect to see a general improvement in the level of reporting year on year.
This will be driven by:
From an asset owner perspective, we expect to see superannuation funds carry out deeper and wider analysis within and across asset classes over time. Deeper analysis will involve looking further down the supply chain of investee companies and assets to try and identify any instances of modern slavery. Wider analysis will involve understanding the risks of modern slavery across all asset classes rather than focusing on a select few.
In addition, as the assessment of modern slavery risk develops over time, we expect to see reporting entities actually identify and report on instances of modern slavery within their investment supply chain. As the depth of analysis increases by looking further down the supply chain, so too should the rate of modern slavery identification across all reporting entities.
Finally, we expect to see the level of superannuation member engagement in relation to modern slavery increase over time in a similar manner as climate change over the past 5-10 years.
The Senate Foreign Affairs, Defence and Trade Legislation Committee (the “Committee”) recently published a report making various recommendations to the Federal Government in relation to modern slavery. The following two recommendations outlined in the report are directly related to the Act:
It could be some time before the Federal Government take action with respect to the Committee’s recommendations or commence a review of the Act. That said, we note that there is an ongoing trend across jurisdictions of strengthening modern slavery related regulatory regimes. For example, the UK Government is considering the introduction of financial penalties for non-compliance under the UK Modern Slavery Act.
Any changes to the Act from its current form would most likely increase the reporting and compliance requirements for all reporting entities.
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