30 June 2021 marked the end of the first full cycle of reporting under the Modern Slavery Act 2018 (Cth) (Act). Over 2,000 modern slavery statements have been lodged and uploaded to the modern slavery register, covering more than 4,400 reporting entities.
The Act commenced on 1 January 2019 and is subject to a statutory review in January 2022. A recent parliamentary inquiry has called for an earlier review to strengthen and broaden the application of the Act. In a sign of what may be to come in Australia, the government of the United Kingdom recently proposed to strengthen the Modern Slavery Act 2015 (UK) by introducing statutory penalties for failure to comply.
Having published a very useful guide just after the commencement of the Act and other guidance, the Australian Council of Superannuation Investors (ACSI) published the first comprehensive review of statements lodged by top ASX companies under the Act. The ACSI found that most reports were 'compliant' but most did not provide meaningful information about modern slavery risk and how it was managed in their supply chains. To avoid the 'race to the middle' ACSI identified, reporting entities need to incorporate modern slavery risk management into their supply chain processes.
With many Australian entities through their second reporting year and currently preparing their second reports (with reports for 30 June 2021 financial year due on 31 December 2021), now is the time for businesses to review their approach. Entities need to address the risk of modern slavery in their supply chains and their approach to compliance, to ensure they can demonstrate continuous improvement in future years.
The Act requires Australian entities and entities carrying on business in Australia with consolidated revenue over $100 million (Reporting Entities) to submit an annual modern slavery statement (Statement). Other entities may volunteer to comply with the Act by notifying the Minister for Home Affairs in writing. The Australian Border Force (ABF) makes statements submitted publicly available on an electronically maintained register.
Statements must address the mandatory criteria contained in section 16 of the Act, including a description of:
- the risks of modern slavery practices in the Reporting Entity's operations and supply chains;
- the actions taken by the Reporting Entity during the reporting period (typically the entity's financial year) to assess and address those risks; and
- how the reporting entity assesses the effectiveness of its actions taken towards assessing and addressing modern slavery.
Reporting Entities must also describe the risks and actions relevant to entities they own or control that are not themselves Reporting Entities. Related Reporting Entities which implement similar processes to address modern slavery have the option to submit a joint Statement. Reporting Entities reporting in a joint Statement or on owned and controlled entities must also report on the consultation they had with the related entities.
There are currently no penalties for Reporting Entities that fail to submit a compliant Statement under the Act.
The focus of year 1 reports
Reporting Entities have generally focused on carrying out an initial supply chain mapping and risk assessment during their first reporting period. Supply chain mapping is an essential step in preparing a Statement, as it allows entities to understand their supply chain and its potential exposure to modern slavery risks. This assists the Reporting Entity to satisfy the criteria contained in section 16(1)(b), (c) and (d) of the Act.
The process typically involves defining key suppliers and assessing them against a set of risk indicators. In addition to reporting on modern slavery risks, some statements have provided detail on the processes used to identify risk areas and have discussed tailored measures taken to mitigate each risk.
Throughout the first reporting period, Reporting Entities have taken a range of actions to combat modern slavery risks, including:
- implementing modern slavery clauses into supply contracts;
- updating internal policies such as supplier codes of conduct, whistle-blower and procurement policies;
- implementing employee training on modern slavery risks;
- reporting to investors on the number and type of grievances raised through internal channels; and
- establishing due diligence processes to address risks identified in supply chain mapping.
In November 2020 the ABF identified key areas for improvement in the Statements submitted to date. This included instances of Reporting Entities:
- submitting statements used in other jurisdictions (typically the UK, which does not have the same mandatory criteria as the Act);
- failing to clearly identify the Reporting Entity for the statement;
- not appropriately describing their consultation processes; and
- not adequately describing the areas of modern slavery risk.
In the first round of reports, many Reporting Entities identified the COVID-19 pandemic as increasing the risks of modern slavery within its supply chains. Very few entities outlined the specific risk areas that the pandemic has exacerbated or reported on measures taken to address the additional risks.
The pandemic has posed significant modern slavery challenges by placing economic strain on the funding of upstream due diligence programs. This has made grievance mechanisms less accessible by reducing the capacity for on-site visits and in-person contact between and within businesses.
The ABF advised that Reporting Entities should address these challenges by:
- maintaining communication channels with suppliers;
- liaising with business peers and peak bodies to identify best-practice approaches to protect workers during the pandemic; and
- keeping abreast of key international resources containing guidance on managing modern slavery risks.
Considerations for the second year of reporting
The Act is due to be reviewed in January 2022 (as required under section 24 of the Act). The Federal Government has not yet indicated what this review will address. In its report on the Customs Amendments (Banning Goods Produced by Uyghur Forced Labour) Bill 2020 (Cth), the Foreign Affairs, Defence and Trade Legislation Committee made a formal recommendation for a review of the Act as soon as possible following the conclusion of the first reporting cycle.
The Committee recommended that this review consider provisions for:
- lowering the reporting threshold below $100 million;
- penalising non-compliance; and
- establishing an independent body to oversee and enforce its implementation
Reporting Entities should anticipate changes to the Act in the coming 12 months.
A Reporting Entities' action during their first reporting period sets a benchmark for future reporting years. Reporting Entities looking to take further actions to address the risks of modern slavery in their supply chain and operations should consider:
1. Engaging with independent third party and industry due diligence and review processes to bolster responses to modern slavery
These include the Cleaning Accountability Framework, the OECD Due Diligence Guidelines and the FAST Initiative. Although responsibility ultimately lies with the company and the board, compliance with an external standard is a strong indicator of intent to mitigate the risks associated with modern slavery.
The Australasian Centre for Corporate Responsibility (ACCR) identified in its June 2021 report on Modern Slavery Due Diligence in the Australian Property Sector that leading companies are using independently verified benchmark rates to assess suppliers and ongoing performance.
Certain industries are also forming focus groups to centralise common due diligence questionnaires for suppliers. E.g. The Property Council of Australia launched a supplier platform for its members in 2019.
2. Asking new questions of existing data
Entities that have carried out supply chain mapping and risk assessment in their first reporting period should consider using alternative factors to identify other risks.
Possible risk factors in addition to the typically used geography, sector and industry risk factors include:
- vulnerable populations;
- high-risk categories; and
- high-risk business models (for example, subcontracting, franchising, seasonality and aggressive pricing).
3. Engaging with employees and those who are at risk of modern slavery
The ACCR recommends increasing engagement with employees through peer-led labour rights education involving representative organisations and introducing employee-led grievance procedures.
4. Establishing ongoing risk identification and response mechanisms
Assign accountability to individuals within your organisation to ensure there is ongoing due diligence and management of modern slavery risks. To best address risks, companies should engage a variety of review processes on an ongoing basis. Companies should also consider the appropriateness of implementing ongoing contractor due diligence, vendor questionnaires or auditing.
Existing company policies and practices should be critically reviewed to ensure that they go beyond mere 'cosmetic compliance' and are effective in addressing modern slavery practices.
5. Consider responses to modern slavery and demonstrating effectiveness
Many Reporting Entities have focused their reporting on actions to prevent or mitigate the risks of modern slavery. In their second reporting period, although there is no requirement to disclose modern slavery incidents, Reporting Entities should consider implementing remediation policies that provide a response to modern slavery incidents.
In addition, the ACCR recognised entities that are leading the response to modern slavery risk through due diligence, amongst other things, are:
- disclosing the locations of suppliers and providing lists of all Tier 1 Suppliers in high risk sectors;
- engaging potentially impacted stakeholders and their representatives on developing their commitments and accompanying policies;
- facilitating peer-led labour rights education for their workforces; and
- providing specific detail on the tailored assurance actions they are taking to address modern slavery risks.
On 20 July 2021, the ACSI released one of the first major third-party reports into compliance with the Act. The report graded the Statements of 151 ASX200 companies against a set of quality and compliance indicators. The results revealed a concerning 'race to the middle' trend, which enforces the ACCR's concerns of 'cosmetic compliance':
- 17% of the companies assessed identified actions taken to ensure grievance mechanisms were trusted and accessible;
- 32% of statements clearly explained steps taken to assess effectiveness of actions taken; and
- one third of the companies appeared to be non-compliant with one or more of the Act's requirements.
The ACSI did not take the approach of 'grading' statements, which was the approach taken by the Business & Human Rights Resource Centre in reviewing FTSE 100 entities' statements under the UK Modern Slavery Act. Other reports may take this approach.
As Reporting Entities progress through these subsequent years of reporting, the focus should be on identifying KPI's and planned actions and reporting on the actions taken. E.g. Providing statistics about supplier's uptake of questionnaires, whether any concerns were raised and what steps were taken to address them.
Contact our team if you would like to discuss how your business can improve its modern slavery processes and reporting.