Report finds ASX 300 companies are 'lagging' on modern slavery

5 minute read  09.02.2022 Kate Hilder, Siobhan Doherty

Joint Monash University Centre for Financial Studies (MCFS) and ISS ESG analysis of mandatory reporting under the Modern Slavery Act 2018 (Cth) by ASX 300 companies highlights three key areas where disclosure is 'lagging'.  The report also emphasises the crucial role that investors can play in driving improvement through their engagement with companies on the issue.

Key takeouts

  • The report pinpoints three key areas where ASX 300 companies need to 'make progress to bring their modern slavery response in line with the government's best practice guidance, and to move beyond compliance to leading practice'.  Namely: 1) disclosure of operational risks; 2) disclosure of risks in their extended supply chains (below Tier 1); and 3) disclosure around their approach to remediation.
  • In addition to flagging weaknesses in current reporting, the report flags the critical role that investors could play in driving improvements in corporate practice (and ultimately in tackling modern slavery) – especially in the absence of fines for non-compliance - through pushing for progress on the three issues identified in the report.
  • The report suggests investors consider using the three areas for improvement identified, to inform their forthcoming engagements with companies.

Overview: New report pinpoints key areas for improvement in MSA disclosure

Joint analysis from Monash University Centre for Financial Studies (MCFS) and ISS ESG has identified that modern slavery reporting by ASX 300 companies under Modern Slavery Act 2018 (Cth) (MSA) is 'lagging' in three key respects (outlined briefly below).  The report urges investors, as 'the main mechanism for driving improvements in corporate practice' in this context, to focus on these areas in their forthcoming engagements with companies to lift standards.  

Three key areas for improvement 

A comprehensive review of MSA reporting across ASX 200 companies released by the Australian Council of Superannuation Investors (ACSI) in 2021, concluded that companies are essentially engaged in a 'race to the middle' when it comes to MSA reporting – that is, while most reports are technically 'compliant', the majority do not include meaningful information about modern slavery risk and how it is managed in their supply chains.

This report, which looks at reporting across the ASX 300, adds to the broader picture of MSA reporting and pinpoints three key areas for improvement.   

1.  Operational-level risks 'tend to be overlooked'

  • The report found that operational level modern slavery risks 'tend to be overlooked' by companies, with a 'significant discrepancy' between companies' own assessment of their risk (as disclosed in MSA statements) vs the external assessment of their risk by ISS ESG.  For example, ISS ESG concluded that 41% of the ASX 300 companies assessed have operations in countries considered at high risk of modern slavery, but only 4% of companies self-described their risk as high in their MSA statements. 
  • This gap was found to be particularly marked in the professional services sectors (eg Financial and Communication Services sectors).  For example it's suggested that operational risks in areas such as cleaning/security, offshored services etc are being overlooked.  

2.  Lack of transparency around the risks in 'extended supply chains' 

  • The report observes that vast majority (76%) of modern slavery issues occur in global supply chains.  However, the researchers found that reporting by companies on their extended supply chains remains limited.   
  • Specifically, the report found that while the majority of MSA statements reviewed provided details of Tier 1 suppliers (direct suppliers), 59% of statements did not disclose whether the company's supply chain disclosure extended beyond Tier 1, to include indirect suppliers (where research indicates that modern slavery risks could be higher).  
  • In terms of the steps/actions companies can take to improve their limited visibility in this context, the report suggests that companies adopt a 'systematic approach to supplier risk assessments and management'.  This could include, it's suggested, implementing a supply chain risk management framework geared toward the identification, assessment and mitigation of risk across the extended supply chain (a suggested model is briefly outlined at page 9 of the report).  It's also suggested that companies monitor their management of supply chain risks through the introduction of modern slavery specific key performance indicators (KPIs).  The report observes that of the 18% of companies currently using KPIs for this purpose, the most common metrics used included (among others): supplier auditing, 'modification of supplier contracts', 'supplier survey response rate', 'reported incidents', and 'corrective actions'.

3. Comprehensive disclosure of remediation processes 

The report found that 

'typically, companies are hesitant to admit responsibility, invest resources, and build strong relationships with suppliers, expert stakeholders, workers, and their representatives – all elements of effective remedy'.

For example, the report found that almost half of ASX 300 companies do not describe remediation processes in their modern slavery statement.  

Of the 51% of ASX 300 companies that do so, the disclosure provided was found to be less than comprehensive.  For example, 80% of MSA disclosures that described remediation processes referenced whistleblower policies, but only 32% described grievance mechanisms/how grievance mechanisms had been implemented.  

The report considers that 'substantive remediation' may need to go further than this to also include for example: a public apology, compensation for loss of income/opportunities, and a guarantee that there will be no recurrence.

Investors could play a key role in pushing companies to lift standards

Consistent with ACSI's previous findings (flagged above), the report argues that rather than driving a 'race to the top' in terms of improved practices, Australia's mandatory disclosure regime has in practice resulted in a 'race to the middle approach' – that is, companies are 'ticking the box to meet the legal requirements of the MSA without seeking to take the lead in addressing modern slavery'.   This leads the researchers to query the effectiveness of the design of existing regime.  

'The key gaps in modern slavery reporting and performance outlined in this report…call into question the effectiveness of the mandatory disclosure legislation model.  Not only do these gaps challenge the MSA’s intention to incentivise best practice, they also suggest that most S&P/ASX 300 companies are not taking their responsibilities to rights-holders seriously in their operations and supply chains.  Without transparent disclosure on the effectiveness of mechanisms to address the root causes of exploitative labour, simple disclosure can provide a sense of "action" at the same time as undermining meaningful progress on modern slavery'.

The report argues that investors have a key role to play in improving corporate practice under the current regime in Australia – especially in the absence of fines for non-compliance - through pushing for improvements in practice.  With this in mind, the report suggests that investors use the three improvement areas highlighted in the report to inform and focus their engagements with companies.

The report observes that globally, the issue is becoming a focus area for investor engagement with companies, and that there are signs that it is also gaining traction in Australia.  For example, the Investors Against Slavery and Trafficking Asia-Pacific Initiative aims to exert pressure on companies to ensure that their MSA reporting is effective.  

[Sources: Driving Improvements in Modern Slavery Reporting: The Role for Australian Investors]

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https://www.minterellison.com/articles/summary-of-report-into-modern-slavery-reporting-by-asx-300-companies-february-2022