According to research by the United Nation’s International Labour Organization and the Walk Free Foundation, never in human history have more people been enslaved. An estimated 40 million people are in slavery worldwide, with the majority being trafficked and exploited for their labor. Slavery and forced labor generate annual profits of $150 billion.
In accordance with standards across the industrialized world, labor trafficking is defined by the U.S. Trafficking Victims Protection Act (TVPA) as: “The recruitment, harboring, transportation, provision or obtaining of a person for labor or services, using force, fraud or coercion for the purpose of subjection to involuntary servitude, peonage, debt bondage or slavery.”
In the United States, labor trafficking is taking place on some farms and in factories, as evidenced by cases involving egg farms in Ohio and clothing factories in California. The globalization of markets also has Western nations outsourcing labor, which can become systemic slavery in the absence of oversight. This is especially true in the manufacturing, fashion and agricultural industries.
Particularly in light of the growing focus on ESG initiatives, investors, regulators and C-suite executives are increasingly focusing on labor trafficking and various forms of abusive work conditions. In addition to measures specifically targeting labor trafficking, new regulations governing corporate social responsibility require U.S. companies to have supply chain traceability, which can also help them to root out trafficking and other labor issues at any point along their supply chain.
This new regulatory environment requires hands-on engagement from leadership. In addition to the clear moral imperatives, companies can be exposed to both criminal and civil liability and executives may be held personally liable for negligence under the TVPA. The C-suite, legal departments, and compliance and risk officers are under pressure to ensure companies are free of racism, sexism, labor and employment issues, and other abuses. Stakeholders like government regulators, investors and customers are increasingly scrutinizing companies’ operations and supply chains, with the expectation that companies practice corporate social responsibility in addition to delivering on their core missions.
Although there has been a recent focus on ESG initiatives, the human rights due diligence, environmental due diligence, and fair play principles involved are not new. By incorporating these principles and processes into ESG initiatives, companies can better manage labor abuse risks and improve the transparency, disclosure and compliance practices all the way to their Tier 3 and Tier 4 suppliers, strengthening safeguards against TVPA risks all along the supply chain.
ESG and Labor Trafficking
Socially conscious investors are increasingly focused on ESG to evaluate companies that align with their values. Money held in sustainable mutual funds and ESG-focused exchange-traded funds rose globally by 53% last year to $2.7 trillion, according to Morningstar. Additionally, companies with better ESG profiles have outperformed their peers in recent years, with 81% of a globally representative selection of sustainable indexes outperforming their parent benchmarks in 2020.
In addition to the market incentives, companies must also consider the cost for failure to comply with regulatory standards around ESG. For example, the U.S. Securities and Exchange Commission’s ESG Task Force is focused on ensuring the accuracy of representations made by investment vehicles and corporations that claim to have ESG priorities. New disclosures and labeling rules were rolled out for consideration in May, following a penalty case against BNY Mellon in which the firm was fined $1.5 million for what the SEC identified as misleading ESG designations.
Plainly, investors buying stock in companies complicit in modern slavery, human trafficking or child labor are not following best practices for ESG investment management, whether viewed from the perspective of U.S. and international law, Principles for Responsible Investing (PRI), U.N. Sustainable Development Goals (SDGs), or any other accepted principles or guidelines for responsible investing. In fact, the PRI Network—which includes more than 4,000 signatories from over 60 countries, representing approximately $120 trillion—specifically identified modern slavery, child labor and working conditions as one of several ESG issues that should be integrated into investment decisions.
For companies, it is important to implement ESG policies that expressly address slavery and other labor abuse considerations in sourcing and purchasing practices. Identifying conditions and practices that are often strong indicators of labor trafficking like worker-paid recruitment fees, confiscation of travel documents or substandard worker housing can also assist in rooting out the problem. In practice, this may entail reviewing supply chains and related contracts, including specific ESG-related representations and warranties, indemnities, and other protections in agreements with third-party suppliers, as well as carrying out third-party audits and assessments of supply chains. In addition to safeguarding the company’s reputation, this can also help minimize or avoid financial penalties, negative regulatory action, and negative reputational outcomes if a company violates ESG-related standards or regulations.
Regulators are also taking steps to combat labor trafficking. For example, the Uyghur Forced Labor Prevention Act (UFLPA) was signed into law by President Biden on December 23, 2021. The UFLPA creates a rebuttable presumption that goods made in whole or in part in China’s Xinjiang Uyghur Autonomous Region (XUAR) are produced with forced labor and are therefore prohibited from importation. On June 21, 2022, the Forced Labor Enforcement Task Force (FLETF) issued guidance to importers with measures to help ensure they are not importing goods produced with forced labor. If they have not already, importers must initiate a deep dive into their supply chains to address any blind spots and vet suppliers to eliminate any links to XUAR and thoroughly document compliance throughout the supply chain.
Through the issuance of Withhold Release Orders, U.S. Customs and Border Protection (CBP) has the authority to prevent the importation of all goods, materials or merchandise mined, produced or manufactured wholly or in part in any foreign country by forced labor. For example, in February, CBP officers in Baltimore seized four shipments of Malaysian palm oil due to information indicating that it was manufactured by forced labor. The palm oil shipments were valued at nearly $2.5 million.
In addition to investors and regulators, consumers in both North America and Europe are also paying more attention to ESG issues including labor practices. For example, U.S. solar power customers are increasingly seeking assurances that the products they purchase are truly sustainable and free of forced labor. To address these concerns and build upon the industry’s existing corporate social responsibility platform, the Solar Energy Industries Association (SEIA) published guidance in April 2021 known as Solar Supply Chain Traceability Protocol 1.0. The protocol is a set of recommended policies and procedures designed to identify the source of a product’s material inputs and trace the movement of these inputs throughout the supply chain. By implementing the key principles of the protocol, companies are better able to meet their U.S. import compliance obligations and provide customers with supply chain transparency. The protocol also incorporates an independent, third-party audit mechanism to measure a company’s implementation of traceability policies and procedures.
Taking Action
The increased focus on ESG initiatives offers many opportunities to incorporate measures to mitigate key labor risks. A wide range of initiatives may fall under the umbrella of ESG, but some are better suited than others to identify and address the risks of labor trafficking and other abusive work conditions in the supply chain.
Environmental
The due diligence work that companies undertake to secure environmentally sound and sustainable raw materials can also be used to make sure that workers who harvest those materials are not being trafficked or abused, are working in humane conditions and are receiving just compensation.
For example, if a fashion house uses cotton from South America, the company should consider water irrigation systems, pesticide use, land use and greenhouse gas emissions throughout its supply chain, particularly as these conditions relate to labor. When conducting inspections and audits of these systems and practices, the investigator should take the opportunity to talk to field workers about their housing conditions, the safety equipment used to protect them from pesticides, and the medical care and attention they receive. After gathering this data, the company can implement compliance measures and stop-gaps to address these issues for the benefit of both workers and the planet, including:
- Improving equipment to reduce emissions, which would not only benefit the environment, but also provide a safer work environment for laborers
- Increasing wages to allow laborers to move out of substandard housing, which would improve land use by freeing up acreage previously set aside for on-site facilities to instead be used for sustainable rotation of crops
- Reducing and regulating pesticide use, which could ultimately help reduce health risks and medical costs for workers
Each of these actions can help protect workers while also guarding against the risks of harming the environment and drawing regulatory sanctions, shareholder litigation and reputational damage.
Social
Diversity, equity and inclusion are on the radar for companies more than ever, and DEI initiatives should extend far beyond the boardroom or the C-suite. Any improvements at headquarters look shallow or insincere if people of color and women still work uncompensated or in debt bondage to produce the company’s products. Thus, it is important for companies to periodically assess the working conditions of employees at all levels and locations and put protocols in place to ensure such practices are not occurring.
For example, standardizing recruitment for all employees and supplier partners can help identify and eliminate worker-paid recruitment fees—a common gateway to labor trafficking in which employees or applicants are required to pay an employer or contractor for costs related to their hiring, recruitment and training. Leadership diversity initiatives can also reinforce the idea that every employee and subcontractor is a person of value, and prompt a company to provide working conditions and compensation and advancement opportunities that reflect that worth.
Governance
Corporate social responsibility is an extension of a board’s governance duties. Efforts to weed out corruption and Foreign Corrupt Practices Act (FCPA) violations, for example, can also help identify labor trafficking and worker abuse practices by Tier 3 and Tier 4 suppliers during the oversight and evaluation process.
In the United States, the Justice Department issued a directive to prosecutors last fall that they consider a company’s entire history of criminal, civil and regulatory misconduct, both domestic and foreign, when making charging decisions. The risk of comprehensive review by the DOJ means that boards should consider and discuss core compliance and safety issues separately from fiscal impact. Companies will need to demonstrate that immediate remediation and compliance actions were taken after identifying a problem, such as labor trafficking or abuse violations. They will also have to prove that there is a culture of compliance, so it is critical to ensure regular and robust recordkeeping, monitoring and reporting on operational risk and compliance issues, including labor conditions in the supply chain.
ESG Perspective
Fair labor practices in the supply chain can be incorporated into many ESG-related processes. Activities like training parent and subsidiary company employees and enhancing compliance structures around labor standards can help identify issues and establish labor standards. Conducting representative interviews of supplier employees and community stakeholders in the home countries where products are sourced can also improve labor practices across the board.
From an ESG perspective, companies that undertake efforts to address the risk of labor trafficking throughout their supply chain can also help mitigate environmental issues and create better compliance and governance standards. This may prove especially beneficial in a landscape where ESG factors are becoming more important to stakeholders. Failing to take action not only jeopardizes workers, but opens the company to risks of regulatory punishment and reputational damage that may affect sales, stock prices, insurance rates and investment opportunities.