ESG Wrap July 18

This month we take a deep dive into human rights and supply chain and the associated investment risks.

It’s concerning to know that human rights abuses in the brands and products we buy and interact with every day remains a far-reaching problem. The International Labour Organisation estimates there are 40.3 million people in modern slavery globally , including 24.9 million in forced labour. One in four of these are children. Research from Australia suggests there are around 4,000 people trapped in slave-like conditions in a diverse range of industries. On the positive side, we are lucky to work in an industry which has a lot of influence, through capital allocation, over the business practices of companies we invest in.

AMP Capital’s ESG team has been engaging with companies across all sectors of the economy to understand how each is maximising the opportunities and managing the risks in relation to this issue. Poor working conditions are not only unethical, they also carry significant investment risks over the longer term to brands and business operations.

During the quarter, we also signed the KnowTheChain Investor Statement: Investor Expectations on Addressing Forced Labour in Global Supply Chains. KnowTheChain is a group of nearly 70 institutional investors responsible for over US$3 trillion in assets under management, which support Sustainable Development Goal 8.7 to eradicate forced labour. The statement encourages investee companies to undertake rigorous human rights due diligence by implementing policies and practices in a number of areas. These comprise commitment and governance, traceability and risk assessment, purchasing practices, recruitment, worker voice and monitoring & remedy. We also signed the Investor Statement on Supply Chain Slavery Legislation in Canada to urge the Canadian Government to enact similar legislation to that in Australia.

“I found slaves in our supply chain”

• "All of us in business face the risk of modern slavery in our supply chains – I found it in my own – and it is now widely accepted that inaction, and hiding our head in the sand, are no longer options. Modern slavery is everywhere." - Andrew Forest, Chair, Fortescue
• Back in 2012, Fortescue made a pledge to examine its supply chain. With the help of labour auditing experts Verite, it was revealed that there were people working in Fortescue’s supply chain whose passports has been seized and their net pay was almost nothing.
• As a key customer, Fortescue had a huge amount of leverage over the supplier. The supplier returned passports immediately, reimbursed unpaid wages, including to employees who had left the business, and overhauled its governance to ensure these things didn’t occur again.

So what?

• As the Chair of Fortescue put it so well, all companies in all sectors face the risk of modern slavery in their supply chains. With the looming Modern Slavery Bill and investor pressure, companies have no option but to dig deeper into their supply chains and be transparent about what they find.
• Large global companies can wield an enormous amount of influence over their suppliers, even those much further down the supply chain. By both governments and business taking action to eradicate modern slavery, the speed of change will accelerate.

Source: SMH, July 2018

Modern slavery bill welcomed, but no penalties for breach

• In June this year the NSW parliament passed the Modern Slavery Act 2018 and the Turnbull Government initiated a similar Modern Slavery Bill. The NSW and Federal Act requires companies in Australia, with revenue greater than $50m and $100m respectively, to disclose details on the actions they are taking to stamp out modern slavery in their operations and supply chains.
• The bill will apply to about 3,000 companies and the statements will require board approval before being released each year.
• The government will also audit its own supply chains and publish statements about Commonwealth procurement which has never been done by any other government around the world.

So what?

• This is a very important first step. Companies often know very little about suppliers beyond the first tier so this act will force them to investigate the operations of suppliers further down the chain. It is also a reminder that companies need anti-slavery policies and dedicated employees to govern this policy and put it into practice.
• AMPC has already made a statement and commitments in response to the UK Modern Slavery Act. We expect an Australian version of a Modern Slavery Act to be passed by parliament during 2018. Based on this a project team has been established and will be working with business units that manage key supply chain and external vendor relationships (such as Real Estate, Infrastructure and TAG) to review supporting processes and policies and understand if there are operational practices that we need to correct. Specialists in human rights and supply chain risk management will also be engaged to understand how we might best deliver on our commitments under the UK Act and our proposed commitments under the incoming Australian Act.

Source: The Guardian, June 2018

Global capitalism undermines progress in workplace safety in Bangladesh's garment sector

• There has been a lot of progress in the Bangladesh garment sector following the Rana Plaza disaster in 2013 which killed over 1,100 people. The Accord on Fire and Building Safety, a legally-binding commitment by 215 global clothing companies and international and Bangladeshi unions, has driven much of this reform.
• In 2013, the Accord uncovered scary details about the 1,600 garment factories it was reviewing. It found 97% didn’t have safe exits, 91% had no fire alarm system and 70% had no way to manage weight loads to prevent building collapses.
• By April 2018, engineers employed by the Accord had inspected over 25,500 factories and more than 99,000 hazards had been amended.
• Unfortunately, Pennsylvania State University published a report about the Bangladesh garment industry earlier this year which revealed prices paid by global brands to supplier factories declined 13% between 2013 and 2018. Profit margins for garment suppliers also decreased 13.3% between 2011 and 2016 and lead times for orders decreased by 8% over a similar period.
• Well-known international brands such as H&M, Gap, Abercrombie & Fitch, Tommy Hilfiger, Calvin Klein, Walmart and Target, all source from Bangladesh.
• Did you also know that just 4% of what Australians spend on clothing goes to garment workers?
  

So what?

• On the surface it appears the Bangladesh Accord has achieved significant progress, however, workers in the garment industry continue to face squeezed wages and a huge amount of pressure to deliver products in shorter time periods.
• Suppliers are constantly being squeezed by their big brand clients, leading to shrinking per-unit pricing and heightened production costs. As a result, they are less likely to put stringent safety measures in place which have large associated costs.
• As we discuss below, consumerism and the demand for cheaper, faster fashion has huge ramifications on the factory worker who produces the clothes. It is unlikely the issues above will be resolved unless our attitude to fast fashion changes.
  

Source: The Daily Star, June 2018

Oxfam scores US and European supermarkets on food supply chain

• A recent report by Oxfam exposes millions of workers in the global food supply chain are stuck in a cycle of poverty and are victims of ruthless working conditions, despite large players in the food industry enjoying billions in profits.
• The report dives into the food supply chains of the 16 largest supermarkets across the US and Europe.
• Supermarkets keep up to 50 per cent of the money their consumers spend, while the proportion that reaches workers and food producers has fallen significantly (see the image below!)
• The eight biggest global supermarkets earned almost a trillion dollars in sales and $22 billion in profit in 2016.

So what?

• Over the last few decades, agricultural supply chains have become more international, and tightly controlled by a small number of food companies and retailing chains that connect farmers with a rapidly-growing population of consumers.
• The private sector has the potential to lift millions of people out of poverty, but the food industry, like too many others, is prioritising profits over ethical behaviour.
• Most global supermarkets wouldn’t even feel a dint in their balance sheets if they paid producers a fair price. As exampled in the report, returning just a few more cents of the retail price would dramatically change the lives of the farmers who produce the food we eat, without straining the consumer.
• There are similar issues in Australia, where Woolworths and Coles dominate the sector. We continue to engage with these companies about how they are managing their food supply chains.

Source: Ripe for Change Report, June 2018

Child labour rampant in tobacco industry

• A large-scale investigation into the tobacco industry found child labour rife over three continents and on the rise particularly in developing countries.
• Children under the age of 14 were forced to work in physically demanding and dangerous jobs to produce tobacco leaf, instead of going to school.
• Many families are in debt to landowners and see no alternative but to use their children to perform unpaid work as repayment.
• A list produced by the US Department of Labour shows 16 countries where child labour is common in the tobacco industry. This list includes Bangladesh, Kazakhstan, Indonesia, Brazil and most recently Zimbabwe.
• A tobacco farmer in Kasunga, a village in Malawi, earns an average income of 223,710 kwacha (roughly $380) for 10 months of work. This translates into about 30 cents of income per kilo of tobacco they pick, which produces about 1,200 cigarettes.
  

So what?

• Some of the world’s leading cigarette manufacturers and leaf merchants purchase tobacco from these counties. They claim to be doing what they can to eradicate child labour, with detailed due diligence policies and engagement with stakeholders. However, it seems like they aren’t doing enough.
• Many of these companies fail to publicly disclose detailed information about how they apply their policies to their supply chain, how they monitor to prevent or address problems, and how they evaluate their efforts to address human rights abuses when found in their supply chains.
• Transparency is a critical component of robust supply chain risk management and enables externals, like us, to review the effectiveness of companies’ human rights policies.
• Aren’t you glad we no longer invest in Tobacco companies.

Source:  The Guardian, June 2018