How the Modern Slavery Act may impact your portfolio

By Stephanie Aikins

December 03 2018
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With the Modern Slavery Act passing the Senate last week, investors are being alerted to the implications for their portfolios, as some companies are likely to have unsustainable practices in their supply chains.

australian parliament house at sunset modern slavery act impact investment portfolio

Dominating the headlines last week was the news that the Australian Senate has officially passed the first federal Modern Slavery Act.

The Act will mandate that companies above a certain threshold report annually on the risk of slavery in their supply chain structure and operations, alongside disclosing their actions towards addressing such human rights abuses.

As such, it will could potentially have a significant impact on those who are invested in impacted companies.

“If a business model relies on underpaid workers, or even slavery, or weak regulation on social issues, current earnings will unlikely be sustainable. Also, brand damage can lead to loss of sales,” said Måns Carlsson-Sweeny, head of ESG research at Ausbil Investment Management.

“Damaged brands can be costly and time-consuming to restore and can also have internal impacts, such as staff engagement and distraction for management and the board.”

He said investors should expect to experience such regulatory risk not just in Australia but across the global markets in the near future, as the deadline for the UN Sustainable Development Goals encroaches ever closer.

“In addition to companies being exposed for underpaying workers in Australia, leading to a government inquiry into the franchise industry, there is also increased global regulatory focus on forced labour,” he said.

“The UN Sustainable Development Goals aim to eradicate slavery by 2030. With only 12 years remaining, we expect there will be increased regulatory activity globally.”

“Offshore, there have also been cases brought by consumers and non-government organisations (NGOs). In 2018, 36 countries were taking steps to address forced labour in business or public supply chains versus only four in 2016. We’ve already seen the UK Modern Slavery Act (MSA), various initiatives in Europe.”

He also urged investors to consider the extent of their holdings in companies meeting the threshold, as the nature of the new regulations may mean they too are subject to reporting.

“We understand that companies need to report beyond tier one suppliers in the supply chain, and we also understand that, based on the definition of ‘operations’, investors that meet the revenue thresholds will need to report on slavery risk in their portfolio holdings,” he said.

Mr Carlsson-Sweeny said investors may find it difficult to ascertain a company’s involvement in the practice of slavery, even if it is audited, as it is often hidden deep in the supply chain.

He recommended that they avert risk by furthering their engagement with ESG investments.

His suggestions come at the same time as a survey by Natixis Investment Managers, which found that many Australian investors (67.1 per cent) think making a positive impact through their investments is important.

What is the Modern Slavery Act?

Modern slavery, in regards to this bill, includes child slavery, forced labour, debt bondage, human trafficking, forced marriages and forced sexual exploitation.

Globally, there are 24.9 million people in forced labour conditions, while there are an estimated 15,000 victims in Australia alone.

The Modern Slavery Act (MSA), which passed the Senate last week, symbolises the federal government’s intention to address this widespread issue through mandating larger companies to make public annual modern slavery statements.

The statements will cover the structure, risks and operations of the supply chain, together with the actions they have taken to assess and address their exposure to modern slavery.

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