The introduction of Australia’s Modern Slavery Act is a giant step forward because it has thrown labour abuse sharply into focus for both consumers and super fund members, says Christian Super chief, Ross Piper.
In his view, the impact on the superannuation industry will be slow, but meaningful, over time as the push to remove violations in their supply chain will potentially alter the way funds view their investment portfolios.
The Act, which came into effect in January, requires businesses above a certain income threshold to report annually on the risks of modern slavery in their operations. Under the new law, they are called on to report what actions they have taken to mitigate that risk and the effectiveness of these strategies.
According to Piper, it is not entirely straightforward how funds will choose to measure modern slavery or, indeed, how companies will respond to the legislation.
“Slavery is harder than other ESG risks to mitigate,” he says, adding that human rights abuse is more subjective and wrestling with it requires the right internal governance structure.
“We have a reasonably robust internal process that determines the specific screens criteria so while some of them are in common with the broader application of ESG screens across the industry, there are a couple of areas such as human rights that demand bespoke analysis,” Piper notes.
“It’s fair to say it’s early days,” he says, adding that there has typically been less focus on the (S) in ESG because of the need for stringent qualitative analysis. And not every fund will have the in-house resources to carry out that research.”
“We certainly wouldn’t pretend it was easy or that we have the answer but modern slavery is a critical part of the whole ESG process and arguably the weakest.”
Consumers play major role
According to Piper, consumer pressure has a major role to play in tackling labour abuse as the threat of consumers switching to slavery-free products is more threatening to companies than any legal framework.
Whilst Christian Super members may have a particular set of beliefs and values to the superannuation fund boss, cracking down on modern slavery is simply good business.
“There is an ethical and moral imperative but actually there is a market imperative too– members are increasingly wanting to know how funds are treating the money they are investing, he says. “I think the legislation is a clear callout our members expect us to be at least asking the questions.”
There are a number of monitoring services that flag ESG issues on global companies but ultimately the decision about exclusion will come down to the fund’s own analysis.
“You have to check the alert to see how credible it is, whether the problem is systemic and how the company under review has responded,” he continues.
Critically, the topic of human rights and which companies should be screened out is debated by the super fund’s ethical committee which is accountable to the board.
“The question is always what is the right thing to do,” adds Tim Macready, Christian Super’s CIO.
Deluge of litigation
According to Macready, Christian Super has been identifying child labour, slave labour and other human rights issues across the super fund’s portfolio for more than 14 years.
Consequently, the Australian legislation won’t change the asset owner’s approach.
He noted that similar to the UK legislation, the new Australian law will provide access to a lot more data to help identify and quantify risks in Christian Super’s portfolio ahead of a decision to divest.
Importantly, he says, the expectation that Australian companies and their biggest shareholders will manage modern slavery risks across business supply chains is a given.
“Any asset owner or fund that takes short cuts or operates outside what is now a global set of norms is ultimately taking risks with their members’ capital.”
So, while the Act itself might be very disclosure-focussed and penalties far from onerous, the result should be better access to information.
“Companies who use child labour in the supply chain are ultimately using an unsustainable form of production and they need to move to a more sustainable business model, regardless of whether they face penalties, or not,” the CIO states.
Short term costs
Macready concedes here are short term costs associated with cleaning up supply chains.
However, he argues that given investors will have to take a hit at some point, long term investors should bear the brunt of those costs now to ensure that returns are placed on a more sustainable footing.
Ultimately, he warns, labour issues will be addressed and they will cost investors money whether that is because customers are driven away, employees leave or companies are swamped by litigation.
“Investors will pay for it one way or another,” he warns.
The CIO has found that divesting compliance with ethical legislation and guidelines and has added a small amount of value in the long term.
He accepts there can be a short term cost however as exclusions can either add, or detract, from value.
“In any given year, we could be 50 basis points up or down because of our exclusions. Unlike many of our peers that is a hit we are willing to take to line up the portfolio for long term value.”
Macready warns of the pushback from some companies and fund managers who don’t want to deal with human rights. “But as ultimate stewards of capital, it is up to us to advise fund managers that we expect them to ensure that all the companies comply with the law.”
Like Piper, he thinks audit has “a long way to go”, particularly in some developing countries where it is easy to rent a ‘clean’ factory for a day or bribe audit officials.
“Supply chains are complex and there will always be companies that slip through the net,” he notes.
“You can pick it up most of the time if you understand the culture but it’s tough.”
“If you got a child labour problems three levels down in your supply chain, that’s became you have a management problem two levels down and a cultural problem one level down.”