How to make business fix supply chain flaws
We’ll send you a myFT Daily Digest email rounding up the latest Supply chains news every morning.
Meatpacking plants in Wisconsin; fruit picking farms in Huelva; sweatshop clothing factories in Leicester — across the globe, coronavirus outbreaks have repeatedly been linked to companies with the worst working conditions, shining an unflattering light on to the supply chains of developed nations.
“Covid has laid bare the vulnerability of workers at the bottom of the supply chain,” says Laura Safer Espinoza, former New York State judge and director of the Fair Foods Standards Council.
“We call these individuals essential workers and yet the protections that they are afforded are woefully inadequate.”
Of the 24.9m people trapped in forced labour, 16m people are exploited in the private sector, according to figures from the International Labour Office in 2017.
And according to research by Hult International Business School in 2016, 77 per cent of companies thought it was likely that modern slavery existed in their supply chains. “In reality, we think it is closer to 100 per cent,” says Peter Hugh Smith, chief executive of CCLA investment fund and chair of an investor initiative to pressure businesses to rid slavery from their supply chains.
So how can investors influence companies to improve standards? And how likely are they to succeed?
David Schilling, senior programme director at the US-based Interfaith Center on Corporate Responsibility, says the first step is for institutional investors such as pension funds to put policies in place to screen their investments to check that standards are being upheld in the supply chains of investee companies.
“What’s the criteria of their investments and are they doing their due diligence to make sure companies aren’t abusing human rights?” he says.
In the UK, socially responsible investment screening is growing and £34.3bn was invested in responsible investment funds as of July 2020, up from £24.1bn the previous year. This represents 2.7 per cent of the industry’s funds under management, up from 1.9 per cent in July 2019, according to the Investment Association.
But the environmental, social and governance metrics that dictate such investments have their critics. While many funds have dropped companies due to environmental concerns, for instance, labour abuses in supply chains often fall under the radar because of a lack of visibility in subcontracting by those companies. The Australian Strategic Policy Institute recently estimated that the supply chains of at least 82 multinational companies such as Apple and Huawei were linked to factories using forced labour from China’s Uighur minority.
Boohoo, which in July was accused of poor working conditions and paying staff less than the minimum wage, was, just weeks before, rated by MSCI among the top 15 per cent of its peers based on ESG metrics. The online fashion retailer featured in multiple “sustainable” funds, including products from Standard Life Aberdeen, Legal and General Investment Management and Man Group.
Attributing such inconsistencies to the current way ESG is defined, George Serafeim, chair of the Impact-Weighted Accounts Project at Harvard Business School, says: “We call all these things that are very, very different, ‘ESG’ — everything from negative screening, to some engagement practices, to deep integration of ESG issues in companies’ strategies.” Investors, he adds, “need to identify organisations that by the nature of their strategy can deliver social impact, not [just] because they’ve adopted a few policies.”
Sarah Kaplan, professor at Rotman School of Management, says investors should put pressure on boards to create reporting requirements for social responsibility, as well as give small shareholders more opportunity to put issues before the board.
“Just like you have a financial audit committee, you should have an audit committee for your social statistics and be looking at those as closely as you look at your financial numbers,” she says. “If the board says ‘I want to see a full audit of our factories’, and if there isn’t improvement, asks why, you can guarantee the chief executive is going to push those questions all the way down through management.”
Ms Safer Espinoza is less optimistic that good intentions at board level will translate into action lower down. “My experience from what [is almost] a 40-year career in enforcement has led me to conclude that self-policing and self-monitoring simply does not work,” she says.
In the US-based Fair Food Program — established by the Coalition of Immokalee Workers — participating buyers such as Walmart agree to suspend purchases from tomato growers who fail to comply with the programme’s code of conduct, which now includes a Covid-19 protection protocol. Ms Safer Espinoza, whose Fair Foods Standards Council monitors working conditions at participating farms, says a legally binding agreement such as this is the only way investors can ensure companies put their money where their mouth is.
“Investors need to urge the major corporations at the top of these supply chains to enter into legally binding agreements with worker organisations, and [investors] can commit to putting their market-enforcing power behind the standards,” she says.
Mr Hugh Smith says investors also need to show management that poor working conditions are a false economy.
“There’s a huge economic profit that comes out of slavery, but most of that actually gets siphoned out by the middlemen — recruitment agencies, gang masters, etc,” he says. “In the great majority of cases, the impact [forgoing this kind of cheap labour] would have on cost is so infinitesimally small.”
Additionally, Mr Serafeim argues, ultra-lean supply chains raise a red flag and companies should be valued accordingly. “While it increases companies’ operating efficiency it actually decreases their resilience . . . This is not only a social issue but is becoming a business issue, so it is also an investor issue.”
And it is only becoming more urgent, says Mr Hugh Smith. “We’re in a recession, there’s global warming. These factors are going to drive economic migration, which risks modern slavery and means we have to do more to even put a lid on it.”
Get alerts on Supply chains when a new story is published