Better data needed for schemes to tackle modern slavery

While the pensions industry has made remarkable progress in both rhetoric and actions around climate change, the environmental, social and governance umbrella is not a wonder elixir to fix all the issues facing institutional investors.

Human trafficking does not garner the same level of attention as carbon emissions or net-zero pledges, yet it makes up an intrinsic part of ESG’s commitments, and the pensions world has a part to play in understanding and overcoming the issue.

Supply chain proliferation

Some companies in which pensions are invested will have data about the first tier of the supply chain, but very few will be able to trace products beyond that

Andrew Adams, CCLA

Modern slavery is embedded within supply chains, the products we buy and the services we use, yet remains mostly hidden to us.

The UN’s Sustainable Development Goals, which act as a backbone to many ESG efforts across the financial sector, outline the necessity to eradicate human trafficking, and “take immediate and effective measures” to see its eradication and to see an end to child labour by 2025.

Yet, 40.3m people are living in some form of modern slavery, according to the UN’s International Labour Organization. Many of them work in the production of core products, such as coal, corn, cocoa and cotton — materials that end up being used by companies in which we invest and the products we buy.

While the rise of ESG has made it easy to screen high carbon-emitting companies, it is substantially more difficult to remove human trafficking from investment allocations.

Data deficit

One reason is the shortcoming in data. It is well understood that ESG data can be problematic — an issue as relevant to human trafficking as it is to carbon emissions.

Andrew Adams, modern slavery project lead at investment manager CCLA — whose Find It, Fix It, Prevent It initiative aims to encourage companies to proactively identify shortcomings in their supply chains to improve the lives of those affected by human trafficking and modern slavery — argues that currently it is not possible for an investor or pension scheme member to have confidence in the data practices or the robustness of the space.

“Some companies in which pensions are invested will have data about the first tier of the supply chain, but very few will be able to trace products beyond that,” he says.

“Additionally, modern slavery is illegal everywhere, so criminals have the incentive to hide it from those above them in the supply chain.”

Likewise, Sarah Wilson, chief executive of corporate governance analysis company Minerva Analytics, notes that data on the crossover between human trafficking and the financial world is “not universally” available to investors, but progress is continually being made within the space.

There has been some improvement with the EU’s Sustainable Finance Disclosure Regulation and the UK’s Modern Slavery Act, but as with all areas of ESG disclosure there remain problems with data — “a lack of consistency of definitions, external verification of data, cross-border jurisdictional challenges, to name but a few”, Wilson adds.

Much of this stems from reporting regulations that do not properly encompass more specialised areas under the ESG umbrella, says Dr Assheton Carter, chief executive at consultancy TDi Sustainability.

“Regulations mostly require investors to complete due diligence, but with the exception of climate change, few incentivise investors to take action to address the problems they find. Perversely, they encourage asset managers to disengage, a strategy that rarely leads to positive change,” he argues.  

“Regulations need to keep up with the expectations of retail investors, right groups and corporates, to reward firms that can demonstrate they have played a part in improving matters, not just disclosing their existence.”

Taking action

Adams notes that best-practice companies are those that “proactively identify problems and risks” before responding to them appropriately, including providing remedy to any victims.

“We argue that most, if not all companies, will have people in a situation of modern slavery somewhere within their supply chain or operations,” he says.

“Despite the large scale of the problems reported, along with the breadth and depth of company supply chains, we see very few companies who report identifying problems.”

For pension schemes and their members, this makes taking action on human trafficking incredibly difficult, yet there are things people can do.

Find It, Fix It, Prevent It has both pension schemes and fund managers, with assets collectively totalling around £7tn, who have committed to encouraging more effective action on modern slavery through corporate engagement, public policy and improving data standards.

Wilson argues that investors must take the lead on the issue. She says: “Annual report disclosures on material risks evolve more dynamically as a consequence of investor voting and engagement, rather than expecting national regulators to move, which might be at a glacial pace.”