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September 28, 2022

Asset managers support EU proposal to ban products made with forced labour

Financial firms say zero tolerance also makes supply chains more sustainable – but the rules must be implemented properly.

The European Commission is proposing to prohibit products on the EU market that have been made with forced labour. National authorities will be able to withdraw any products made with forced labour from the EU market, following a proper investigation. EU customs authorities will also be able to identify and stop such products, at EU borders.

While the proposal does not target specific companies or industries, it covers all products, particularly those made in the EU for domestic consumption and exports, and ties in with an earlier recommendation by the European Parliament. It is also welcomed by asset managers.

“Addressing forced labour is a complex challenge. This legislation could be one piece of the puzzle. We believe not only is this the right thing to do, but there is also a business case to be made,” says Saskia Kort-Chick, director of social research and engagement at AllianceBernstein.

Elizabeth Chiweshenga, senior sustainability analyst at abrdn, says: “We are supportive of the EU’s proposals and various other existing regulatory measures in this important area. Forced labour is an ongoing focus in our research and engagements.” Chiweshenga says the EU proposals will support abrdn’s existing efforts to uphold a zero tolerance approach to companies that have forced labour in their operations and supply chains. 

Size of the issue

According to recent data from the International Labour Organization, almost 50mn people were living in modern slavery in 2021, 28mn of whom were in forced labour. The ILO defines forced labour as “all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily”.

The report found that in 2021, most cases of forced labour (86 per cent) were in the private sector. Forced labour in sectors other than commercial sexual exploitation accounted for 63 per cent of all forced labour. The data also showed that forced labour has grown in recent years – 2.7mn more people were in forced labour in 2021 compared to global estimates from 2016.

Thierry Breton, European commissioner for the internal market, said: “In today’s geopolitics, we need both secure and sustainable supply chains. We cannot maintain a model of consumption of goods produced unsustainably. Being industrial and technological leaders presupposes being more assertive in defending our values and in setting our rules and standards.”

The EU’s process to ban products made with forced labour will be implemented through a “robust, risk-based enforcement approach”, according to the European Commission. First, national authorities in member states will assess forced labour risks, based on different sources of information such as due diligence reports from companies, to help focus their efforts.

Authorities will then investigate products if they have well-founded suspicions that these have been made with forced labour. Information from companies may be requested and authorities will carry out checks and inspections, including in countries outside the EU. 

If national authorities find products made with forced labour, they will order the withdrawal of these products already on the market, prohibit their placing on the market, and ban the exportation of these products. 

Valdis Dombrovskis, EU executive vice president and commissioner for trade, says: “Our aim is to eliminate all products made with forced labour from the EU market, irrespective of where they have been made. Our ban will apply to domestic products, exports and imports alike.”

He says competent authorities and customs will “work hand-in-hand to make the system robust” and the European Commission will “deepen its cooperation” with its global partners and international organisations. 

Supply chain responsibility

AllianceBernstein’s Kort-Chick says the asset manager has seen great disparity in how well prepared, or otherwise, companies are in dealing with this issue. In order to pinpoint occurrences of forced labour, companies will need to have a clear understanding of their value chain. Supply chain mapping, traceability and due diligence processes, including social audits and worker voice initiatives, are among the actions companies can take, says Kort-Chick. Having these practices in place could help identify forced labour risks, while also leading to increased supply chain stability and efficiency.  

She adds that AllianceBernstein would welcome similar legislation in other markets, “which would create an even, level playing field and create increased regulatory certainty”.

Martin Buttle, better work stewardship lead at CCLA, says the asset manager welcomes the increased regulatory focus addressing modern slavery in company supply chains. “As demonstrated in the US, we believe regulation can further incentivise companies to work harder to address modern slavery in their supply chains and act as an effective barrier to markets for companies who are unwilling to act,” he says. 

In the US, Section 307 of the Tariff Act, which has been in place since 1930, prohibits the import of any product that was mined, produced or manufactured wholly or in part by forced labour, including forced or indentured child labour.

However, Buttle is concerned that if implemented poorly, the EU legislation may work “as a disincentive for companies to act on this important issue, and may not adequately help the victims of this terrible crime”.

Due to the scale of the issue, CCLA believes that modern slavery is present in nearly every company’s supply chain. Buttle says for this reason, the best companies are not those that have found no exposure, but those that have been able to demonstrate that their modern slavery policies and processes have been able to identify and subsequently support victims. 

He adds that the complex nature of supply chains means that companies need to be “proactive and persistent in investigating their supply chain and, once issues have been found, have the bravery to be transparent about their findings and to work to help the people impacted rather than just divesting their supplier relationship”.

Buttle says this is why CCLA encourages the EU to support business that are genuinely working to end modern slavery, and only exercise the most stringent punishments to businesses that are unwilling to act. “If properly incentivised business can be a key force in the bid to end modern slavery; investors, legislators and civil society need to collaborate to make this happen,” he says. 

 

A service from the Financial Times