Stricter compliance policies required to end forced labour

Around the globe, desperate and poor people are still being sold or forced into slavery. Whether in fishing, agriculture, construction or other work, these men, women and children are ending up in the supply chains of major global companies but out of the gaze of the consumer or shareholder, writes Meggin Thwing Eastman, vp, ESG Research at MSCI ESG Research.

In well over half the cases where MSCI ESG Research has tracked companies involved in controversy over slave labour, the allegations centre on the supply chain below the first tier, away from the assembly line or factory. It is hidden too in some industries away from recent media attention that has centered on agriculture and fishing. In a recent report ‘Slaving Away: Shining a light on forced labour in the global value chain’, analysis by myself and MSCI colleagues Jackie Daitchman and Valerie Sioson, reveals that electronic goods and other items, such as clothes and the toys, may be linked to forced labour somewhere in the course of their transformation from raw material to finished products.

Our study analysed data on a total of nearly 8,500 companies. Of the approximately 2,500 companies in the MSCI ACWI Index - a global equity index consisting of developed and emerging market countries - we found that 62.4% of them are subject to either the new UK anti-slavery law or proposed transparency laws in the US.

In the past two years alone, a total of 88 companies have faced allegations by NGOs and the media linking them with forced labour, either in their own operations or somewhere in their supply chain. When we widened our scope to the broader MSCI ACWI Investible Market Index, which includes another 6,000 or so smaller cap companies, we found another 30 had faced similar allegations between 2013 and 2015. They range from emerging market companies close to the labour source to major global brands.

Of the companies that faced allegations, 42 percent were from the global agriculture sector, primarily palm oil production and fishing companies. Another notable cluster (14%) is large-scale construction projects, primarily in the Middle East. In general, most of the allegations centre on South East Asia and the Middle East.

However it does not end there. When we analysed data from the US Bureau of International Labor Affairs, we found that much forced labour occurs in manufacturing, specifically in the supply chains of the electronics and consumer goods industries. We identified nine raw materials and eight finished goods as presenting the greatest risk of implicating their users or producers in forced labour. We estimate that at least 25% of the global supply of these items comes from countries where there is a potential problem.

We were then able to identify the 10 industries with the greatest dependence on goods most often produced with forced labour. While it is not possible to tie individual companies directly to the use of slave labour without outside evidence, the largest companies in those industries likely face the greatest potential exposure.

So what can be done to eradicate the use of slave labour? Given the new laws on transparency both in the UK and the US, it appears that company actions so far may not do enough. We estimate that global brands selling electronics, toys, clothes - as well as those in the food business – will likely need to adopt, or be forced to adopt, stricter compliance policies and procedures all the way down their supply chains.

Meggin Thwing Eastman is vp, ESG Research at MSCI ESG Research