Ending slavery with the right strategy

Ending slavery with the right strategy

In this 2015 photo, Lao workers are rescued from a chicken and pig farm in Nakhon Pathom whose owner was charged with labour exploitation. Bangkok Post
In this 2015 photo, Lao workers are rescued from a chicken and pig farm in Nakhon Pathom whose owner was charged with labour exploitation. Bangkok Post

Thailand is often associated with culinary delights, sandy beaches, and beautiful temples, but it also has its share of human rights-related labour problems. Today, there continue to be a significant number of forced-labour victims in the country. According to the US State Department's 2019 Trafficking in Persons Report (TIP), the Thai government successfully identified 631 victims in 2018. However, Thailand's private sector can still help to make the government's approach more sophisticated.

The government now appears to understand not just TIP's importance, but also how it works. The TIP praised the detection of large numbers of victims as it shows government's commitment. Once this was realised -- from a calamitous drop in 2014 and 2015 to the lowest "Tier III" ranking -- concerted government and NGO efforts resulted in Thailand reaching the "Tier II Watch List" in 2016-2017, before rising to "Tier II" ranking in 2018, and maintaining it this year.

Following scandals related to unfair labour practices on fishing boats, and to avoid EU sanctions, the government revised its anti-human-trafficking law by increasing jail time and fines, with more severe penalties for harming victims. Furthermore, Thailand became the first Asian country to ratify the International Labour Organisation's Protocol on Forced Labour. Thailand is now making significant efforts to bring itself into compliance with US Trafficking Victims Protection Act of 2000 standards, which drive the TIP.

While governments, the United Nations, and NGOs are taking the lead on forced labour, the private sector also needs to engage in this fight in order to accelerate real change. Asset managers can play a key role because the investment community and the issue of modern slavery are interconnected. The common denominator is "ESG" engagement.

ESG is an investment strategy that delivers financial and social returns by assessing the ethics of companies' policies and activities. The "E" stream comprises environmental issues, such as biodiversity, carbon emissions, energy usage, and water management; the "S" stream focuses on social issues such as human rights, child labour, employee relations, and health & safety; and the "G" stream concerns corporate governance issues, such as board structure, executive compensation, ownership structure, and shareholder rights transparency. Modern slavery falls under the "S" stream.

In Thailand, the banking sector has started to become active in this stream. To promote sustainability, the Thai Bankers' Association, the Bank of Thailand, and 15 other banks have committed to issuing loans to companies with positive ESG engagements.

They issued four policies on responsible lending and signed a memorandum of understanding committing to this framework. This was a response to increasing pollution, environmental damage, and labour abuses caused by business activities in the region, and it empowered the Thai banking sector to play a crucial role in reversing the trend.

For investors, an effective ESG strategy requires clear indicators that enable accurate analysis of companies' activities. The majority of ESG investment is based on the "E" and "G" streams because they offer the most quantifiable indicators, such as the Carbon Disclosure Project, while the "S" stream is much less understood and therefore attracts the least investment.

A recent study by Harvard Kennedy School stated that "S" is "seriously under-conceptualised and fails to draw substantive and procedural human rights standards". Currently, no standardised criteria exist for measuring social factors related to modern slavery.

Despite the lack of ESG investment related to modern slavery, the market consensus shows a significant demand for it and an appetite for quantified data to facilitate the due diligence process. According to a survey by BNP Paribas, 71% of asset owners align their investment with the United Nations' Sustainable Development Goals, one of which aims to end modern slavery by 2025. Furthermore, an Allianz Life study found that 73% of Americans consider social issues when making a decision to invest in companies.

Risk screening is the primary motivator for ESG engagement, and there is significant evidence that supports this concern. In 2017, Deloitte reported that one company affected by a modern-slavery scandal in the 1990s suffered a sales loss of approximately US$12 billion (about 368 billion baht) in five years, while the average share-price fall related to the issue between 1996 and 2000 was US$70 million. In addition to these short-term financial hits, the resulting reputational damage and supply-chain disruption can potentially lead to larger losses in the long term.

The positive aspects of social investment are also starting to attract attention. Hermes Investment Management reported that "companies with good or improving social characteristics have tended to outperform their lower-ranked peers on average by 15bps per month from Dec 31, 2008 to June 30, 2018".

Consumers -- particularly millennials -- respect companies that take a social stand. Additionally, many employees express great pride and satisfaction when their leaders demonstrate that they care.

These benefits, coupled with the increasing emphasis on internationally recognised human rights standards, create a compelling case for ESG investment related to modern slavery. However, investors will only be able to follow this strategy if standardised data and indicators exist to support the necessary due diligence.

These indicators must be evidence-based, with proof that they can effectively improve supply-chain labour conditions and lead to victim identification. Only with this information will investors be able to compare companies and separate the leaders from the laggers.

The investment community, corporations and sustainable reporting professionals need to work together to adopt and promote these indicators in order to scale the effort, and companies should integrate them into their supply-chain policies to combat modern slavery. Such multi-stakeholder efforts will give investors the power to make a significant contribution to the eradication of modern slavery.

Human-rights atrocities in supply chains must stop. This is a critical moment to take the initiative to create the necessary indicators and launch them.

Asset managers have the clout to affect the behaviour of companies and thereby help save modern-day slavery victims. And, the business case for doing this is clear: doing good and being profitable are not mutually exclusive -- in fact, they can be complementary, and can even offer a competitive advantage.

Jill Kuo is a project manager with the Mekong Club, whose mission is to support the private sector to eradicate slavery in Asia, and her responsibilities include management of the ESG project, coordinating the Mekong Club's Association, and strategic communication.

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