ESG – does the ‘S’ include slavery?

Linking back to my previous article in relation to modern slavery: Modern Slavery: what corporate governance can do, I now look at how ESG (Environment, Social, Governance) reporting is linked to modern slavery. As you are probably aware, ESG has roots in CSR (Corporate Social Responsibility) which represents the organisation’s actions and effort to have a positive impact on its stakeholders and the environment. ESG factors measure the activities of the organisation’s actions and evaluate how advanced they are with sustainability. ESG reporting is something that all corporate governance professionals need to be concerned with the increase in stakeholder and investor attention.

E, S, and G.

Sustainability for larger organisations is not a one-size-fits-all but instead depends on the company’s culture and activities. ESG measures mean responsible or sustainable decisions and actions. The ‘E’ or ‘Environmental’ stream which includes energy usage, water management, biodiversity and carbon emissions. The ‘S’ or ‘Social’ focuses on human capital management, human rights, diversity, health and safety and modern slavery. Lastly, the ‘G’ means ‘Governance’ which addresses shareholder transparency, board structure and ownership structure as well as how a company is managed. Both the ‘S’ and ‘G’ directly include modern slavery, and the ‘E’ can lead to people forced to work in polluted or dangerous conditions.

ESG reporting gives investors guidance that the company is social- conscious and aims for a positive impact in the long-run on environment, society and business performance. It demonstrates a holistic approach to sustainability.

However, modern slavery is an underweighted element within the ESG framework.

The UN’s 2015 Sustainable Development Goals (SDGs) or Global Goals, include the aim to eradicate modern slavery by 2030. While these goals include actions to protect the planet, people and end poverty, the attention focused on addressing modern slavery is unlikely to increase significantly. This could be because modern slavery is a complex issue that ultimately requires action from multiple stakeholders to address it.

Unfortunately, modern slavery is one of the most underweighted elements of all indicators within the ESG framework, and as such, it attracts very less investment. Being the least quantified stream meant being the least focused topic by investors. Although modern slavery indicators are important as they measure and describe the risk profile of an organisation; measuring modern slavery can be really difficult. Reading modern slavery reports on company websites do not usually provide detailed insights, as it may only offer a veneer of confidence for investors and stakeholders. The fact is that there aren’t any measures that have been acknowledged on how this can be tackled. Creating a standard for a modern slavery indicator would provide a better understanding to investors of the risks that modern slavery holds and would help mitigate risks. However, currently, the indicators on this area are non-standardised; therefore, it makes it difficult for investors to compare options. It is also difficult as companies do not disclose enough information on modern slavery, and they are often not transparent enough on this topic. Lack of disclosure knowingly prevents investors from understanding how organisations manage the risks associated with modern slavery. Investors prefer stable earnings and these are impacted by modern slavery, it is more than just an ethical issue, but instead, an investment risk related with potentially catastrophic outcomes for organisations who find themselves dealing with human rights violations.

Stakeholders’ views on modern slavery

During my research on stakeholders’ opinions in relation to modern slavery, it was found that a majority of the surveyed does not have accurate information about significant matters such as who approves the modern slavery statement and whether this topic gets escalated to board level. My research further found that 87% of the participants thought modern slavery exists in the UK (chart 1.) and over half of the participants (71%) were aware of the business reporting requirements (chart 2.)

Chart 1.

Chart 2.

Interesting to see that greater part of the participants was aware of the above-mentioned facts. Yet, only 2% of them think that businesses do enough to tackle the issue (chart 3.) and none of them (0%) believes that businesses do more than enough.

Chart 3.

Furthermore, 84% of the participants agreed on the fact that businesses should take a broader human rights approach (chart 4.) and it should be extended beyond the compliance of modern slavery statement.

Chart 4.

This was further supported by a question where child labour was discovered within one of the world largest food and drink processing conglomerate (chart 5.), where 84% of the participants would definitely not or probably not buy from a particular supplier if child labour was broadly known.

Chart 5.

Therefore, the good news is that people are aware and are willing to change their behaviour. The difficulty is how to give people the right information to make the right decisions.

Boglarka Radi