Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Super funds start to act on modern slavery
The uncomfortable truth is that slavery, even in its more modern form, still exists. The UN estimates there are approximately 40 million victims of modern slavery around the world. The exploitation of people for commercial gain is deeply intertwined into everyday products and services through our global supply chains.
This is a serious global issue that occurs in every industry and sector. To assist in the fight to eliminate modern slavery, Australia introduced the Modern Slavery Act 2018, which came into force in 2019. The Act requires large Australian entities and foreign entities conducting business in Australia to report annually on the risks of modern slavery in their operations and supply chains, and the actions taken to address those risks.
The results of the first year of reporting under the act shows encouraging results. Nonetheless, it remains clear that we need to dive deeper into investments and supply chains if Australian companies are to play their part in eradicating this global menace.
Looking at the superannuation sector, Australian super funds have approximately $3 trillion invested globally. This is a significant sum and has the power to hold material influence on the fight against modern slavery through direct engagement with investment managers, investee companies and broader advocacy.
The Australian Modern Slavery Act was the first in the world to include specific terms to help define what modern slavery is. People trafficking, servitude, forced marriage, forced labour, debt bondage, deceptive recruiting and child labour are all included in this definition.
On review of the first Modern Slavery Statements of 20 large superannuation funds, JANA was encouraged to find that the funds focused explicitly on modern slavery from a “risk to people” perspective, rather than the risk to the value of investments.
The review also found that all of the funds reviewed acknowledged modern slavery risk should be considered in relation to their investment activities, with 95 per cent carrying out modern slavery risk assessments on their assets.
While none of the super funds identified any instances of modern slavery in the first formal year of reporting, this should not result in complacency. Indeed, we must question whether the results are valid, as identifying possible instances is a big challenge given the often deep and complex nature of global supply chains.
Evidence from the UK Modern Slavery Act, which came into effect in 2015, indicates that instances of modern slavery are typically identified further down the supply chain, e.g. at tiers three and four of the supply chain, rather than at the investee company level. Looking at compliance across Australian superannuation funds only one of the 20 funds reviewed carried out a risk assessment beyond tier one of their assets.
Not only that, but the number of approaches also taken to assess modern slavery risk varies hugely from a high-level regional and sector mapping of the listed equity assets only, to a more thorough assessment across a wider range of asset classes, including infrastructure, property and corporate bonds.
Less than half of the funds reviewed had carried out some form of modern slavery specific training for staff, and fewer still (15 per cent) had produced a standalone Modern Slavery Policy. In many cases, policies linked to modern slavery were embedded within wider ESG and Responsible Investment Policies, although several funds noted standalone policies were in progress.
While there is still more work to be done with reporting under the Act, it is very encouraging to see that many superannuation funds opted to report despite being below the $100m revenue threshold where reporting becomes mandatory. This proactivity to be transparent and accountable shows that the sector is serious about combating investment-related modern slavery.
So while we know the superannuation industry is engaged and serious about slavery, the fact still remains that super funds and other institutional investors need to dive deeper and conduct wider analysis within and across asset classes over time to truly identify, and fundamentally address instances of modern slavery. It is essential that as reporting under the Act evolves, funds start to analyse data beyond tier one of assets.
As the assessment of modern slavery risk develops over time, we expect to see reporting entities identify and report on instances of modern slavery within their investment supply chain. As the depth of analysis increases by looking further down the supply chain, so too should the rate of modern slavery identification across all reporting entities.
When we begin to see instances of slavery being highlighted by reporting under the Act, this shouldn’t be an occasion for condemnation or despair. It will instead be an indication that reporting is working, and funds are taking their responsibilities seriously and inquiring into their supply chains with rigour.
It is essential that risk assessments evolve to look down the supply chain at tiers three and four and beyond. While we may not like what we find, this is where instances of modern slavery are typically identified. When those identifications are made, they provide a basis to act and engage, so we can truly move towards the elimination of modern slavery.
Christopher Beattie, Consultant – JANA
