For super funds and their advisers

Modern slavery and the complexity of ESG investing

Joey Alcock and Laura Daly

As the ‘S’ in ‘ESG’ is becoming increasingly important for big super funds and other fiduciary investors, the generally illegal activity known as ‘Modern Slavery’ in most countries, including Australia and New Zealand, has shown up the difficulties in finding out about and addressing bad behaviour down the supply chain. This is bad behaviour and the law is not very easy to adhere to.

In a session last week (on July 29) at the virtual version of the annual Frontier Advisors client conference, Joey Alcock and Laura Daly said that fund managers and super funds needed to understand their responsibilities under the law. Frontier has introduced a set of questions in its manager and client surveys to do with Modern Slavery. The consultancy has surveyed managers across equities, fixed income, other debt, infrastructure and property asset classes. They expect all asset owners and their managers to engage actively on the issue. The firm will be adopting a new questionnaire, as a standard tool, developed by the Financial Services Council.

Alcock is a principal consultant at Frontier and the chair of its responsible investing group. Daly is a research associate and member of the responsible investing group.

One of the difficulties in tracking whether investee companies are engaged in Modern Slavery is that it is illegal, globally, and therefore hidden from view. It includes “coercion, threats, abuse of power, and otherwise exploiting people in their employment”. It is applicable to asset owners as well as corporates, in Australia for any entity with more tha $100 million in assets.

As an aside, the NSW Government flagged its own legislation which would have been tougher, being applicable to any entity with more than $50 million in assets. Alcock says that, in the interests of national uniformity, the NSW proposal might well be dropped. The first round of statements from investors, initially due in December 2020, after the federal legislation was passed in January 2019, is now scheduled for March 31, 2021. The Federal Government established a Modern Slavery advisor group in May this year.

Alcock said that COVID-19 made the situation worse, because it tended to hit areas in the community which were most vulnerable, which increased the risk of them being subject to potential exploitation and human rights abuse, particularly abuse of women. “The ‘Black Lives Matter’ movement has increased the awareness of the historical slave trade,” he said, “but also perhaps of the ongoing trafficking of persons,” he said. There are various dynamics which were now shedding light on supply chains.

Daly said that in the most recent survey, about 70 per cent of Australian equities managers who responded were cogniscent of the potential risks, but 12 per cent were “wholly uninformed” about the law. Among property managers, about 20 per cent are unaware, given that the sector includes cleaning services, security and various other labour practices.

Daly said Frontier had developed a ‘risk heatmap’ tool to help investors look at the supply chain issues and understand the various labour practices involved. Modern Slavery statements by investors and corporates would involve and improve as more data became available, Alcock said.

– G.B.

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