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Morgan Ellis

Morgan Ellis
Vice President, MSCI Research

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Modern Slavery: The Unseen Risks

  • New and evolving supply-chain disclosure requirements seem likely to increase pressure on companies to become more proactive about reporting their exposures to modern slavery issues.
  • Modern slavery controversies have shown that this is not only a problem for emerging markets but can also be found in developed markets and can impact companies in a wide range of industries.
  • Companies that generate most of their revenue by sourcing private-label goods from countries where forced labor is prevalent are most vulnerable to being implicated in controversial labor practices.

In the recent documentary film "Seaspiracy," the director’s focus on modern slavery in the Thai fishing industry may have made it appear that this is an issue confined to Southeast Asia, or that it occurs only in emerging markets or in certain industries. But modern slavery occurs all over the world and can impact virtually all industries. Even developed countries have experienced problems recently, from allegations of chronic underpayment in the U.K.’s retail industry to allegations of exploiting visa-holding farm workers in Australia.1

How can investors identify the companies in their portfolios most at risk? The reach and scope of regulations requiring more detailed reporting on potential supply-chain exposure to this issue is increasing for both companies and investors. There are currently five countries that require reporting on modern slavery exposure; these countries — the U.S., the U.K., Australia, France and the Netherlands — cover 66.7% of the market capitalization of the MSCI ACWI Index,2 and there are several more with advanced pending legislation.

 

A Global Concern

MSCI’s ESG Controversies model, which assesses companies on their exposure to legal, regulatory or reputational risks, indicates that both developed- and emerging-market companies are at risk for having modern slavery in their supply chains. In fact, 87.3% of the 238 active controversies cases we identified as being related to modern slavery were linked to companies operating in developed countries, as of Jan. 19, 2021. The vast majority of modern slavery-related controversies are linked to companies in either the U.S. or the EU, as can be seen in the exhibit below.

 

Where Modern-Slavery-Related Controversies Occur

MSCI ESG Controversies assess the impact of company operations, governance practices and/or products and services that allegedly violate national or international laws, regulations and/or commonly accepted global norms. Sources: MSCI ESG Research; company disclosure; MSCI ACWI Index, as of Jan. 19, 2021

 

Which Companies Are Most at Risk?

A combination of increasing regulatory requirements and media scrutiny on supply-chain conditions appears to be lowering investors’ tolerance for exposure to modern slavery in company supply chains. Thus, identifying industries and companies that have elevated risks of such exposure as well as reliance on substantial outsourcing has become increasingly important for investors. In the exhibit below, we screen for companies by these risks, based on their revenue exposure.

 

Company Exposure to Modern Slavery Regulations and Supply-Chain Labor Standards

Based on company revenue exposure scores. Sources: MSCI ESG Research; company disclosure; MSCI ACWI Index, as of Jan. 19, 2021

We assessed companies’ vulnerability to modern slavery in their supply chains by examining the volume of sales from private-label products produced in countries with relatively low manufacturing costs, where poor labor standards may be more likely to be present. Companies with higher levels of reliance on outsourcing production to these countries are likely to have more complicated supply chains where there are greater chances for disruptions or controversies to occur.

The highlighted groups of companies in the exhibit above represent two sets of outliers for investor focus. The red group includes companies with more immediate risks, due to higher exposure to a combination of current legislation and high supply-chain labor risk, while the orange group includes companies with a combination of high supply-chain labor risk and the potential for increasing exposure to modern slavery regulation.

This sort of scrutiny may increase as modern slavery reporting legislation advances and as evolving disclosure requirements, such as those in the EU, demand ever-higher levels of reporting and disclosure from investors on companies in their portfolios, as well as from companies themselves, on their potential exposures and how they are managing modern slavery risk.

 

 

1Cavanough, E., Wherret, C. “Blue Harvest: Wage theft & other labour infringements in the NSW Mid-North Coast’s 2019/20 berry harvest.” The McKell Institute, December 2020.

2MSCI ACWI covers large- and mid-cap stocks from 50 developed and emerging markets. Data as of Feb. 1, 2021.

 

 

Further Reading

Unseen Laborers: Addressing Modern Slavery in 2021

MSCI: Modern Slavery Statement

Have Corporate Controversies Helped or Hurt Performance

Regulation