Companies' global supply chains are under greater scrutiny than ever before. Historically companies could "choose" to talk about their human rights impact. Today new legislation is forcing companies to be transparent by publishing detailed data on their supply chains, their impact on local communities, and what action they are taking to improve their global impact in the human rights arena.

From 'soft law'…

Since the ground-breaking 'Protect, Respect, and Remedy' Framework was adopted by the UN in 2011, companies are expected to respect human rights throughout their business operations. The UN Guiding Principles (UNGP) detail how companies can know and show that they respect human rights in practice.

Companies are expected not only to avoid causing or contributing to adverse human rights impacts, but to address "human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts". Thus businesses have a responsibility to prevent and address adverse human rights impacts through their own activities and across the entirety of their value chain.

Suppliers represent a particular challenge for companies: adverse human rights impacts can occur at any level of a supply chain - from the bottom tier of direct or strategic suppliers, all the way up via multiple layers of sub-suppliers and sub-contractors, to those at the top of the supply chain that provide raw material inputs.

…to 'hard law'

New legislation concerned with forced labour and human trafficking received Royal Assent in the UK in March 2015. Under the Act, larger businesses with a certain level of turnover derived from their UK operations will be required to publish an annual slavery and human trafficking statement. This will mean that any commercial organisation which supplies goods and services in the UK will need to report on what actions they have taken to ensure their supply chain is "slavery free". Businesses will need to describe the steps they have taken to ensure that slavery and human trafficking is not taking place in their supply chains or any part of their own business. The statement will require director sign-off.

This legislation will affect those companies with an annual global turnover in excess of £36 million. To be caught, companies must have operations inside the UK and there is no minimum "footprint" required. Based on this threshold, it is estimated that more than 12,000 UK active companies will need to issue a statement. Although the provisions apply only to companies who have a presence in the UK, they have extraterritorial application.

Therefore, this requirement potentially has a much wider application than the strategic reporting requirements for quoted companies under the amendments to the Companies Act 2006. The Act is expected to come into force in October 2015 (although is subject to final parliamentary approval). The government has indicated that guidance on implementing the Act will be available at the same time (October 2015).

The guidance will be non-prescriptive and will contain suggestions as to the content of the statement. What they have indicated so far is that any statement will need to take account of the following:

  • A brief statement of an organisation's business model and supply chain relationships
  • A business's policies relating to modern slavery, including due diligence and auditing processes implemented
  • Training provided to those in supply chain management and the rest of the organisation
  • The principal risks related to slavery and human trafficking including how the organisation evaluates an manages those risks in their organisation and their supply chain
  • Relevant key performance indicators as measures to assess the effectiveness of what is described in the statement, with a view to showing progress year on year

The Modern Slavery Act also criminalises aiding, abetting or procuring forced labour or human trafficking or being an accessory to such offenses.

This is ground breaking legislation, and, while there may be some transitional relief, businesses need to prepare urgently to ensure compliance, dealing not just with Tier 1 suppliers but throughout their supply chain. This means appropriate mapping of salient risks, looking again at policies and procedures, training, integration with existing risk management systems, managing supplier contacts and their terms, issues of verification and preparing for the statement. Each business will, as the UK Government says, need to tailor their response to this legislation to their particular needs and those of their sector.

With so much at stake, companies and their directors need specialist advisors to help them navigate this new terrain.