The last few years have seen investors, governments, the press and the wider public become increasingly aware of (and concerned about) ethical and sustainability issues within supply chains.
One key element of supply chain sustainability is a need to ensure that modern slavery is not present in the supply chain. In recent months the issue of modern slavery has been brought into focus by some high profile scandals, as well as new government initiatives. It is clear that if there is even a suggestion of modern slavery being present in a business's supply chain, the reputational and financial consequences can be extreme.
Under the Modern Slavery Act, many UK companies are required to publish an annual statement setting out the risk of modern slavery within their own business and their supply chains and the measures which are in place to tackle those risks. To date, there has been no minimum standard to be met by transparency statements and no ability for fines to be levied against organisations which fail to comply with the requirements of the Modern Slavery Act.
This is set to change. At the end of 2020, the Government announced plans to toughen up the reporting obligations relating to modern slavery, to introduce mandatory reporting periods and to introduce a penalty for non-compliance with supply chain transparency requirements.
Change is not limited to the UK. The German government is implementing a supply chain law, Australia passed a Modern Slavery Act in late 2018 and other countries have announced that they are considering new legislation in this area.
Where are we now?
The only legal obligations relating to publication of a supply chain transparency statement are:
- to publish a statement each financial year setting out the steps taken to ensure that slavery and human trafficking is not taking place within its business or its supply chains;
- for the statement to be approved by the board of directors
- for a director to sign the statement; and
- publish the statement on its website, with a prominent link to the statement on its homepage.
Despite these basic obligations, research suggests that a significant number of companies fail to comply with these requirements.
Outside of these legal requirements, there is currently a wide divergence in the approach of organisations to supply chain transparency reporting. Some businesses publish lengthy statements setting out in detail the approach of the business to slavery and trafficking, together with long-term plans for improvement. Other businesses publish short statements, with limited detail. Somewhat surprisingly, there is little correlation between and organisation's size and the approach taken to its transparency statement; although some sectors (for example, FMCG) tend to provide significantly more detailed statements than others.
Where are we heading?
When the Modern Slavery Act was passed in 2015, it was clear that the Government hoped that the press and the public would put pressure on businesses to both improve their transparency statements and improve their record in tackling modern slavery. It is not clear that this has been a success. As noted above, a significant number of companies fail to meet even the basic requirements set out in the Act and the detail and quality of content is often poor.
The UK Government has decided to take steps to improve reporting. March 2021 saw the launch of a government registry to which organisations can upload supply chain transparency statements. This represents a substantial step towards achieving transparency in supply chains by enabling easy access to information which was previously only available through accessing individual company websites.
Going forwards, the Government intends to introduce the following measures:
- an obligation for organisations to publish statements on the registry;
- a requirement for statements to cover the specific reporting areas which are currently set out as suggestions in the Modern Slavery Act;
- a requirement for statements to cover the period from April to March each year, with a publication deadline of 30 September;
- penalties for a failure to comply with reporting requirements.
In addition to Government action, we have seen increased activity among institutional investors in relation to supply chain transparency reporting. In some instances, businesses have been notified by investors that their current reporting practices do not meet legal requirements and those investors have threatened action if the legal requirements are not met. This represents a significant shift in approach from the investor community and demonstrates that supply chain transparency reporting should no longer be seen as a "tick box exercise".
What can you do?
A supply chain transparency statement is not an end in itself, it is designed to be the way in which an organisation can publicly display its commitment to tackling slavery and trafficking within its business and supply chain. Given the reputational and financial risks which may arise if allegations of slavery or human trafficking are made, businesses should take a holistic view of their supply chains and not simply focus on developing generic policies or the annual drafting of the transparency statement. To that end our five key points for success are set out below:
1. Develop a medium-term supply chain plan and publicly commit to delivering the key outcomes by setting out the plan in your supply chain transparency statement. This allows your business to show that it is delivering against plan each year and will demonstrate continuous improvement in relation to your supply chain.
2. Identify high risk areas, both geographical and sectoral. In the past, there has been too much focus on high risk jurisdictions, rather than high risk sectors. Recent events have shown that modern slavery is an issue even in low risk jurisdictions like the UK.
3. Undertake detailed supplier due diligence. All suppliers should be asked to demonstrate an understanding of the issues around modern slavery and obliged to meet minimum training and reporting requirements. Where a supplier is operating in a high risk area it may be appropriate to undertake site visits, interviews and other additional due diligence before entering into a relationship. Remember that due diligence shouldn't stop when the contract is signed, modern slavery can arise at any time, so a process of continuing due diligence should be embedded into the relationship.
4. Train your staff and, importantly, your suppliers' staff who are far more likely to witness slavery within the supply chain than your own staff. Individuals need to understand the different forms which modern slavery and human trafficking can take, how to report it and why tackling slavery is important. Training should be targeted depending on job roles – procurement experts will need to understand how your organisation's policy should be reflected in contracts and how to conduct due diligence; other staff members may need less focussed training. Consider setting up a whistleblowing hotline accessible to all staff and suppliers for the reporting of concerns.
5. Ensure your contractual rights meet your policy requirements. It is essential that your supply chain contracts allow you to fulfil your policy. Consider including additional audit rights, termination rights, reporting requirements and staff training requirements. Given the likelihood of significant publicity surrounding allegations of modern slavery, organisations should seek to ensure that they can use termination / suspension rights without a requirement for a formal criminal conviction.