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Human Rights in the Supply Chain

May 2017

ACCSR recently made a submission to the Australian Parliament’s Inquiry into establishing a Modern Slavery Act in Australia. Here, we provide an overview of our submission and summarise the recommendations we made to the Inquiry.

Part 1: Modern slavery as a management practice

The incidence of modern slavery

The notion of ‘modern slavery’ is broader than a traditional understanding of slavery might imply. It encompasses slavery-like practices, such as debt bondage (the pledge of services as security for a debt), forced labour (work conducted under threat of a penalty) and forced marriage. The launch of an Inquiry in Australia is part of a growing trend of legislative developments in this area, as the international community seeks to address an insidious global problem.

The Australian government has recognised that Australia has a major role to play in eradication of modern slavery, introducing the National Action Plan to Combat Human Trafficking and Slavery 2015-19 and the International Strategy to Combat Human Trafficking and Slavery. A Modern Slavery Act would be a powerful – and necessary – next step.

Domestically, the incidence of modern slavery is limited, but nonetheless significant: there are approximately 4,300 people living in slavery in Australia, according to the Walk Free Foundation 2016 Global Slavery Index.[1] This largely comprises people subject to forced labour, particularly in the agriculture, food processing and hospitality industries, as well as forced prostitution.

Regionally, the incidence of modern slavery is enormous: of the estimated 45.8 million people enslaved globally, approximately 30 million people are held in these conditions in Asia-Pacific.[2] Not only is Australia a destination for people trafficked into slavery from Asia-Pacific, but four of our top five import sources are Asia-Pacific countries.[3] This means that, because of the faults in the supply chains upon which we rely, the daily use of goods and services by Australians is contributing to the abuse and exploitation of overseas workers.

“The trafficking of people and the exploitation of workers is only profitable insofar as somebody is willing to buy the goods that slave labour has produced.” – Kevin Hyland OBE, UK Independent Anti-Slavery Commissioner.

The management of modern slavery

Strategic management theorist Andrew Crane identifies modern slavery as a management practice.[4] It is “an attempt to under-price a key resource (labour) through illegitimate means”.[5]

Modern slavery occurs where organisations are incentivised to exploit fundamental weaknesses in their industries and in the institutions that operate around them. Certain industries, such as manufacturing, are more likely to feature exploitative practices because of the structure of value distribution along the supply chain: there is high labour intensity and low margins in the lowest tiers, and the capture of value occurs further downstream by more powerful entities, who pressure upstream entities towards slavery.

Institutional weakness can manifest in different ways: socioeconomic factors such as poverty and unemployment make workers vulnerable to exploitation; geographical factors such as distance isolate facilities from regulatory institutions; cultural factors such as entrenched inequalities validate maltreatment; and political factors such as regulatory quality affect the extent to which organisations are held to account.

In order to employ exploitative practices, organisations must be able to exploit the industry and institutional weaknesses, for example by relying on poor supply chain management by upstream organisations. Similarly, organisations must be able to sustain these favourable conditions, for example by lobbying or bribing regulatory authorities to maintain the status quo.

To mitigate macro-level weaknesses, and constrain the ways in which organisations can exploit them, more extensive supply chain regulation is crucial. However, this is no easy task.

Part 2: the challenge of regulating the supply chain

Managing supply chains

The governance of supply chains is based on due diligence, which has three basic functions: ‘(i) identifying actual or potential human rights impacts; (ii) preventing and mitigating those impacts; and (iii) accounting for impacts and the responses to them. These should be part of an ongoing management process, integrated into company decision making.'[6]

The overarching challenge that faces supply chain regulation globally is two-pronged: how to implement effective due diligence requirements in fluid, multi-tiered, global supply chains; and how to shape the power dynamics between buyers and suppliers.[7]

Layered supply chains

Any country can tailor its domestic regulations to operate extraterritorially for organisations with international supply chains. These ways, as well as regulating themselves, organisations become the indirect regulators of their supply chain, imposing the standards that apply in the country where the goods or services are provided (the home state). Theoretically, this allows the home state to regulate suppliers that would ordinarily be beyond its reach, although it can also have the effect of diluting domestic regulatory authority, with private actors performing functions traditionally occupied by public regulatory agencies. It may also be very difficult to trace and regulate multiple layers of suppliers, leading organisations to outsource due diligence to suppliers, the first tier monitoring the second tier, and so on. This becomes problematic where suppliers lack the necessary resources or expertise, and the buyer relies solely on due diligence information received via third-party filters.

Power dynamics

In their relationships with direct suppliers, buyers who have a high degree of purchasing power or can easily switch between suppliers will be able to more easily monitor and influence supplier behaviour. A corresponding multiplier effect, with the influence of the buyer on suppliers forcing sub-suppliers to adapt their behaviour, depends on the chain of influence. If the buyer cannot easily switch between suppliers due to high costs, lacks a high degree of purchasing power, or cannot transmit incentives that encourage cooperation, it will have more difficulty exercising due diligence and influencing behaviour along the supply chain. The buyer may then tolerate non-compliant behaviour by suppliers, allowing suppliers to insulate themselves against change.

Promoting domestic governance

In the pursuit of better supply chain management, there has been a shift away from reliance on voluntary international due diligence standards, towards mandatory domestic reporting requirements. Being legally unenforceable, the standards of the existing soft law framework, made up of instruments such as the UN Guiding Principles on Business and Human Rights and UN Global Compact, remain ultimately aspirational. A more powerful and immediate tool of change is a legal obligation to conduct and report on due diligence.

By requiring organisations to adhere to due diligence criteria, home states can deploy buyers as agents in the transmission of international norms to third-country suppliers and their host governments. Moreover, the onus placed on buyers encourages them to utilise their purchasing power to pursue progressive upgrading of their supply chains. The design of appropriate contractual mechanisms, for example, will enable buyers to hold suppliers to account for any failure to comply with human rights standards.

Part 3: Introducing a Modern Slavery Act

International trends

Due diligence reporting obligations for human rights risks generally, or modern slavery risks specifically, have been introduced by some of Australia’s key trading partners and global leaders on the protection of human rights.

In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 requires companies to conduct a due diligence assessment for products manufactured with conflict minerals. The California Transparency in Supply Chains Act 2010 (TSCA) requires companies with annual worldwide gross receipts of more than USD $100 million and doing business in California to disclose their efforts, or lack thereof, to eradicate modern slavery from their supply chain.

In Europe, the 2014 EU Non-Financial Reporting Directive requires member states to implement domestic legislation requiring businesses with more than 500 employees to disclose their management of human rights impacts. France has adopted a ‘Duty of Vigilance Law’, which requires companies with more than 10,000 employees to implement a vigilance plan (essentially, a due diligence plan) for the identification and mitigation of risks to human rights, human health and the environment.

In the UK, the 2015 Modern Slavery Act 2015 (UK Act) obliges commercial organisations that supply goods or services in the UK and have an annual turnover in excess of £36m to prepare a slavery and human trafficking statement. The statement should describe the steps taken to ensure that slavery and human trafficking is not taking place in the supply chain, or state that no such steps have been taken. In early 2017, two years after the introduction of the Act, the UK Parliament Joint Committee on Human Rights recommended the introduction of mandatory human rights due diligence requirements for all commercial organisations.

While progressive, the operation of these instruments to date has not succeeded in achieving transparency with substantive value. For example, of an estimated 500 companies required to comply with the TSCA in 2015, only 31 percent had a disclosure statement available that followed all requirements of law.[8] Similarly, most of the statements produced in 2016 and 2017 in response to the UK Act lacked detail, and were limited to broad descriptions of processes and activities. It is important, then, for governments to provide appropriate guidance on reporting obligations, and in doing so seek to generate responsive due diligence rather than superficial compliance.[9] In addition, neither the TSCA nor the UK Act contemplated a repository for the statements produced nor a list of organisations to whom the legislation applies, in order to enable interrogation of performance stakeholders.

Overall, the quality of responses demonstrates that more strenuous corporate compliance is required, alongside more extensive guidance for the target organisations.

A Modern Slavery Act for Australia

The introduction of a Modern Slavery Act in Australia, inclusive of a transparency in supply chains provision, would represent a step towards the codification of the UN Guiding Principles on Business and Human Rights by cementing the responsibility of business for the incidence of modern slavery.

By enhancing the quality of supply chain regulation and drawing public attention to due diligence standards, a Modern Slavery Act would promote the accountability of organisations operating in Australia for engaging in or enabling exploitative practices. Importantly, given the position that many organisations occupy in international economies, such an Act would also compel the transmission of behavioural change along the length of overseas supply chains.

Accordingly, in our submission to the Inquiry into establish a Modern Slavery Act in Australia, ACCSR recommended that the Australian government:

  • Require organisations to implement mandatory due diligence and reporting processes on human rights generally or modern slavery in particular, to compel organisations to take the action that will achieve fundamental change in this realm
  • Utilise the GRI Standards Reporting Principles to define report quality, to encourage the presentation of information in a way that is representative and comparable
  • Formulate criteria for reporting, to ensure that reporting is a substantive rather than a purely descriptive exercise
  • Define the concept of the supply chain, to specify appropriate scope for due diligence
  • Set a revenue threshold that encompasses medium-sized as well as large-sized companies, to capture the relevant actors
  • Operate a publicly accessible registry of the reports produced and a list of the organisations to whom the transparency provision applies, to make the information accessible for interrogation by stakeholders
  • Include mechanisms for monitoring and enforcement, such as financial penalties for non-compliance, and a ‘name and shame list’ to promote accountability
  • Publish academic and industry-informed guidance, to promote report quality and organisational learning

[1] Global Slavery Index. 2016 Global Slavery Index. http://www.globalslaveryindex.org/
[2] Ibid
[3] Australian Government Department of Foreign Affairs and Trade. Trade at a Glance 2015. http://dfat.gov.au/about-us/publications/trade-investment/trade-at-a-glance/trade-at-a-glance-2015/Pages/trade-at-a-glance-2015.aspx
[4] Crane, A. (2013). ‘Modern slavery as a management practice: exploring the conditions and capabilities for human exploitation.’ Academy of Management Review, 38/1: 45-69
[5] Ibid 63
[6] Norwegian Ministry of Foreign Affairs and Ethical Trading Initiative Norway. (2013). A Guide to Human Rights Due Diligence in Global Supply Chains. Norwegian Ministry of Foreign Affairs and Ethical Trading Initiative Norway. 4 < etiskhandel.no/noop/file.php?id=10082>
[7] Safarty, G. (2015). ‘Shining Light on Global Supply Chains’. Harvard International Law Journal, 56/2, 420-463, 430-431
[8] Know the Chain. (2015). Five Years of the California Transparency in Supply Chains Act. Know the Chain. <https://knowthechain.org/wp-content/uploads/2015/10/KnowTheChain_InsightsBrief_093015.pdf>
[9] Ergon Associates. (2016). Reporting on Modern Slavery: The current state of disclosure – May 2016. Ergon Associates. http://www.ergonassociates.net/images/stories/articles/ergonmsastatement2.pdf; Ergon Associates. (2017). Modern slavery statement: One year on. Ergon Associates. <http://www.ergonassociates.net/images/stories/articles/ergonmsastatement2.pdf>

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