Issue Briefing - Supply Chains

Sectors & Issues
June 9 2017 - Juliana Burden, Head of Research

This paper outlines the human rights risks that are associated with the supply chains of multinational corporations by discussing the nature of concerns with reference to sector-specific issues, the rapidly changing regulatory landscape in which companies are operating, and the measures that can be implemented to mitigate the risks present within their supply chains.

Supply China Risks

Many global companies depend on third party suppliers for the provision of components, raw materials and services that form key elements of their finished products. These suppliers in turn, may outsource to others leading to complex supply chains that can comprise multiple tiers, hundreds of supplier locations and thousands of individuals. When labour-intensive industries are based in countries where regulations are weak or poorly enforced, this can present serious concerns relating to working conditions, labour rights, and the risk that child, forced or slave labour is being used. In addition, a supplier's business activities may also have wider impacts e.g. on the surrounding community. The more extensive and opaque the supply chain, the greater the risk that such abuses may occur.

The statistics are alarming. The International Labour Organization (ILO) estimates that 20.9 million people worldwide are victims of forced labour with approximately 90% exploited in the private economy (by individuals or enterprises). Migrant workers and indigenous people are particularly vulnerable to forced labour. In addition, the ILO estimates that globally, 168 million children are involved in child labour, accounting for around 11% of the child population as a whole. Of this number, children in hazardous work that directly endangers their health, safety and moral development represent more than half of all child labourers, totalling 85 million in absolute terms.

Identifying High-Risk Industry Sectors

Resources such as the Walk Free Foundation's Global Slavery Index, and the US Department of Labor's List of 'Goods Produced by Child Labor or Forced Labor', have helped to identify the countries and industries which are most at risk for the use of child/forced/slave labour and demonstrate that these problems are widespread both globally and across a range of industry sectors. As of September 30, 2016, the List comprised 139 goods from 75 countries.

In recent years, several high-profile cases (set out below) have highlighted the severity of the risks associated with particular industry sectors.

Hazardous working conditions in the textile industry in Bangladesh

The collapse of the multi-storey Rana Plaza garment factory which killed over 1000 workers in 2013 , and the fire at the Tazreen Fashions factory, which killed 112 people in 2012, shocked the world and exposed the dangerous conditions in which many in the (largely unregulated) garment sector in Bangladesh are forced to work. Both facilities were found to be supplying international clothing brands.

Slave Labour in the Thai fishing industry

Investigations by the Associated Press and the Guardian newspaper revealed that Burmese slave labourers and others were working on Thai cargo ships, fishing for squid, shrimp, snapper, grouper and other fish. The slaves reported working up to 22-hour shifts with no or little pay, no days off or access to clean drinking water and risked being beaten if they complained or tried to rest. The seafood caught was found to be entering the supply networks of major supermarkets, restaurants and pet stores in the USA.

Minerals used in the manufacture of consumer electronics

The sourcing of so-called ‘conflict minerals’ (also known as 3TG for tin, tungsten, tantalum and gold) presents serious human rights concerns as these are mined in countries such as the Democratic Republic of Congo (DRC), and sold to fund armed conflict. Child labour is commonplace at the underground mines in the DRC where the minerals are being extracted. Such minerals are essential in the manufacture of a variety of devices including consumer electronics, such as mobile phones.

An Evolving Regulatory Landscape

The “Protect, Respect and Remedy” framework, established by the UN Human Rights Council in 2008, stresses that companies have a duty to respect international human rights standards i.e. to not infringe on people’s rights and to address adverse human rights impacts that they cause or contribute to. This responsibility is set out in the UN Guiding Principles on Business and Human Rights (introduced in 2011) which instruct both governments and business on how to implement the framework. The Guiding Principles, which have been endorsed by the Human Rights Council, are considered to be the authoritative global source of reference for business and human rights.

Driven by the need to eradicate the use of child, forced and slave labour, and increasing demands for corporate accountability from civil society, investors and other stakeholders, the principles underlying these voluntary guidelines are being translated into law in a number of jurisdictions. In recent years, the following legislation has been introduced in Europe, the UK and USA:


 
  • UK Modern Slavery Act 2015 - requires companies (with an annual turnover above £36 million) to publish an annual statement declaring whether steps have been taken to ensure that slavery and human trafficking are not taking place in the business or its supply chain.
  • Section 307 of the U.S. Tariff Act of 1930 (19 U.S.C. § 1307) - enacted in 2016, this prohibits the import into the United States of merchandise mined, produced or manufactured, wholly or in part, in any foreign country by forced or indentured child labour.
  • The California Transparency in Supply Chains Act (enacted 2012) - requires certain companies with an annual turnover of over $100 million, to disclose their initiatives to eradicate slavery and human trafficking from their direct supply chain for the goods offered for sale.
  • 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (section 1502) - requires certain U.S. manufacturers to audit their supply chains and report on their use of conflict minerals.
  • EU Conflict Minerals Regulation - agreed in 2017 and due to come into force in 2021, this will apply to EU-based importers of conflict minerals.
 

This legislation has been welcomed but is not without critics who point out that, in many cases, there are often no legally binding requirements to conduct due diligence on supply chains, or criminal or financial penalties for non-compliance, meaning that the regulations can lack teeth. In the case of the EU Conflict Minerals Regulation for example, the NGO Global Witness also believes that the legislation is far from comprehensive, and that by focusing solely on the importers of conflict minerals and not the companies who manufacture products which contain these minerals, it fails to hold the majority of the parties linked to this trade to account.

To date, the impacts of the new regulations have been mixed. In July 2016, Bloomberg reported that three years after U.S. companies began filing reports about their efforts to locate conflict minerals in their supply chains (under a rule arising from the 2010 Dodd-Frank Act), more than 70% say they still cannot make a determination. Clearly, considerable challenges remain.

Managing Supply Chain Risks

What constitutes effective supply chain risk management? It is evident that a lack of transparency and adequate oversight of supplier operations heightens the risks that human rights abuses are taking place within a company's supply chain. Human rights due diligence - as outlined in regulatory guidance and advice from organisations such as the UK Government, the UN Global Compact and the Organisation for Economic Co-operation and Development (OECD) - should therefore include:


 
  • obtaining up-to-date, on-the-ground information in order to map the scope and depth of the supply chain to assess risk effectively;
  • building respect for human rights into supplier contracts;
  • engagement with suppliers;
  • communicating relevant codes of conduct and polices to all suppliers and their contractors;
  • unannounced and independent, third-party supplier audits to ensure compliance with these standards; and
  • full reporting on audit results and taking remedial action where necessary.
 

This same guidance and benchmarking projects such as KnowTheChain, which assesses and compares the measures that companies in the same industries have adopted to address the risk of forced labour in their global supply chains , recognise that good practice goes beyond simply adopting an audit-based approach. Through participation in relevant industry initiatives and collaboration with other stakeholders (both internal and external) such as the Electronic Industry Citizenship Coalition (EICC) and Bangladesh Accord for example, companies can access opportunities to share information on a range of issues and take collective action to drive change within their own industry.

Conclusions

New legislation that compels companies to address supply chain risks demonstrates that significant progress is being made in this area but without stricter enforcement of regulations and higher penalties for non-compliance, the responsibility still lies in large part with companies to ‘do the right thing’. As well as a moral argument, there is a strong business case for doing just that. Responsible companies recognise that what is good for workers and the community is also good for them. Cases such as the Rana Plaza tragedy expose business to reputational, operational and financial risks. A robust approach to supply chain management can help to mitigate such risks.

At the time of writing (June 2017), the Trump Administration was attempting to repeal some aspects of the Dodd-Frank Act which may eventually lead to the requirement for U.S. companies to publish conflict minerals disclosures being removed. By contrast, in March 2017, the French National Assembly adopted a new law (“Devoir de vigilance des entreprises donneuses d'ordre”) that will come into effect in 2018, which makes it compulsory for large French companies to implement a diligence plan which should describe the measures taken to identify and prevent the occurrence of human rights and environmental risks resulting from their activities, the activities of companies they control and the activities of sub-contractors and suppliers on whom they have a significant influence. And in May 2017, more than 30 major institutional investors, which reportedly have over AUS$2 trillion (£1.2trn) in assets under management between them, called for the introduction of modern slavery legislation in Australia, which is currently conducting an inquiry into establishing a Modern Slavery Act in the country. Such moves clearly illustrate that the push for more responsible corporate behaviour continues to gather both strength and momentum.

 

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