Legislating supply chain transparency

Should Canada follow the lead of other countries to prevent human rights abuses?
By Kevin Thomas
|Canadian HR Reporter|Last Updated: 03/20/2017

In late February, the French government passed a new law requiring companies to establish and disclose plans and processes to address and prevent human rights abuses in their global supply chains. The Netherlands also proposed legislation that, if passed, would require companies to address risks of child labour in their supply chain.

Shortly thereafter, Australia announced an inquiry by the Joint Standing Committee on Foreign Affairs, Defence and Trade into whether it too should adopt a law on modern slavery in supply chains, including forced and child labour.

Does this represent a growing trend in international regulation? Yes.

There are already at least three other supply chain transparency regulations on the books in the United Kingdom, European Union and California that, alongside these new initiatives, represent a worldwide move to ensure companies are taking steps to eliminate the scourge of any forced labour in their global operations.

While few Canadian companies are legally required to report under these foreign laws, Canada may well have to play catch-up if it wants to compete in a global investment marketplace.

As major investment jurisdictions such as the U.K. normalize corporate disclosure around supply chain practices, investors are starting to expect comparable disclosure from companies in other jurisdictions, including ours.

And well they should.

Investors are increasingly attuned to the risks in the global supply chain, especially the incidence of forced labour or child labour. Although no company sets out to use products made with forced labour, the reality is there are more than 21 million people working in conditions of forced labour worldwide, and the International Labour Organization estimates 19 million of those are employed in the private sector.

Billions of dollars’ worth of goods entering Canada each year come from jurisdictions or industries where forced labour has been uncovered.

Electronics, food, clothing and commodities such as coffee are cited by the United States Department of Labor as “at risk” of child and forced labour, depending on their country of manufacture or origin.   

As investors, we don’t want to be linked to human rights abuses such as forced labour any more than the companies themselves do.

While companies face the reputational risk of negative human rights performance, operational risks of supply disruption or blocked shipments of goods made with forced labour, and associated legal risks, institutional investors themselves have their own responsibilities under international norms.

Complaints under the OECD Guidelines for Multinational Enterprises from the Organisation for Economic Co-operation and Development, for instance, have targeted investors as well as companies, and the Office of the United Nations High Commissioner for Human Rights has argued “institutional investors would be expected to seek to prevent or mitigate human rights risks identified in relation to shareholdings.” 

The Shareholder Association for Research & Education (SHARE) represents Canadian institutional investors that have an active interest in eradicating forced labour and other human rights abuses from the supply chains of the companies they own.

First and foremost, like most Canadians, we abhor the abuse of basic human rights, and our clients make an effort to contribute positively to respect for human rights through their actions as active shareholders.

We also recognize that bad labour practices are ultimately bad for business, and represent a genuine risk to the reputation and profitability of those companies that don’t conduct adequate due diligence.

That’s why we are paying close attention to jurisdictions such as the U.K., California, France and the EU that have started to take action to combat the growth of forced labour by enacting legislation requiring companies to monitor their global supply chains for forced labour and to report publicly on their efforts.

The thousands of reports now flowing in from companies required to report under the U.K.’s new Modern Slavery Act, for example — including some Canadian firms with U.K. operations — is a testament to the power of this growing wave of legislation.

Legislative steps

Recently, we took a closer look at this new wave of supply chain transparency legislation. We asked what works well, what doesn’t, and what best responds to the investor interest in critical disclosures that will allow us to distinguish between well-managed companies and the others.

Our review concluded Canada would do well to enact legislation akin to the U.K.’s Modern Slavery Act to improve disclosure to investors and help Canadian companies to raise the bar on human rights due diligence.

While there are some Canadian firms that have taken leadership positions on human rights in the supply chain, and are providing useful information to investors, broad, legally mandated reporting requirements for the rest of the market have real advantages over the patchwork of voluntary reporting Canadian investors are faced with now.

Investors need legal standards and frameworks that provide consistency in company reporting, while allowing for variance where business models differ.

We need reporting across an entire market, allowing consumers and investors to compare performance amongst all competitors rather than amongst the few leaders who voluntarily disclose.

For companies, standardized reporting also creates opportunities to learn from peers and develop common approaches to due diligence.

Legislation can promote continuous improvement by requiring a regular schedule of reporting that allows companies to learn from experience and adopt new practices over time.

The wave of supply chain transparency legislation now sweeping through other countries has been welcomed by investors in those countries, and in some cases like the U.K., investors were intimately involved in crafting the rules.

Similar legislation in Canada would be welcomed by investors here, and we hope companies and investors will contribute positively to its development.

Kevin Thomas is the Toronto-based director of shareholder engagement at the Shareholder Association for Research and Education (SHARE), an association devoted to responsible investment services, research and education for institutional investors. For more information, visit www.share.ca.

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