With ESG on the Rise, Asset Managers Target the Murky Underbelly of Supply Chains

Firms like AllianceBernstein and BNY Mellon have joined the fight against modern slavery — but like other ESG initiatives, it’s not easy.

Dwayne Senior/Bloomberg

Dwayne Senior/Bloomberg

As allocators continue to embrace environmental, social, and governance investing, asset managers are turning their focus to the fight against modern slavery.

Since the U.K. launched the landmark Modern Slavery Act in 2015, global asset managers like Abrdn, BNY Mellon, and Lazard have pledged to remove modern slavery — a term that includes human trafficking, forced labor, debt bondage, and forced and early marriage — from their operations and supply chains. AllianceBernstein, for example, has developed its own proprietary model to identify its portfolio companies’ exposures to modern slavery risks.

These risks are not trivial: As of 2017, 40.3 million people worldwide were victims of modern slavery, which generates $150 billion in profits annually in the United States alone, according to the International Labor Organization, a subsidiary of the United Nations.

But it’s not easy for investors to reliably get information about companies’ supply chain conditions. Because shareholders have limited capacity to conduct on-site research for individual companies, they largely rely on the management to report key performance indicators and draft action plans. This requires a certain degree of honesty and dedication from the management side.

“Supply chain monitoring is incredibly difficult,” said Shivaram Rajgopal, a Columbia Business School professor with a research focus on shareholder value. “You might get into a world where you are relying on certificates based on certificates based on certificates, without anybody actually doing the primary work.”

That doesn’t mean it’s a lost cause. Michelle Dunstan, chief responsibility officer at AllianceBernstein, told Institutional Investor that “most companies are relatively receptive” and willing to act on AB’s constructive feedback. The conversation between AB and its portfolio companies would usually evolve into a long-term exchange of ideas about supply chain management, she said.


Besides moral concerns, investors are paying attention to modern slavery issues because they present both “an emerging opportunity and risk,” Dunstan said. Companies with unethical labor practices are subject to more regulatory concerns and reputational risks, both of which could have an adverse impact on stock price and talent acquisition.

In AllianceBernstein’s modern slavery risk assessment model, companies are first evaluated based on their geographical locations and products. Those relying on imports from countries with historical records of labor abuse, for example, are exposed to higher modern slavery risks in supply chains. Certain sectors — such as raw materials and basic services – also raise more concerns. Once AB spots red flags in the portfolio companies, it has a discussion with management about the governance framework, risk identification mechanism, action plans, and room for future improvement.

“We are looking for companies that acknowledge that this is a material risk and are trying to actively do things to improve,” Dunstan said. “This is not an exercise to name and shame or call things out.”

Another challenge in addressing modern slavery is that it does not necessarily bring immediate financial benefits to companies, according to Patricia Jurewicz, founder of the non-profit organization Responsible Sourcing Network. Unlike carbon footprint, which is easy to quantify and can be related to direct tax benefits in certain countries, reducing modern slavery is harder to translate into financial improvements.

“If people are working under forced labor conditions for little or no pay, and you are paying them more to resolve the issue, that does not save you money,” Jurewicz said. While improved labor conditions might boost production and increase the employee retention rate from a longer-term perspective, companies that are under immediate performance pressure might be reluctant to take action, she said.

Rajgopal added that the lack of reliable audits can be an even bigger problem in emerging markets, where there are fewer data disclosure requirements and anti-fraud mechanisms. According to MSCI, 74 percent of companies in the MSCI World Index — which captures the large and mid-cap representation in 23 developed countries — are subject to modern slavery regulations. In contrast, only 15 percent of companies in the MSCI Emerging Markets Index would be punished for violating similar codes of conduct.

“Many developed market consumer companies are dominant in their supply chains, making them well placed to monitor adverse impacts and effect change,” MSCI said in a statement to II.

China, for example, is responsible for more than a quarter of the global manufacturing output, according to data from the United Nations Statistics Division. But given local restrictions, it is almost impossible to independently verify claims about exploitive labor practices in the country. Jurewicz said companies are reluctant to speak out about the labor conditions in China given “the pressure to sell into the Chinese market as well as the pressure of producing so many of their goods.”

Modern slavery activists like the Responsible Sourcing Network have had more success in other parts of the world. In the late 2000s, reports came out from BBC about the usage of child labor in Uzbekistan’s cotton industry. RSN, along with Uzbek activists and international advocates, started a campaign against the use of Uzbekistan cotton among investors, suppliers, and retailers. The nonprofit got over 300 retailers to pledge not to source cotton from Uzbekistan until the systematic forced labor issue is properly addressed. Likewise, AllianceBernstein has worked with Nestlé and Panasonic to address forced labor in Malaysia and Madagascar.

Still, shareholder activism alone is not enough to reduce the negative societal impact of any corporate actions, or what the economists call “externalities,” according to Rajgopal. Be it carbon emission or modern slavery, any ESG mandate needs to be translated into regulations to make an actual impact, he said. In the United States, shareholders suing fund managers over externalities need to show proof of financial loss to win the case.

“Shareholders very rarely litigate or go after American companies for externality-related issues,” Raigopal said, mostly because it’s hard for them to prove that investment losses are directly associated with mishandling of such externalities.

In regions where modern slavery is a pronounced concern, legislation varies by country or state. In Australia and the U.K., modern slavery has become part of the legal vocabulary. In the United States, the focus has been on human trafficking. In terms of disclosure requirements, California is the only state to have passed legislation related to modern slavery. Early this year, New York proposed the Fashion Sustainability and Social Accountability Act, “which goes much further than California,” according to MSCI. “The bill still needs to be passed into law, but if successful it would make New York a global leader in terms of supply chain legislation,” MSCI said.

Rajgopal said fundamental changes in supply chains will ultimately come down to political action. “How effective is the financial industry going to be a substitute?” he asked. “It’s an open question.”