ESG ahoy: unpacking recent trends in modern slavery, human rights and energy

As we move into 2022, it is clear that companies are taking steps in the right direction when it comes to tackling governance and human rights issues in Australia through increased regulation in the modern slavery space, greater attention to climate change and transformation in the energy market. Internationally we have seen the development of more stringent laws to improve environmental, sustainability and human rights due diligence, with a strong focus on value chain interrogation. Pressure is mounting for Australia to follow suit and we are likely to see more key developments in the market this year.  

A race to the middle in modern slavery compliance

Australia has recently undergone the first full cycle of modern slavery reporting under the Modern Slavery Act 2018 (Cth) (Act). More than 2,500 Modern Slavery Statements were published on the public Modern Slavery Statements Register. This was the first year that organisations have been compelled, as part of the compliance process, to consider the real and/or suspected risks of modern slavery in supply chains, value chains and business operations. Australian Council of Superannuation Investors’ (ACSI) recently suggested that for the majority of businesses it is a ‘race to the middle’ and a means of ‘cosmetic compliance’.[1] Nevertheless, companies that approach their modern slavery assessment as a mere tick-box exercise will not only risk being ineffective, but also non-compliant in this space.

UNSW recently published its report Paper Promises which evaluated the early impact of Australia’s Modern Slavery Act in relation to four key risk areas: garments from China, rubber gloves from Malaysia, seafood from Thailand and fresh produce from Australia.[2]

Of the companies reviewed, the average company scored just 37% overall, with the report finding that:

• 77% of companies reviewed had failed to report under each of the mandatory reporting criteria
• 52% of companies failed to identify obvious modern slavery risks in their operations or supply chains
• 75% of garment companies sourcing material from China failed to mention of the risk of Uyghur forced labour in their supply chains, a well-documented human rights issue
• 52% of healthcare companies sourcing PPE gloves from Malaysia failed to identify this as a sector with high modern slavery risks
• 52% of food companies sourcing Australian horticultural products failed to identify this as a sector with high modern slavery risks
• 40% of seafood companies sourcing from Thailand failed to identify this as a sector with high modern slavery risks
• 78% of companies failed to explain how the COVID-19 pandemic affected its modern slavery risk profile

Nevertheless, 27% of companies appeared to be taking some form of effective action to address modern slavery risks. This includes the prevention of workers being charged recruitment fees, supporting freedom of association for workers, evidence of responsible purchasing practices, human rights due diligence on new and existing suppliers, and collaboration with unions, migrant worker and civil society organisations.

The first round of reporting saw organisations gain clarity around the process and requirements of reporting from Australian Border Force, including how far entities should go when mapping their value chains for risks and what constitutes the “supply chain” (as that term is not defined in legislation). The above report revealed that only 25% of surveyed companies disclosed countries of suppliers, with most failing to identify suppliers beyond tier 1 of its supply chain.

Organisations are also grappling with how to respond to modern slavery issues when they inevitably arise. Whilst in many cases cutting off a supplier due to modern slavery practices is not supported (as it may just exacerbate existing conditions for the workers), the issue remains as to what companies should do if they identify modern slavery risks in their supply chains. 

A shift towards collaboration and meaningful action  

Last year we saw a number of organisations band together to complete sector informed modern slavery risk assessments across their diverse supply chains, including forming working groups with representatives from each sector to map, assess and report. We will see more of this in 2022 as organisations ratchet up their compliance processes in tackling modern slavery and ESG related issues on a broader scale. With the upcoming review of the Modern Slavery Act in 2022, businesses will be expected to ‘up the ante’ in the next reporting cycle to increase their sophistication of reporting, collaboration with external organisations and interrogation of global value chains and onshore operations.

In 2022 organisations will be expected to move beyond mere compliance towards meaningful action against modern slavery. They will need to engage with the wider community on forced labour and how goods, potentially tainted by human rights abuses, are used in their supply chains. For example, recent headlines have put industries on notice that there is a nexus between modern slavery, cotton and solar panels – both goods being at significant risk of forced labour. As these are well documented human rights abuses, companies that fail to meaningfully consider this will likely be non-compliant in its next round of reporting.

Law reform, here we go (here we go) again  

NSW Modern Slavery laws commenced on 1 January 2022, with significant amendments that removed obligations for corporates. However, the Minister must review this legislative regime within 12 months. Law reform may follow, with the aim of reintroducing provisions that were previously removed.

Corporates are on notice that come next year, obligations may be introduced at a federal level to lower the reporting threshold to capture more entities and to introduce measures of compliance such as imposing penalties.  

A public review of the federal modern slavery legislation will be initiated in 2022. The terms of that are still being worked through by the Australian government but it will be an opportunity for interested stakeholders and companies to participate in discussions around how the Modern Slavery Act could be improved.

Crackdown on forced labour & consequences for renewables

The House of Representatives is currently revising legislation with the aim of banning the importation of any goods into Australia made using forced labour. If passed, a great number of materials would be banned from import, which may cause supply chain issues over and above the strain caused by COVID-19. Organisations that have not assessed their supply chain will be harder hit and business operations risk coming to a halt.

This import ban follows a global trend of banning or scrutinising goods and financial streams affected by human rights abuses and would bring Australia in step with European Union and US regimes. The US banned the importation of certain solar panel materials in June 2021. The ban saw a swift halt of shipments from Hoshine Silicon Industry Co Ltd and its subsidiaries, as well as adding a number of entities to its list of individuals, organisations and companies believed to be involved in, or that pose a significant risk of becoming involved in, activities contrary to US national security and/or foreign policy interests.

This is of particular interest in Australia, which is leading global efforts in rapid expansion of the renewables sector, with recent reports indicating Australia installing around five times the amount of variable renewable energy on per capita basis as compared to the European Union.[3] Australia’s renewables sector would be just one of those affected if the legislation goes through given the high risk of modern slavery issues in solar panel production, particularly panels manufactured in certain parts of China. If the Bill is passed, large orders of solar panels would not be permitted into Australia, with Senator Rex Patrick (the Sponsor of the Bill) stating “they would be stopped at the border”. Other goods at high risk of ban are petroleum, cotton, minerals and sugar.

Proliferation of environment and human rights due diligence laws

While NSW is leading the way with respect to modern slavery laws, lawmakers are out of step with neighbouring Victoria, ACT and Queensland in not introducing a human rights act. Coming into a federal election year, it’s unlikely that we will see the introduction of a federal human rights regime, however the move towards greater human rights due diligence in the corporate space may push state legislators to consider the introduction and harmonisation of human rights laws in Australia in the future.

The European Union directive on mandatory environment and human rights due diligence is hotly anticipated, with the European Commission expected to publish its draft legislative proposal later this year. As frustration grows in Europe at the delay in publication, many countries are in train to enact domestic human rights and environmental due diligence laws, including France, Germany, Norway, Austria, Belgium, Switzerland and the Netherlands. The seismic shift in reporting will no doubt cause ripples in Australia. Businesses should be on watch for stringent environmental and human rights reporting in its ‘value chains’ – a purposefully broad term under the European Union directive – as part of due diligence processes. Particularly because regulators such as ASIC have, over the last five years, recalibrated certain reporting directives to include issues of climate change, a catalyst of a number of human rights issues.

Coupled with this is the passing of the new Magnitsky law, which now permits the targeted sanctioning of individuals and other entities for limited proscribed conduct, but not the unilateral freezing of assets, which could impact on business operations and supply chains. We are seeing a broader wave of engagement in Australia to address key social issues of a global nature, being human rights atrocities and how goods tainted by human rights violations impact a business’ supply and value chain. More broadly, the reputation of a company in sourcing material from what Senator Patrick called ‘abusive labour programs’ will have a profound impact.

The shift in the European Union towards environmental and human rights due diligence reporting will reach Australian shores this year. Businesses should do the work now to understand their modern slavery obligations, value chain, and risks to operations due to climate change, human rights issues and issues of governance more broadly. Critically, risk mapping climate change and ESG concerns can no longer be siloed and organisations should be proactive in this space, because reactive action may open an organisation to adverse action.

While there’s much room for improvement, it is promising that the majority of businesses are genuinely engaging with the modern slavery regime as this will form a strong base in which to approach ESG issues as a whole in the future, with lessons to be learned from across the shores.

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