Investor attention will soon turn to labour rights controversies

It is lamentable that in the 21st century, breaches of fundamental labour rights remain commonplace in some countries and industries.

In October 2016, a BBC documentary showed that Syrian refugees were being exploited in factories of Turkish suppliers to European retail and textile companies, such as Inditex and Marks & Spencer.

These illegally employed persons were paid less than the Turkish minimum wage. In some cases, they were forced to work with hazardous chemicals used for bleaching jeans without adequate protection.

It is not only suppliers in developing countries who commit such controversies. Every year, listed mining companies record several dozen fatal accidents as a result of their day-to-day operations. According to the International Labour Organization, more than 2.3 million people worldwide die from workplace accidents or work-related illnesses annually.

There is vast room for improvement in the conditions faced by many workers globally. Around a quarter of the share of the world’s workers live below the poverty line (less than $2 a day), as do their families. There are also 168 million working children worldwide, more than half of whom work in jobs classified as ‘hazardous’. Some 21 million people live in conditions that violate their basic rights, through forced labour and slavery.

In recent years, discussion has ramped up as to the obligations of companies and their suppliers to comply with minimum working standards. There is still no established catalogue of rights that is globally binding for companies. But thanks to the work of John Ruggie, UN Special Representative for Business and Human Rights, in late 2011 the UN Guiding Principles on Business and Human Rights came into being. Its principles are not legally binding, but it finally put corporate responsibility into writing, including responsibility for indirect effects across the entire value chain.

Companies’ activities are mainly regulated under the legal frameworks of countries in which they operate. If these countries do not implement or enforce compliance with human and labour rights, then neither national (the country of corporate domiciliation) nor international jurisdictions have adequate obligations under which firms can be prosecuted for a criminal breach of labour laws.

Emerging transparency

In recent years, national legal initiatives such as the UK Modern Slavery Act have marked a step in the right direction. Such legislation imposes transparency obligations on companies that commit very severe labour rights violations, increasing the reputational pressure they face. And supply chain management is under intensifying scrutiny.

As the UN Guiding Principles for Business and Human Rights are being implemented through national action plans, there is ongoing discussion around changing laws to introduce binding due diligence obligations on companies in the area of human rights.

At the end of 2016, a civil suit, brought by the victims of a factory fire in Karachi, Pakistan, which killed 260 people, was admitted in Germany. The defendant is German textiles discount chain KiK, as the factory’s principal. Should the court award damages to the victims, this may turn out to be a landmark ruling that establishes a company’s liability for breaches of working standards by their suppliers, thereby increasing the relevance of such concerns for shareholders.

Not enough progress

Our data, drawn from our annual ‘Corporate Responsibility Review’ (2017) on the sustainability management of companies worldwide, which includes analysis of the most controversial industries in 2016 (Fig. 1), shows there has been little progress. The situation is particularly acute in textiles, although the share of companies in the sector recording ‘severe’ or ‘very severe’ controversies fell from 25% in 2015 to around 20% last year. If moderate controversies are included, the share rises to almost 40%.

The share of affected companies rose appreciably in the electronic devices and appliances sector, which outsources production to low-income countries on a large scale. In just a year, the share almost doubled to 13.7%.

Controversies at suppliers to companies such as Fujitsu and Panasonic contributed to this poor overall performance. At the end of June 2016, China Labor Watch published a report on working conditions at Dongguan Chenming Electronic Company, a Chinese supplier of PC and laptop cases for various companies, including Asustek and Fujitsu. According to the report, employees in the production process had to work in excess of 15 hours a day and had only one day off per month. Regular overtime amounted to as much as 40 hours a week. A penalty system was also in place, punishing workers with wage reductions for absence from or late arrival to work.

The household and personal products sector also joined our list of the 10 worst performing industries, primarily due to labour rights problems connected with the supply of palm oil at Asian agriculture firm Wilmar International. A November 2016 report by Amnesty International documented cases of child labour and other violations on palm oil plantations of two subsidiaries and three suppliers of Wilmar International in Indonesia. Manufacturers including Colgate, Palmolive, Kellogg, Nestlé and Reckitt Benckiser confirmed that they sourced and used significant amounts of palm oil from Wilmar’s refineries.

Our research confirms the metals and mining sector was the third most controversial industry in 2016, with a 12.2% share, albeit lower than the previous year’s level. Work at opencast pits and underground mines can often be hazardous, and safety standards in extraction areas (usually in developing and emerging countries), are not always adequate. This results in a large number of fatal accidents at mining companies each year.

As transparency about and awareness of violations of labour rights grows, investors will have access to more information that enables them to question the long-term sustainability of a company that does not live up to reasonable standards. Companies therefore have an incentive to make changes sooner rather than later.

 

Jaspreet Duhra is senior manager Client Relations and head of oekom research’s London office

Julia Haake is director of International Business Development and head of Paris office

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