AB IQ Responsible Investing (ESG) Equities Fixed Income Blog

Fighting Modern Slavery in the Fishing and Finance Industries

Sep 23, 2022
5 min read

Modern slavery is a pervasive social evil that can infest most sectors of the global economy. To understand and improve companies’ ability to eliminate modern slavery from their operations and supply chains, we believe it’s important to apply a best-practice framework across sectors. Our own version, based on five pillars, is relevant for most companies.

While the framework should be consistent, some sectors are particularly susceptible to modern slavery and others are especially important in the fight to detect and disrupt it. Fishing and finance are prominent in the context of modern slavery, and engagement with company management must recognize this.

A Five-Pillar Approach to Best Practices

Identifying and reducing potential modern slavery risks in portfolios requires regular engagement with company management teams. At AB, our goal is to implement a comprehensive five-pillar engagement program that addresses the continuum from a company’s current governance processes to its plans for future improvement (Display).

Modern Slavery Best Practices Framework
First Governance, then Risk Identification, Action Plan to Mitigate Risks, Action Plan Effectiveness and Future Improvement.

For informational purposes only.
As of September 1, 2022
Source: AllianceBernstein (AB)

Despite modern slavery’s higher profile in recent years, corporate management in several industries still has a relatively low level of awareness—both of modern slavery itself and of the most effective ways to address it. In these sectors—which include fishing and finance—our first-round engagements have focused on raising this awareness and identifying action steps to address the most important abuses. As we revisit companies in future rounds of engagement, we intend to advance our best-practice program.

Fishing Enables Modern Slavery to Flourish Unseen

On the ocean, ships can be far from the oversight of authorities, making illegal, unreported and unregulated fishing a serious global problem and a prime enabler of modern slavery at sea.

Industrial vessels are venturing further into the oceans to find their catches—and to avoid scrutiny. Distant-water fishing takes place outside countries’ exclusive economic zones, meaning that vessels can escape the jurisdiction of coastal nations and commit illegal activities, such as modern slavery. Because fishing vessels can transfer their catches to other ships and resupply without returning to port, they can stay at sea for long periods, reducing costs and keeping their crews isolated.

Far from land and confined onboard ships, victims are exposed to the worst excesses of modern slavery. A recent Greenpeace Southeast Asia survey of abuses highlighted a range of top forced-labor indicators, including: withholding wages (87% of complaints), abusive working and living conditions (82%), deception (80%) and abuse of vulnerability (67%). Unable to escape, victims are subject to beatings and harassment, and if they resist, may in a worst case be thrown overboard by their captors.

How Investors Can Battle Modern Slavery in Fishing

Most fishing businesses are unlisted companies that fall outside investors’ purview, but investors can still find effective pressure points to combat modern slavery at sea. Listed food retailing companies are the end point in the supply chain and should play a key role in working with suppliers to address this issue. By highlighting the problems of modern slavery at sea, investors can foster improvement.

In our engagements, we find food retailers’ management teams ready to discuss the topic, but efforts to put the necessary structures in place to address the problems have been slow. As a result, improved outcomes have been limited at this stage.

On a positive note, some larger food retailers have instituted traceability for certain fish species as well as sustainability standards to help ensure the fish they sell can be verified as responsibly sourced in line with their own and/or third-party standards. But this approach protects primarily the marine environment and fish rather than people.

Some food retailers have also started to disclose if their fish are sourced from higher slavery-risk countries such as Thailand and Vietnam. This is a positive step, though only one of a wide range of best practices we encourage to help prevent possible abuses. Collectively, these practices intend to strengthen retailers’ policies across business models, workforce protection efforts and supply-chain audits (Display).

Assessing Supermarkets’ Policies Across a Wide Range of Best-Practice Categories
Recommended policies include building long-term relationships with suppliers and supporting collective bargaining.

For informational purposes only.
As of September 1, 2022
Source: AB

Our highest priorities are to encourage:

  • Long-term relationships with suppliers to help improve visibility into the supply chain
  • Zero worker-paid recruitment fee and migrant worker policies to reduce the risk of overseas laborers being enslaved
  • More social audits and worker-voice initiatives to help identify where abusive labor practices are occurring

Long-term supplier relationships, in particular, help build trust on the ground and create some stability in the workforce. By contrast, flexible and transient workforce requirements can facilitate practices that enable modern slavery. These include entrapping migrant workers through debt bondage and deceiving them with unfounded promises of higher wages in the future or the freedom to return home.

There are practical difficulties in implementing some policies: for instance, social audits are hard to carry out on board a vessel at sea. Worker sentiment surveys via anonymous texts can be a way to overcome obstacles and identify issues. Traceability can be challenging in the fishing industry too. Fish are often “pooled” (catches from several boats are processed together) and then potentially used across many different products, such as frozen meals and cat food. As a result, the risk of pooled fish being tainted by modern slavery might endanger the reputation of brands and businesses, including food retailers.

If investors continue to raise awareness across all these areas, we expect corporate management in food retailing to make faster progress to strengthen their policies.

Finance Is Central to Combating Modern Slavery

Modern slavery is a criminal enterprise intended to profit from abuse; warehousing and transferring the money generated requires access to the financial system. This gives the finance sector a key role to play in helping stop modern slavery.

Yet the financial industry lacks awareness of the problem. In a 2020 survey of UK financial institutions, 43% of board-level directors didn’t know about their firm’s modern slavery policy; more than two-thirds of employees hadn’t heard much of the issue from management. We’ve seen some improvement recently, but there’s still a long way to go—and the reputational risks are high.

For instance, Australian lender Westpac was fined A$1.3 billion in 2020 to settle a money-laundering suit linked to financing child exploitation—it was the highest civil penalty in Australian history. Many finance executives are still unaware that modern slavery is a problem in developed as well as emerging countries, and they believe that anti-money laundering efforts to know their clients and screen for transactional risks are sufficient to combat it.

But transactional risks are only a small part of the problem. Financial institutions lend to and invest in businesses that facilitate slavery. They also provide bank accounts where multiple cash transactions can go unmonitored. Many banks aren’t checking for illicit cash dealings that could indicate exploitation at a car wash or in a nail salon. Nor do they investigate their corporate clients’ supply chains to find out how they source products at high risk of involvement with modern slavery.

Strengthening Policies and Practices in Finance

Finance companies can upgrade their existing systems for uncovering money laundering to screen for indicators of suspicious activity that may signal modern slavery violations by clients. And senior management should send a clear signal to staff that modern slavery awareness is important. Asset managers can help drive change by researching the risks to portfolio companies, engaging with company management and pressing for better policies and practices on modern slavery.

We find that banks put the most focus on financial transactions and less on institutional lending. Their biggest blind spot, as we see it, is in small- and medium-sized enterprises (SMEs)—which face high modern slavery risks. Our top engagement priorities in the banking sector are to:

  • Encourage better risk identification in SME lending, including hiring or working with social auditors to identify risk areas
  • Broaden transaction monitoring from a narrow focus on sexual exploitation to check for several other forms of modern slavery, including forced labor

Beyond these priorities, our wider agenda spans group-level policies and capabilities, financial transactions, and lending to both institutions and SMEs (Display).

Four Critical Action Categories for Banks
Recommended actions include strengthening internal expertise and mapping high risk sectors/geographies.

For informational purposes only.
As of September 1, 2022
Source: AB

We’re confident that our agenda is gaining traction, and that banks’ awareness of modern slavery is growing. For example, in 2019 one of Australia’s largest banks had only a three-page compliance document to address modern slavery. After engaging with the company and discussing our ESG matrix, we were pleased with their progress and the increased detail and transparency of their reporting as they advanced in their journey.

To further raise awareness, we’ve partnered with Themis and the UK government to offer a new modern slavery digital training course for UK financial institutions, which is freely available to all. It features interactive guidance for 10 industry sub-sectors, using diverse multimedia formats and taking a unique sector-specific approach that reflects the range of challenges faced by different institutions.

The Big Picture

Modern slavery is a massive and complex problem. According to the US State Department, it generates more than US$150 billion in illicit profit for traffickers and those who help facilitate the crime. While awareness is rising, investors and businesses still need to make substantial changes to eradicate modern slavery by the UN’s 2030 target.

We believe our five-pillar approach provides a robust platform for engagement with company management across industries, but a special focus and specific efforts are warranted for key sectors, such as fishing and finance. While progress so far has been slow, we’re confident that strong foundations are being put in place for improved policies and practices.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

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