Investor perspectives on modern slavery and supply chain risks

There is a growing recognition of business risks related to modern slavery within a company’s operations and supply chains, as well as increasing regulatory expectations. As a result, this important issue is increasingly front of mind for many companies and investors.

Modern slavery generally refers to situations of forced labour or child labour. It is both a human rights and employee rights issue and occurs when a person faces a situation of exploitation and cannot refuse or leave due to threats, violence, coercion, deception, and/or abuse of power.¹

Business risks related to modern slavery may include reputational risks (e.g., boycotts, protests or customer backlash), legal risks (e.g., fines, criminal charges, litigation, depending on jurisdiction), financial risks (e.g., supply chain disruption, increased operating costs, decreased productivity, higher cost of capital, loss of market share), and/or supply chain risks (e.g., disruption in the flow of goods and services, lack of efficiency, and performance of supply chains).

For their part, investors can consider the exposure of companies to these risks and the actions they are taking to prevent, manage, or mitigate them as part of their investment decision making. For example, investors can assess the policies and practices companies have in place to identify, mitigate, and prevent human rights abuses in their supply chains. This may include policies or practices related to adherence to fair compensation or foreign labour recruitment, compliance with modern slavery or supply chain transparency regulations, knowledge of and support for labour rights, and due diligence related to supply chain mapping and auditing.

Understanding modern slavery and supply chain risks

According to the Global Slavery Index, in 2021 an estimated 50 million people were living in modern slavery on any given day, which is an increase of 10 million people since 2016. The same report found that those fleeing conflict, natural disasters, or repression of their rights, or seeking to migrate for work, are particularly vulnerable to exploitation. While often thought to be more prevalent in developing nations, modern slavery occurs in every country in the world and many instances in low-income countries are in fact linked directly to demand from higher-income countries.

Regulatory expectations and context

The United Nations (UN) established the UN Guiding Principles on Business and Human Rights (UNGPs) in 2011 to establish common human rights expectations for governments and corporations. While the UNGPs are not binding, since their establishment various countries have put in place legislation to specifically address modern slavery. These laws typically require companies of a certain size to prepare and publish an annual statement outlining the actions they are taking to address modern slavery in their operations and/or supply chains. The first country to enact this type of requirement was the United Kingdom through the Modern Slavery Act 2015, followed by Australia in 2018. In the United States, at a state level, the California Transparency in Supply Chains Act came into effect in 2012, and applies to all retail sellers and manufacturers that do business in the state. In the European Union, there are multiple regulatory initiatives that cover human rights-related disclosures and due diligence. This includes the Corporate Sustainability Due Diligence Directive, which was passed in February 2024 and requires in scope companies to undertake human rights due diligence. Canada is one of the most recent countries to put in place its own act to address modern slavery in supply chains (the Act), which was passed in 2023 and came into force as of January 2024.² Corporate entities covered by the Act must publish and submit to the government a report regarding modern slavery risks and mitigating actions by May 31, 2024. Unlike in some other jurisdictions, failure to adhere to this Act comes with a fine of up to $250,000 per offence and may lead to personal liability for board members.

While most of the regulatory actions for corporations focus on transparency and disclosure, these statements on their own are not sufficient to address modern slavery. They do however provide investors and others with insights on the policies and practices companies have in place to identify and address the risks of modern slavery in their operations and/or supply chains. They can also serve to inform engagement with companies on these issues.

Company exposure to supply chain risks

We live in an increasingly globalized world where companies located in one country also operate within the borders of others. Each of these operations may have its own network of suppliers providing goods and/or services to the company. The sourcing of raw materials and the manufacturing, packaging, and transportation of goods often create complex and opaque supply chains. Some of the products imported by developing countries that are most at risk of involvement in modern slavery include electronics, garments, palm oil, solar panels, and textiles.³

The operational structure of a company, the regions in which it operates, and the products or services that it requires may all contribute to modern slavery and supply chain risks. For example, companies that rely on offshore manufacturing in countries with weak labour standards or limited enforcement capacity may be more at risk. In some countries such as India where there are lower operating costs, even with adequate labour laws there may still be inadequate resources to monitor or enforce these laws.^{4, 5} Moreover, there can also be increased risks when companies use labour recruiters or intermediaries to recruit, hire, or manage their workforce abroad due to gaps in regulation and monitoring of the recruitment industry in those countries. This can lead to the exploitation of jobseekers, particularly foreign migrants.⁶ Although modern slavery can happen in any supply chain, companies with offshore manufacturing in Africa – specifically South Sudan, Somalia, and the Central African Republic – may be more susceptible as the region is considered to be the most vulnerable to modern slavery risks. The Asia-Pacific region is another region with higher risk, given that it has been assessed as having one of the weakest government responses to modern slavery.⁷

Characteristics of products or services that are potentially indicative of greater risk include:

Addressing modern slavery and supply chain risks

Despite the complexities of supply chains and the challenges associated with addressing issues of modern slavery, there are actions that companies can take to manage and mitigate related supply chain risks.

Investor perspectives on modern slavery and supply chain risks

For investors, the consideration of material environmental, social, and governance (ESG) factors as part of investment decisions enables the ability to both identify and address issues that may affect long-term risk-adjusted returns. ESG factors that may be material include issues such as human rights, modern slavery, and supply chain risks.

In sectors that may be at a higher risk of modern slavery, understanding how a company is identifying, managing, and mitigating these risks is important. Enhanced transparency and disclosure from companies, such as that which is required through various modern slavery laws, can help investors gain insights in this regard. Investors may also use active stewardship as an avenue to collect information, raise issues, or address actual or potential risks with companies. This may include direct engagement, whereby investors may meet with the management or the board of a company, or proxy voting for equity investors. Shareholders may submit or vote on proposals related to modern slavery. For instance, if a modern slavery controversy at a company has been identified, and shareholders believe the company is inadequately managing the associated risks, a third-party audit of its policies and procedures throughout its supply chain may be requested through a shareholder vote.

What is RBC Global Asset Management (RBC GAM) doing?

As described in the Royal Bank of Canada’s (RBC) Approach to Human Rights,¹² RBC and its subsidiaries, including RBC GAM,¹³ are committed to respecting human rights, and taking actions to meet businesses’ responsibility to respect human rights, as set out in the UNGPs. As part of this commitment, RBC has particular regard for those rights set out in the Universal Declaration on Human Rights; the International Covenant on Civil and Political Rights; the International Covenant on Economic, Social and Cultural Rights; the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work; and the United Nations Declaration on the Rights of Indigenous Peoples. In addition, RBC has published an annual Modern Slavery Act Statement every year since 2016, and does not tolerate slavery or human trafficking in its organization or in those of its suppliers and sub-contractors.¹⁴

At RBC GAM, investment teams consider material ESG factors when making investment-related decisions within the portfolios that they manage, for applicable types of investments.¹⁵ Material ESG factors may include human rights, employee relations and working conditions, discrimination, modern slavery, and/or supply chain risks. The extent to which an ESG factor is considered material depends on the issuer, the industries and geographies in which it operates, and the nature of the investment vehicle for which it is purchased. As active stewards of our clients’ capital, our investment teams may engage with issuers on topics that they deem to be material to their investments.¹⁶ Through proxy voting, we generally support shareholder proposals that call on companies to respect internationally recognized human rights and comply with relevant international agreements regarding the protection of those rights. For example, we will generally support shareholder proposals that call on companies to disclose their practices, policies, and oversight for assessing, preventing, and mitigating human rights risks. This includes within the company’s investments, operations, and/or activities in countries with historical or current evidence of labour and human rights abuses.

^{1 Walk Free, What is modern slavery? Accessed April 5, 2024
2 Fighting Against Forced Labour and Child Labour in Supply Chains Act, Government of Canada, January 1, 2024
3 Global Slavery Index, Accessed April 5, 2024
4 Responsible Sourcing Tool, Is Modern Slavery hiding in your supply chain?
5 Global Slavery Index Map, Accessed April 5, 2024
6 Responsible Sourcing Tool, Is Modern Slavery hiding in your supply chain?
7 Global Slavery Index Map, Accessed April 5, 2024
8 Responsible Sourcing Tool, Is Modern Slavery hiding in your supply chain?
9 Ibid
10 Ibid
11 Walk Free, What is modern slavery? Accessed April 5, 2024
12 RBC’s Approach to Human Rights, Royal Bank of Canada (RBC), November 2023
13 In this document, references to RBC GAM include the following affiliates: RBC Global Asset Management Inc. (including Phillips, Hager & North Investment Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited, and RBC Indigo Asset Management Inc.
14 Modern Slavery Act Statement 2106, RBC
15 Certain fund products do not integrate ESG factors, including but not limited to money market funds, index funds and certain third-party sub-advised funds.
16 In some instances involving certain fixed income investments, quantitative investment, buy- and maintain, passive and certain third-party sub-advised strategies, there is no engagement with issuers by RBC GAM.
17 Alphabet Inc., Notice of 2023 Annual Meeting of Stockholders and Proxy Statement, Schedule 14A, Securities and exchange commission (SEC)}