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UK Modern Slavery ActBeyond Compliance & Long-Term Strategy to Address Human Trafficking in Supply Chains

BSR Human Rights Advisory Services

May 2016

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Contents

1. Issue Background

2. UK Modern Slavery Act Compliance

3. Strategic Approach

4. Current Practices

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Issue BackgroundHuman Trafficking in Supply Chains | Compliance & Strategy

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Modern slavery is rampant throughout the globe and is recognized as one of the biggest business risks, with prevalence throughout the supply chain

Human Trafficking and Forced Labor

• Scope – Estimated that 21 million people are in forced labor globally, which generates about $150 billion per year in illegal profits. Of these, 10.7 million are exploited in agriculture, mining, manufacturing, construction and utilities sectors, generating $43.4 billion in illegal profits annually

• Regulation – State and national governments like California and the UK are requiring corporate disclosure of efforts to address HT/FL in supply chains

• Why act? – Companies face reputational risk, loss of brand equity, and litigation for failure to comply with regulations. E.g. Recent Costco lawsuit, Nestle and child labor.

OECD Human Trafficking and Corruption

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• Few commercial incentives for suppliers to improve

• Suppliers and brands may not understand the business case

• HT/FL often begins in countries that lack strong governance or rule of law

• Corruption is an enabler

• Lack of unions to help provide protection

• Brand procurement practices

• Seasonality drives need for short-term labor

• Lack of requirement for direct contracting

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Lack of Transparency Lack of CapacityLack of Disclosure

Lack of Incentives Business ModelsSystemic Challenges

The difficulty of mitigating risk of human trafficking/forced labor in supply chains is compounded by several root causes.

Challenges in Managing HT/FL Risk

• Low visibility into Tier 2+ recruitment practices

• Intentionally shadowy

• Trafficking often found in the informal economy

• Suppliers not forthcoming or don’t know what to report on

• Audits inaccurate; no “magic questions”

• Lack of expertise or resources from suppliers to address issue

• Brands lack access to resources to help address

Labor Trafficking is Particularly Difficult to Uncover

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• Labor trafficking victims do not usually self-identify

• There’s nothing inherently wrong with working in a factory, or being a housekeeper – very difficult to see where the crime is.

• Labor victims don’t always view us as saviors

Labor Trafficking 15%

Sex Trafficking

85%

Sex Trafficking15%

Labor Trafficking

85%

Victims Estimated

Cases Identified

Labor vs. Sex Trafficking

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UK MSA Compliance

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Human Trafficking in Supply Chains | Compliance & Strategy

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Legislation TimelineIn the last 6 years there has been a proliferation of legislation focused on human trafficking, some of which require company disclosure and reporting of mitigation efforts, across the globe.

2010 2011 2012 2013 2014 2015

Business Supply Chain Transparency Act introduced

EU Directive on Preventing and Combatting Trafficking in Human Beings

E.O. 13627: Strengthening Protection Against Trafficking in Persons in Federal Contracts

UNGPs

Ca. Transparency in Supply Chains Act

Australian Slavery, Slavery-Like Conditions and People Trafficking Act

EU Directive on ESG Disclosure (Directive 2013/34/EU)

UK Modern Slavery Act

Business and Supply Chain Transparency on Trafficking and Slavery Act 2015 introduced

UK Bribery Act Focus on Supply Chains

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UK Modern Slavery Act: Compliance

Transparency in Supply Chains etc. A Practical Guide 9

• Overview− Businesses supplying goods or services in the UK with global gross income

of at least £36 million.

− Required to post an annual statement with link from website homepage

− Approved by Board of Directors and signed by a company Director

− Enforcement through required disclosure. Court of public opinion will focus on due diligence efforts – how much do you investigate when a problem is identified?

• Content of Statement

− Statement must set out the “steps taken during the financial year to ensure that slavery and human trafficking is not taking place in any of its supply chains or in any part of its own business, or a statement that it is taking no such steps.”

− No other requirements – any length, any format.

UK Modern Slavery Act: Compliance

Transparency in Supply Chains etc. A Practical Guide 10

• Suggested Statement Contents

− The organization's structure, its business and its supply chains

− Policies in relation to slavery and human trafficking

− Due diligence processes related to slavery and human trafficking in its business and supply chains

− Parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk

− It’s effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate

− Training and capacity building about slavery and human trafficking available to its staff

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Stakeholder Expectations

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• Basic Compliance

− Strict compliance with reporting requirements and detail on current efforts to identify and reduce trafficking, even if minimal. Ensure Senior Executive or Board-level sign-off.

• Emerging Good Practice

− Governance structure in place with long-term strategy and approach

− Risk-based targeted due diligence based on geography, product, commodity or other known trafficking “hot spots”

− Collaboration with other companies, governments, or NGOs to develop remedies consistent with human rights

− Transparency on lessons and challenges

− Current leaders already have some of these efforts in place.

The “spirit of the law” is to encourage companies to develop a longer term strategic approach to addressing modern slavery in their supply chains.

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Mostly voluntary as they are out before year-end deadline.UK Slavery Act – First 100 Reports

Highlights

• Some good examples of statements that are relatively detailed in setting out an approach to due diligence, the majority do not go beyond broad commitments to ensure no modern slavery.

• Short – nearly all under 1000 words, 50% are under 500

• Most refer to auditing efforts & training

• Some report on KPIs

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Statement discusses policies, risk assessments, and training. Ford’s UK MSA Statement

Strategic ApproachHuman Trafficking in Supply Chains | Compliance & Strategy

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Core Elements of a Strategic Approach

We cannot manage what we cannot see or understand

Need to de-link “visibility” from “responsibility”

Supply chain mapping aligned with UN Guiding Principles

Hot-spot analysisand targeted due diligence in high-risk areas / auditing program

Gain Visibility

Process review and operating model

Report review and benchmarking

Reporting strategy and content development

TransparencyInternal Buy-In & Alignment

Conduct policy gap analysis to ensure prohibition on forced labor and human trafficking is included in all relevant policies

Consider specific policy statements, e.g. no recruiting fees; confiscation of passports

Consider revising procurement policies

Remedies & Solutions

Determine scope of responsibility

High-touch engagement / capacity building with suppliers

Incorporate worker voice through interviews & effective grievance mechanism

Consider ending relationship with supplier

Transparent about what you find

Transparent about solutions

Transparent about challenges

Partner with an organization when making public statements

Collaboration

Identify and build strategic partnerships –industry, NGO, government, solutions provider

Engage “host” and “home” governments

Engage in public policy discussion / consider lobbying for anti-trafficking legislation

Gain Visibility

We cannot manage what we cannot see or understand

Need to de-link “visibility” from “responsibility”

Supply chain mapping aligned with UN Guiding Principles

Hot-spot analysisand targeted due diligence in high-risk areas / auditing program

Gain Visibility Internal Buy-In & Alignment

What To Do

� Map supply chain to as many Tiers as possible

� Identify FL/HT hot spots; beyond Tier 1 in highest risk areas

� Conduct targeted and ongoing investigations; consider collaboration

� Auditing begins the conversation, it’s not the final solution

“When you understand more about the risks, then you can start to understand where the root causes lie and what the most effective interventions

look like.” –Head of Responsible

Sourcing

Country Risk Commodity Risk Sector Risk

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Internal Buy-In & Alignment

Internal Buy-In & Alignment

Conduct policy gap analysis to ensure prohibition on forced labor and human trafficking is included in all relevant policies

Consider specific policy statements, e.g. no recruiting fees; confiscation of passports

Consider revising procurement policies

What To Do

� Build awareness internally about FL/HT and the company’s responsibility to address it

� Review existing labor policies, identify and close gaps

� Analyze whether procurement policies should be revised to change incentives for suppliers

� Make the Chief Procurement Officer the hero.

“When I joined our company there was a lot of resistance from the buying teams of, “Oh yeah, fine, sales prevention.” It took getting people on board to understand why you’re doing it and educating them and training them across the business. And we still do it. It took a good year and a half, two years and then the mind-set changed.”–Head of Corporate

Responsibility

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Remedies & Solutions

Remedies & Solutions

Determine scope of responsibility

High-touch engagement / capacity building with suppliers

Incorporate worker voice through interviews & effective grievance mechanism

Consider ending relationships with supplier

What To Do

� Determine the scope of responsibility: visibility ≠ responsibility

� Approach legitimate suppliers as partners in remediation, not “red flags” to be addressed

� Understand supplier’s willingness and incentives to partner

� Engage with workers wherever possible, always taking into account their situation, fears, incentives; consider making available an anonymous direct grievance hotline or other mechanism

� Build staff capacity to conduct “enhanced engagement” through workshops, interviews with employees, capacity building

� Consult with experts to determine appropriate remedy, always bearing in mind the victim’s perspective and potential impacts

“A big part of our team overseas is simply having experts in the field, on the ground, building the relationships, building

networks and starting to understand where all these risks are. It’s only by having that close connection which helps drive us to do

things which absolutely no one knew about before.”-- Head of Responsible Sourcing

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Collaboration

Process review and operating model

Report review and benchmarking

Reporting strategy and content development

Collaboration

Identify and build strategic partnerships –industry, NGO, government, solutions provider

Engage “host” and “home” governments

Engage in public policy discussion / consider lobbying for anti-trafficking legislation

What To Do

� Identify industry associations for collaboration; cross-industry groups

� Engage “host” and “home” governments wherever possible – take a “shared responsibility” approach

� Engage in policy discussion; consider lobbying on these issues.

� Conduct due diligence on NGO partners – be strategic and long-term

“Five years ago, the impression was that we could fix this ourselves. We truly thought that if we audit every one of these suppliers, very, very frequently, they’re going to get it and they’re going to be doing the right thing. And I think, frankly, over the last five years, we’ve seen the folly of that and we’ve seen the reality that we cannot do this on our own.”-- Head of Responsible Sourcing

Academics

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Workers & Unions

Int‘l Labor

Int‘l Finance

Developing Govt‘s

Developed Govt‘s

SuppliersGloblal Companies

Development

Agencies

Foundations & NGOs

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Transparency

Transparency

Transparent about what you find

Transparent about solutions

Transparent about challenges

Partner with an organization when making public statements

“What has led to that change I think is very senior people within the business travelling, seeing it first-hand. When an issue hits the old proverbial fan – or you’re in the press, or you’re being hounded by an NGO – the business sits up and listens. How could this have happened? What do we do to prevent it again?”-- Head of Corporate

Responsibility

What To Do

• Share with others what you’re finding on the ground

• Can be a full report, e.g. Nestle, or can happen behind the scenes

• Share publicly your strategy or other effective remediation efforts

“Jacobs Douwe Egberts admits that it is possible that coffee from plantations with poor labour conditions ended up in their products, and coffee giant Nestléacknowledges having purchased coffee from two plantations where authorities

freed workers from conditions analogous to slavery in 2015.”

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Current Good PracticesHuman Trafficking in Supply Chains | Compliance & Strategy

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Nestle recently published a report detailing forced labor in seafood supply chain in Thailand

Nestle – Forced Labor in Shrimp Industry

• Background: After media reports such as the Guardian discovered forced labor in supply chains, Nestle launched a year long investigation in Dec 2014 revealing forced labor in Fancy Feast supply chain

• Action: Nestle commissions Verite to conduct a 3 months assessment; Verite interviewed 100+ people, including about 80 workers from Myanmar and Cambodia, and boat owners, shrimp farm owners, site supervisors and Nestle suppliers

• Results: Instances of forced and child labor, human trafficking, deceptive recruitment practices, inadequate and unsafe working conditions, excessive recruiter fees, restricted movement

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Overview of forced labor among Tier 2 suppliers in Taiwan Investigating Beyond Tier 1 - Patagonia

• Background: Patagonia reviewed working conditions in the mills that produce the fabrics it uses in products

• One quarter are located in Taiwan with instances of trafficking and exploitation in most of them

• Issue: Labor brokers were charging labor workers high fees for jobs in mills, as much as $7000

• Response: Patagonia published an Employment Standards and Implementation guide for Taiwan based suppliers and beyond

• Patagonia held a forum to explain the standards to Taiwanese suppliers and required suppliers to repay fees to workers who were hired before June 1, 2015; 5000 workers will be repaid

Patagonia

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Delta is one of the first airline companies to adopt the US Customers and Border Patrol’s Blue Lightning initiative

Collaboration with Government: Delta

• Computer-based training program that provides airlines with tools to help identify and report suspected instances of human trafficking

• To date, over 68,000 Delta employees have been trained through the program on how to identify traffickers and their victims and respond accordingly

• Employees can call the Immigration and Customs Enforcement Homeland Security Investigations Tip Line

• Real-time reporting mechanism allows law enforcement to analyze information and coordinate an appropriate, effective response

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After an article noted abuses in the Thailand shrimp supply chain, Costco organized and joined the Shrimp Sustainable Supply Chain Task Force.

Collaboration: Shrimp in Thailand

• Comprised of representatives from Thai shrimp feed manufacturers, shrimp processors, retailers in the U.S. and Europe, and NGOs

Three goals:

1. Implement verification systems to trace fish supplied

2. Create and enforce a code of conduct for vessels sourcing fish for fish meal plants

3. Improve the sustainability of two of Thailand's major fisheries that supply fish meal

• Worked with the Thai government to develop port control measures and documents

• Engaged a multi-stakeholder group to develop audit protocols in its membership supply chains

www.bsr.org

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BSR Advisory Services | Human Rights

Peter NestorAssociate Director, Human Rightspnestor@bsr.org

Salah HusseiniManager, Human Rightsmlee@bsr.org