Engaging with companies and fund managers over forced labour in the solar supply chain

The energy transition is fraught with complexity. We want to invest in companies that can provide vital solutions to help tackle climate change, while also delivering attractive financial returns for our clients. But how do we ensure we are supporting a “just transition” – one that ensures the benefits are shared widely and avoids social exclusion? How are the companies we invest in treating other stakeholders – including staff, local communities, regulators and the environment – across their supply chains?

Human rights are an important issue for our clients and one of six priority areas within our engagement blueprint.

Unfortunately, our research into modern slavery and ethical supply chains resulted in some worrying findings about the solar industry. The supply chain is often dependent on materials, such as polysilicon, that are produced in China’s Xinjiang Uighur Autonomous Region (XUAR). The risk of forced labour in this region is high, giving rise to ethical concerns and regulatory risks.

As a result of the research, Schroders' fund managers focused on energy transition have enhanced engagement efforts with relevant companies. This includes requesting evidence of due diligence and transparency around supply chains and adjusting portfolios where necessary.

As multi-manager investors at Cazenove Capital, we have shared the research findings with third-party fund managers with relevant holdings. Many of them provided evidence of work already undertaken and some have amended their portfolios.

The research has economic, as well as ethical, implications. In June this year, the US updated the US Tariff Act with the Uighur Forced Labour Prevention Act, banning all imports from XUAR unless it can be proven that forced labour was not involved in their production. Europe and Australia are considering a similar regulation. These measures could impact profitability and share prices for companies in the solar industry and are a clear example of how ESG-related research can protect financial returns.