Conflict and modern slavery: the investment perspective

The Ukraine war reminds us of the devasting consequences of war beyond the direct death toll, displacing populations and upending livelihoods. Since the Russian invasion began on 24 February, Ukraine has witnessed one of the fastest exoduses of people in recent history. To date, nearly 6.7 million refugees have been recorded in Europe (source: UNHCR).

Although there is now evidence of Ukrainians returning to their home country, the extreme relocation triggered by the conflict requires the integration of substantial numbers of refugees into receiving European populations.

Sadly, the headlines from Ukraine are the tip of an iceberg; the UN estimates that some 100 million people around the world have been forcibly displaced from their homes, in most cases as a result of violence (source: UNHCR).

Modern slavery and human trafficking have been a consequence of 90% of modern wars (source: Contemporary Slavery in Armed Conflict). This is due to a mixture of factors, including refugees being picked up by traffickers when crossing borders, or accepting offers of accommodation or work without validation of legitimacy and safety.

The vulnerability of refugees is often compounded by demographic factors, with women and children being over-represented among displaced populations.

As a result, businesses operating in regions that are receiving refugees must be aware of the risks of labour exploitation in their operations and supply chains.

Following the Syrian civil war in 2011, Turkey experienced an influx of refugees. Today the country holds the largest population of refugees globally – 3.6 million of which are Syrians. A significant proportion of these refugees were integrated into the garment manufacturing sector – an important part of the Turkish economy.

Even before the Syrian refugee crisis, the garment industry relied heavily on a cheap and flexible workforce made up of migrant labour. Now there are reports of widespread labour exploitation of refugees, with evidence of 60+ hour weeks and the majority of Syrian workers earning below minimum wage (source: World Bank).

Specifically within Istanbul, it is thought that 85% of Syrians are informally employed. As a result, global apparel brands came under scrutiny for their lack of adequate action, with only a few brands gaining praise for good practice (source: BHRRC).

As a wave of mandatory due diligence laws come into effect across Europe, the focus and scrutiny on human rights abuses such as modern slavery is rising. With tangible civil liability and monetary fines on the horizon, as well as basic business responsibility, the importance of examining and managing potential human rights risks has never been higher, both for management teams, and as investors in those companies.

How should investors engage on this issue?

In Schroders’ Engagement Blueprint we set out our request for companies to establish and implement a human rights policy in line with the UNGPs, International Labor Organisation and other international frameworks, and commit to respect human rights. We also ask companies to introduce robust due diligence processes and effective remedy.

However, due to the heightened risk associated with human rights in and around conflict-affected areas, we expect companies to go beyond this. That entails adapting existing policies to the specific needs of conflict-affected areas, and performing enhanced due diligence in these contexts. Such action comprises:

• Assessing actual and potential human rights impacts;
• Integrating and acting upon the findings;
• Tracking responses;
• Communicating how impacts are addressed.

As a starting point, there are two simple questions investors seeking to engage on this issue should ask companies:

1. How have your supply chains been impacted by the influx of migrant labour, and how are you assessing the associated risks of modern slavery?
2. What enhanced due diligence processes are you undertaking given this heightened risk?

Case study – Turkish garment manufacturer:

Recognising the heightened human rights risks in the country, particularly associated with an influx of migrants from Syria, in 2020 we began engaging with a Turkish garment manufacturer on its human rights policies and practices.

The company was at a relatively early stage on this topic so we started by encouraging it to increase disclosure and demonstrate adherence with responsible sourcing practices, as well as participating in industry initiatives to improve standards and collaborate with relevant NGOs and stakeholder groups.

We are pleased that since our engagement, the company has set compliance and monitoring targets for its supply chain, and has begun reporting basic audit data.

Case study – Taiwanese company:

In 2022 we engaged with a Taiwanese company with exposure to Myanmar. The company had begun to make progress to include human rights, among other ESG factors, in its supplier management practices.

We sought to understand what actions the company will be taking to increase suppliers signing onto the code of conduct. We also encouraged the company to work to increase the scope of its audit practices. We will continue to engage with the company on these topics in the coming years, and may consider escalating our concerns if it is deemed necessary.

Case study – European recruitment companies:

We have recently, in mid-2022, initiated engagements with two companies operating within Europe that fall within the human resources and employment services industry. We identified this industry as higher risk because employment and temporary agencies are likely to interact with individuals who are rapidly looking to find work, having been displaced from their homes and original employment.

The engagement seeks to understand how the companies are acting to anticipate and address these risks – ensuring that due diligence is being undertaken on employee applicants and end employers. Over the coming months we will continue to monitor the responses by these companies in line with our engagement process.