Modern slavery — pressure on supply chains

Companies face increasing pressure to ensure they are not party to or associated with any form of people exploitation, including at the input / service providers in their supply chains. Newly-introduced laws and regulation could potentially increase litigation risks associated with modern slavery. Identification of exploitation could lead to large liability claims, in particular with respect to director & officer (D&O) covers.

Potential impacts

  • Increased pressure on companies, including insurers, to disclose information on human rights along their entire supply chains. If human rights violations are identified, the stock price of a company could be negatively impacted.
  • Reputational risks could arise from doing business with input / service providers in the supply chain associated with any form of modern slavery.
  • In casualty, alleged human rights violations in supply chains could lead to more claims in D&O lines of business.

Modern slavery is an umbrella term for different forms of people exploitation, including forced and child labour, human trafficking and forced marriage. Of the estimated 40 million people trapped in modern slavery, 16 million “work” in the private sector.1 In recent years, non-governmental organisations have raised the profile of human rights violations in public debate. This has put pressure on companies to ensure they are not party to any such exploitation, including in the operations of all those participants that make up their supply chain.

Today’s supply chains are global and complex, with many agents involved at different stages. As such, it can be difficult to trace the origins of a final product and to identify occurrence of human rights violations along the production path. The increased attention on the topic exposes companies to legal, financial and reputational risks.2 For example, the US Supreme Court is considering a case in which a multinational is being sued for child labour in Africa.3

There is also pressure from shareholders, who expect companies to adhere to ESG principles. At any level, modern slavery is the antithesis to ESG principles. Further, any company seen not be acting on human rights abuses in any part of their operations will likely struggle to attract and retain high-quality and motivated employees.4

The heightened awareness of new forms of slavery is reflected in implementation of more stringent regulations. For example, in 2015 the UK adopted the Modern Slavery Act, which requires commercial organisations to publish a statement on how they ensure they are not party to slavery and human trafficking at any of their operations, including supply chains. The State of California (Transparency in Supply Chains Act), Australia (Modern Slavery Bill), France (Duty of Vigilance Law) and the Netherlands (Child Labour Due Diligence Law) have introduced similar measures.

More rigorous laws and growing expectations of due diligence give rise to new liability risks. A first successful claim based on the new regulations could lead to an avalanche of subsequent claims. For insurers, this means more detailed appraisal of the issue of modern slavery in underwriting, notably with respect to D&O liability covers.

References

1Global Estimates of Modern Slavery: forced labor and forced marriage, ILO, 2017, https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/
publication/wcms_575479.pdf
2GRI, Responsible Labor Initiative, Advancing modern slavery reporting to meet stakeholder expectations, 2019, https://www.globalreporting.org/media/r1ydr40k/rligri_advancing-modern-slavery-reporting-to-meet-stakeholder-expectations.pdf
3In this case, plaintiffs aim to apply a dormant 18th century law on a 21st century global supply chain phenomenon; Agence France Presse,“US Supreme Court Considers Firms’ Liability For Africa Child Slavery”, Barron’s, 1 December 2020, https://www.barrons.com/news/us-supreme-court-considers-firms-liability-for-africa-childslavery-01606851008
4W. Henisz, T. Koller, and R. Nuttall, “Five ways that ESG creates value”, McKinsey Quarterly, November 2019, https://www.mckinsey.com/~/media/McKinsey/Business Functions/Strategy and Corporate Finance/Our Insights/Five ways that ESG creates value/Five-ways-that-ESG-creates-value.pdf

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