Increasing regulation on modern slavery in supply chains

Growing concern about the prevalence of modern slavery – such as forced or child labour – in global supply chains may contribute to changes in sourcing among corporates, says Fitch Ratings in a new report.

Many consumer goods contain parts sourced from sectors and regions with high incidences of modern slavery. Affected companies include those in the retail, food production, and electric vehicle and battery industries.

A growing body of legislation is asking importers to take more accountability for the actions of their suppliers in relation to labour rights. Laws in the UK, US, and Australia require large companies to report annually on their risk management related to modern slavery in their supply chains. This presents challenges as typically retailers and distributors of finished goods have limited visibility into the operational practices of suppliers. There is proposed or pending legislation on modern slavery and general supply chain sustainability in the Netherlands, Canada, Germany, and the EU.

Fitch expects regulatory requirements to accelerate trends such as near-shoring – shifting production from the lowest-cost emerging markets economies to countries nearer to the home market. Proximity sourcing has benefits such as improved oversight and regional trade agreements that include workers’ rights provisions. We also expect growth in responsible or ethical sourcing, driven by both regulation and consumer preference. In light of other geopolitical risks, such as the coronavirus pandemic and bilateral trade wars, corporates may find that shifting some purchasing from regions with high modern slavery risk contributes to other operational or financial objectives.

If reporting on modern slavery in supply becomes more widespread, standardisation of labour risks and improved data collection could contribute to better assessing the impact of these risks on a company’s financial performance.

Further information on Fitch’s ESG Relevance Scores and research can be found on Fitch’s ESG page.

Source: Fitch