Companies' reporting on modern slavery is lacking quality in several areas, the UK's Financial Reporting Council (FRC) found in a review issued Monday that also offered guidance for improvement.
Modern Slavery Reporting Practices in the UK looked at a total sample of 100 FTSE-100, FTSE-250, and Small Caps companies' modern slavery statements and their strategic and governance reports.
The majority of modern slavery statements reviewed were "fragmented, lacked a clear focus and narrative, and often contained boilerplate language", the FRC said.
Disclosures about KPIs measuring the effectiveness of steps to minimise modern slavery risks were particularly poor, according to the regulator. Only a quarter of companies disclosed KPI results, and just 12% confirmed they have made informed decisions based on those KPIs.
The research, commissioned by the FRC in collaboration with the UK's Independent Anti-Slavery Commissioner's Office, was carried out by Lancaster University, building on preliminary research carried out by the FRC.
Dame Sara Thornton, the UK's Independent Anti-Slavery Commissioner, said an estimated 16 million modern slavery victims work in the private sector globally, and "businesses carry significant material and reputational risk of modern slavery being found somewhere in their supply chains". She added that "irresponsible commercial practices and poor governance" can create the conditions that allow exploitation to thrive.
Modern slavery statements
Modern slavery statements are mandatory for commercial organisations supplying goods and services with an annual turnover of £36 million or more. The Modern Slavery Act 2015 (MSA) requires those businesses to write an annual statement setting out the steps they are taking to address the risk of slavery in their operations and supply chains.
The MSA also requires reporting entities to publish their modern slavery statement on their website with a direct link from their homepage. The majority of companies (72%) provided a link to their modern slavery statement on the Home Office's online registry, but most companies linked to their 2020 or 2019 statement rather than their most recent one.
As well as assessing past performance, forward-looking discussion of evolving issues and the company's strategy for dealing with them is critical information for shareholders to assess the company's approach to addressing modern slavery risk, the report said.
The research highlighted how improvements could be made to the reporting areas recommended in the MSA guidance. These include:
Policies. The FRC said growing investor demand for transparency on modern slavery and greater regulatory focus in the UK provides insight into the potential costs of poor reporting. Effectively identifying modern slavery risk and communicating a long-term strategy will be critical to navigating such pressures and costs.
Due diligence. Companies should demonstrate how they have engaged prospective suppliers on modern slavery issues and, where necessary, how they have sought to improve labour practices before contract approval.
Risk assessment and management. Companies that properly assess the nature and extent of their exposure to slavery risk should be more able to take targeted action to find it, remedy it, and prevent it occurring in the future. Particular business risks that companies are encouraged to consider when assessing and managing risks to workers include those relating to "country, sector, transaction, and business partnerships", the report said.
Performance indicators and effectiveness. A company's effectiveness review should involve reflection on how the metrics used to drive performance and shape operations influence the company's exposure to slavery risk in its own business or supply chain.
The UK Corporate Governance Code does not include specific provisions on modern slavery or human rights issues. However, the Code's principles and provisions cover the board's ability to assess and manage the company's risks and to consider the interests of wider stakeholders in making key decisions, the FRC explained.
In the strategic report, companies should report on business objectives and strategy, principal risks, and matters that directors have had regard to when performing their duty under s.172 of the Companies Act 2006. Under this section, directors must have regard to a number of considerations beyond the immediate financial health of the business, including the impact of the company's operations on the community and the environment and the desirability of the company maintaining a reputation for high standards of business conduct.
The report's lead researcher, Steve Young, Ph.D., a Lancaster University Management School professor, said the risks of slavery and trafficking "may be passing under the radar in some companies". Other companies, he said, "seem to be adopting a compliance-oriented approach with processes and disclosures satisfying regulatory requirements rather than seeking to understand and address fundamental concerns".
He added: "At the other end of the spectrum … we see a number of companies that are leading the way in terms of their thinking and transparency. We hope our evidence helps to promote best practice and illustrate the stakeholder benefits that are possible when boards prioritise the issue."
— To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.