This white paper is a compilation of a four-part blog series published in June 2022 by our Australian team. It provides key insights on the level of reporting pursuant to the requirements of the Australian Modern Slavery Act. While this series is specific to Australia, the legal obligations of that Act apply to businesses headquartered across the globe that sell goods or services into Australia.
Human rights, and particularly modern slavery (as it affects an organization and its supply chain), has been gaining greater prominence on the international regulatory stage with a movement from transparency disclosures to mandatory human rights supply chain due diligence and greater penalties for breach of statutory obligations.
The human rights footprint of an organization is also coming under the increased scrutiny of all stakeholders—investors, consumers, employees (and potential employees), NGOs, new regulators and business partners. In parallel, ESG, increasingly being advanced as a financial value proposition by the institutional and private equity investor community, is becoming the accepted blueprint of doing business. ESG encompasses a variety of interrelated topics that every organization—public or private—must integrate into its corporate strategy. These include how it adapts to environmental, human rights, and climate challenges and how it creates shared responsibility for these issues with its value chain partners. Any governance structure must be capable of aligning corporate strategy with these key imperatives as a part of an ESG strategy.
ESG based reporting is rapidly becoming just as important as financial reporting, and is the dominant vehicle for any organization engaged in building trust with its stakeholders.
The series follows this roadmap:
- In Part I, we provide a snapshot of Australia's reporting requirements, origin countries reporting in Australia and industries.
- In Part II, we summarize what leading businesses are doing to meet their obligations.
- In Part III, we identify key issues and gaps for areas of improvement.
- In Part IV, we end with an outlook of what's next.
We hope you enjoy this series.
Part I: Introduction
The beginning of 2022 marked the commencement of the third reporting season under the Modern Slavery Act 2018 (Cth) (Act). All eligible entities operating on the Australian financial year should have submitted their second modern slavery statement by the end of December 2021. Those operating on a calendar financial year were due to submit their second statements by 30 June 2022.
The Act requires organisations registered or carrying on business in Australia, and with a consolidated revenue of at least A$100 million, to report annually in a modern slavery statement on how they are addressing the risks of modern slavery in their supply chain and operations (Statements). These Statements are lodged on a publicly accessible register held and managed by the Australian Border Force.
Snapshot of Statements submitted to date
We have conducted an analysis of the modern slavery statements submitted thus far. As of late June 2022, 6,222 entities and two Commonwealth bodies have submitted modern slavery statements (3,799 mandatory and 528 voluntary) headquartered across 42 different countries. Below are pictorial snapshots we prepared showing the origin countries of the organisations reporting in Australia and their industry sectors:
Industries of reporting entities
Part II: What leading businesses are doing to meet their obligations
The Act was developed with the intention to drive a 'race to the top' by organisations to properly identify, address, and report modern slavery risks in global supply chains.
However, our review of the modern slavery statements submitted to date and consideration of various reports commentating on these issues (including from the Australian Council of Superannuation Investors (ACSI) and Monash University) indicate a large proportion of organisations are taking a 'race to the middle' approach - only meeting the bare minimum of the Act's requirements and failing to undertake in-depth analysis of the issues.
What are the reporting requirements?
The Act sets out strict criteria that must be reported in a Statement. Unlike in other jurisdictions (such as the UK) the reporting criteria in Australia are mandatory. The reporting criteria are:
(a) the identity of the reporting entity;
(b) the structure, operations, and supply chains of the reporting entity;
(c) the risks of modern slavery practices in the operations and supply chains of the reporting entity, and any entities that the reporting entity owns or controls;
(d) the actions taken by the reporting entity and any entity that the reporting entity owns or controls, to assess and address those risks;
(e) how the reporting entity assesses the effectiveness of such actions;
(f) the process of consultation with any entities the reporting entity owns or controls or is issuing a joint modern slavery statement with; and
(g) any other information that the reporting entity, or the entity giving the statement, considers relevant.
What are the leaders reporting?
There is a noticeable group of organisations leading the pack, going above and beyond the minimum requirements under the Act to understand their supply chains and the modern slavery risks within, and taking measured steps to identify and mitigate these risks.
Below, we set out our insights on how the "leaders" are complying with the Act's mandatory reporting criteria.
(a) Structure, operations, and supply chains
The strongest Statements:
- described the nature of their business, provided detail of their workforce arrangements, and types of business relationships;
- provided details as to the specific number of employees, direct hires, labour hire contracts, and the coverage of Enterprise Agreements; and
- importantly, identified the steps they are taking to obtain greater visibility beyond tier 1 in addition to explaining their tier 1 supply chain.
The leaders provided a clear description of their supply chains in terms of the suppliers by number, their specific regions/countries, and the dollar spend.
(b) Actions taken to assess and address modern slavery risks
The leaders disclosed how they are assessing and addressing modern slavery risks within their own operations (such as through recruitment, procurement, investments etc.) not just within their supply chains.
Only a small portion of organisations provided sufficient detail around the implementation of key actions to minimise modern slavery risks faced by their organisations and how these key actions are implemented. The majority of statements simply identified the categories of risk and high risk countries in their supply chain, which is not sufficient.
The best statements were those which drew on case studies and specific examples used to illustrate how the company was mitigating risks, their efforts to engage with and educate suppliers, highly detailed risk assessments and transparent disclosure of policies, and an assessment of the effectiveness of these policies. They followed the Government Guidance in disclosing their detailed risk assessment of individual suppliers and risk assessments deeper into supply chains.
Many organisations provided detail of training programs, internal committees, and working groups relating to human rights and modern slavery, however, the most comprehensive statements were those that provided detail of the specific steps these groups were taking to identify and monitor modern slavery risks and specific detail of the training provided (to whom, how many people, etc.).
(c) Assessing the effectiveness of actions
The leaders not only set out the steps they have implemented to oversee, monitor. and report on their actions, (such as internal reporting channels and working groups), but also disclosed the results of these processes. They set out their specific key performance indicators and how they are assessing these KPIs to determine whether they decrease the risk of exposure to modern slavery.
(d) Consultation with owned and controlled entities
The leading statements showed meaningful collaboration between the reporting entity and each entity it owns or controls (such as regular meetings between each entity's procurement teams and working groups and cross-board briefings).
(e) Additional information
The best statements used this section as an opportunity to report on other collaborations, beyond the minimum requirements of the Act, such as industry and strategic partnerships. The better statements also set out what progress had been made in the previous reporting period and outlined their commitments and focus for the following year. Usefully, some organisations also annexed an index which cross-referenced the mandatory reporting criteria to references within the modern slavery statement and attached other reports that may contain useful information (such as sustainability reports).
Only a few organisations are actively engaging with stakeholders in a way that informs their modern slavery risk management approach to go beyond just asking suppliers to fill out a one page survey. The leaders demonstrated how they regularly engage with their stakeholders and suppliers and use the feedback from these external sources to assess effectiveness.
Part III: What Australian businesses can learn: Areas of improvement
Key stakeholders such as investors, employees, customers, and suppliers are increasingly demanding corporate efforts to address their modern slavery risks, and broader human rights and environmental, social and governance risks. As such, modern slavery statements are proving to be useful tools to monitor corporate compliance and improvement in this space.
From our review of the first two tranches of modern slavery statements submitted to date, we have identified below the key issues and gaps:
(a) Limited operational and supply chain awareness
One of the predominant reporting gaps was in relation to mapping and addressing potential risks in the reporting entities' own operations and supply chains. The "laggers" only provided a very brief description of their supply chain demonstrating a superficial understanding of the source of exposure to modern slavery risks.
Our review revealed that many companies had only a basic understanding of their supply chain at the contractual level but not of the risks beyond this. Most companies could not identify or assess the risks beyond their Tier 1 suppliers and lacked visibility of their supply chain as a whole. Additionally, many organisations failed to assess and address risks within their own operations (such as through recruitment, procurement, investments, customers, etc.).
Statements should adequately disclose, at the minimum, who the entities' suppliers are and the risks of modern slavery present along the entire supply chain and within their own operations.
(b) Inadequately identifying and assessing risks
This criterion appears to be the most difficult for organisations to grapple with. Whilst organisations are not required to report on specific individual risks or actual cases of modern slavery (although you can voluntarily include case studies or examples), they are required to at least identify how risks of modern slavery practices may be present in the organisation and their supply chain. The Government Guidance provides that
'risks of modern slavery practices' means the potential for your entity to cause, contribute to or be directly linked to modern slavery through its operations and supply chains.1'
The concept of risk in this context means risk to people, rather than risk to the entity. However, these risks may often intersect. The terms 'cause, contribute to or be directly linked' stem from the UN Guiding Principles on Business and Human Rights, with which all reporting entities should ensure they familiarise themselves.
The majority of Statements merely described how risks of modern slavery are being identified, rather than properly identifying and describing the actual present risks.
While in some instances non-disclosure of actual incidents may be for a legitimate reason (such as to avoid compromising ongoing investigation), reporting entities should aim to provide as much practicable information on the present risks in order to promote transparency and disclosure and in accordance with the UN Guiding Principles.
(c) Inadequate disclosure of actions taken to assess and address modern slavery risks
The UN Guiding Principles make it clear that entities must provide for, or cooperate in remediation, if they identify they have caused or contributed to adverse impacts. Whilst some organisations detailed their whistle-blower procedures, additional information could be provided on how organisations are monitoring their grievance processes and ensuring they are effective to receive and resolve incidents of modern slavery. Most entities failed to disclose information about the use of their grievance mechanisms and the extent to which they are responding to modern slavery risks identified through these mechanisms.
Some specific actions for entities to consider implementing and disclosing in their next statements include: disclosing responsible procurement practices, enforcing a commitment to ensuring workers in their operations and supply chains are paid a living wage, taking responsibility for and remediating the harms occurring in supply chains, and implementing proper grievance mechanisms (such as a hotline, online complaints system, or a disclosure app).
(d) Failure to assess the effectiveness of actions and reporting results
In both tranches of statements, we saw across the board an incomplete picture of how entities are assessing the effectiveness of their actions to address risks of modern slavery.
Many organisations provided a summary of the processes they have implemented to oversee, monitor, and report on their actions to address modern slavery risks, (such as internal reporting channels and accountabilities and working groups) but failed to disclose or assess the results of these processes.
Entities should ensure they are disclosing the steps they are taking to assess the effectiveness of their actions to address modern slavery risks. Reporting entities should enhance their tracking of the effectiveness of their responses and communicate how impacts are addressed. This can include disclosing the specific KPIs or other metrics used to measure their efforts.
Part IV: What's next for Australian businesses?
Organisations should now have established frameworks for how they aim to combat modern slavery within their organisation. It is important to remember that your modern slavery obligations extend beyond preparing a well-written statement each year and ticking the box. Entities should ensure that they are regularly identifying the risks of modern slavery within their operations and assessing the steps taken to combat these risks as well as regularly reviewing the effectiveness of these steps.
From our review of the first two tranches of modern slavery statements that have been submitted, we have collated the following recommendations to help your organisation develop an effective response to modern slavery:
(a) Create entrenched organisational change and training: Companies cannot rely solely on certain teams such as procurement and legal to address risks of modern slavery. Everyone within the organisation needs to be abreast of their modern slavery responsibilities and how to identify and address risks.
(b) Mitigation and leading from the top: Your organisation should ensure modern slavery is being considered and implemented via a range of mechanisms including at board meetings, committees, working groups, and management plans. Entities should ensure they are embedding risk management and integrating respect for human rights across the organisation, starting at the top.
(c) Collaboration and engagement: A complete modern slavery response goes beyond the actions of the parent company. A wide range of stakeholders should be engaged and their feedback should form an organisation's response to modern slavery risk mitigation. Organisations should communicate and engage with a range of stakeholders on these risks and mitigation strategies including employees, unions, and key suppliers.
(d) Establish a risk identification and response mechanism: Ensure you have the proposer procedures and reporting processes in place to maintain the capability to identify risks and respond to these quickly. Accountability should be assigned to individuals within your organisation to ensure ongoing due diligence and risk management. Employees and stakeholders should feel comfortable identifying and reporting risks.
(e) Actively monitor, review, and adjust your supplier relations accordingly: Organisations should monitor high risk suppliers and countries continuously and meaningfully review their supply chains and operations. Practically speaking, organisations should ensure all supplier agreements have a code of conduct or compliance terms included.
(f) Assessing and demonstrating effectiveness: During the first and second reporting seasons, many organisations focused solely on the actions they are implementing to combat modern slavery. However, organisations should set up long-term processes, including measurable KPIs, to assess the effectiveness of these actions.
Getting it wrong
Whilst there are no penalties for non-compliance under the Act (yet), the consequences of inaccurate or misleading disclosure extend beyond the Act and may include:
(a) Regulatory action: Regulatory action may be taken in respect of breach of directors' duties (for example, a failure to exercise skill, care, and diligence by appropriately managing and disclosing modern slavery risks).
(b) Consumer action: Consumer claims and consumer class actions are a potential risk (for example, ACCC complaints for misleading statements about ethical sourcing).
(c) Shareholder action: Requisitioned resolutions (for example, solutions requisitioned seeking a review of the company's supply chain practices) and shareholder class actions are also a potential risk that entities should be aware of.
Next steps and how we can help
Our analysis of the leading entities' first two statements indicates they are carrying out detailed risk assessments and due diligence across their entire organisation and supply chain operations not just producing the same bare-bones statement each year. The leaders are those who are actively ensuring modern slavery risk management processes are embedded into their end to end supply chain process and across their organisation.
Our review of the statements submitted by the entities sitting in the middle of the pack, or lagging behind, reflects that there is significant improvement to be made in disclosure moving into the third reporting season. Entities wishing to improve should aim to provide a deeper assessment of the risks of modern slavery in both the operations and supply chain and draw on specific examples and case studies. Additionally, transparency needs to improve around the assessment of the effectiveness of the steps taken to address these risks. As part of this process, entities should consider consulting with a broader range of stakeholders including working groups in all owned and controlled entities, unions, and suppliers.
What this tells us is that a comprehensive and compliant modern slavery program extends beyond a yearly statement.
Now is the time for organisations to undertake comprehensive reviews of their approach to combatting modern slavery. To avoid the 'race to the middle,' organisations need to ensure modern slavery risk management processes are embedded into their end to end supply chain process and across their organisation.
Given the absence of financial penalties for non-compliance with the Act, society groups and non-governmental organisations are stepping into the role of 'naming and shaming' non-compliant organisations. Modern slavery is becoming an increasingly important ESG metric for consumers, investors, employees, Governments, and activists in pressuring businesses to ensure the ethical security of their supply chains and operations. As a result, these stakeholders will critique the comparative quality of modern slavery statements and rely on these statements as a benchmark to measure an organisation's year-on-year performance and improvement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.