ARTICLE
7 December 2023

Financing Sustainable Supply Chains: Role Of Financial Institutions (FIs) In Mitigating Forced Labour Risks

SL
Shook Lin & Bok

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Shook Lin & Bok LLP is one of the leading commercial law firms in Singapore with a strong Asian presence and global reach. It is recognised for its expertise across its major areas of practice including banking and finance, capital markets, corporate mergers and acquisitions, corporate real estate, employment, international arbitration, litigation and dispute resolution, regulatory, restructuring and insolvency, TMT and funds.
Forced labour is a pertinent issue that poses serious risks to human life across the globe. Traditionally, forced labour is thought to be remote in the financial services industry.
Singapore Finance and Banking
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Forced labour is a pertinent issue that poses serious risks to human life across the globe. Traditionally, forced labour is thought to be remote in the financial services industry. In reality, FIs are intrinsically linked to forced labour risks through their diverse business relationships. FIs can play an integral role in mitigating forced labour risks in supply chains through avenues such as contractual safeguards and sustainable supply chain finance.

INTRODUCTION

Every day, there are 27.6 million people in conditions of forced labour, which comprise of 11.8 million women and over 3.3 million children.1 Forced labour is usually associated with cycles of violence, abuse and coercion worldwide.

Put simply, forced labour refers to work or service that a person did not voluntarily undertake but is demanded from him or her under the threat of any penalty.2

In Singapore, Article 10 of the Constitution generally prohibits forced labour. The Association of Banks in Singapore has also highlighted labour standards as a responsible finance consideration in its Guidelines on Responsible Financing.3

WHAT IS THE RELATIONSHIP BETWEEN FIs AND FORCED LABOUR RISKS?

As the primary workforce of FIs consists of skilled professionals, a common misconception is that the risk of forced labour in the industry is negligible. However, FIs may be exposed to two key sources of forced labour risks.

1. Business Relationships

One area of risk is the vast interconnections between FIs and business partners, such as borrowers from diverse industries. FIs may become associated with forced labour by lending to customers, or working with banking partners or payday lenders that are directly or indirectly linked to forced labour practices in their supply chains. As an example, a bank could extend a loan to finance a construction project that depended on forced labour.

From an anti-money laundering perspective, FIs could be a platform to launder proceeds of forced labour crimes, or remit funds for goods and services that resulted from forced labour. Hence, the connections between FIs and forced labour risks should not be undermined.

2. Internal Operations

FIs could encounter forced labour risks in their internal operations. For instance, FIs outsource and offshore assets and services, which entail the procurement of base-skill workers possibly through labour hire. In the purchase of corporate goods and services, such as office supplies and corporate clothing, FIs are exposed to large, complex supply chains that carry risks of forced labour.

The risks of forced labour may be heightened by several factors. For one, there is often low visibility over multi-tiered supply chains, making them difficult to monitor. Furthermore, global FIs, such as large banking corporations that operate in multiple jurisdictions, may rely on local or regional FIs to handle certain transactions. As such, they lack a direct line of sight to underlying transactions that may involve overseas third parties engaging in forced labour practices in their supply chain.

WHY SHOULD FIs MITIGATE FORCED LABOUR RISKS?

There are compelling reasons for FIs to mitigate forced labour risks from regulatory, social and commercial angles.

1. Regulatory

Addressing forced labour risks allows FIs to remain compliant with laws and regulations. Recent decades have seen greater legal and regulatory developments that aim to tackle forced labour in various jurisdictions. Prime examples include the UK Modern Slavery Act 2015, Germany Supply Chain Act 2023, Australia Modern Slavery Act 2018 and France Corporate Duty of Vigilance Law 2017.

In Singapore, human trafficking is an offence under the Prevention of Human Trafficking Act 1990; as are the deduction, demand or receipt by an employer from a foreign employee of specified fees, costs, or levies imposed on the employer under the Employment of Foreign Manpower Act 1990; and the retention, possession or control in Singapore of another person's foreign travel document under the Passports Act 2007.

In addition, there have been calls for FIs, especially banks, to do more to ameliorate forced labour risks. The establishment of reporting obligations and guidelines have contributed to the growing pressure on FIs to operate ethically and sustainably. If not adequately addressed, FIs face possible risks of legal challenges and remediation obligations.

2. Social

FIs can be a force for good in combatting forced labour. Given their significant reach and ability to influence business conduct, FIs are well-poised to disrupt access to finances from those who benefit from forced labour and shift capital allocation to more sustainable business models. On a micro level, this helps FIs meet their public commitments to sustainable finance goals. On a macro level, these efforts would bolster Target 8.7 under Goal 8 of the United Nations Sustainable Development Goals by contributing to effective measures to eradicate modern slavery.4

3. Commercial

Mitigating forced labour risks allows FIs to capitalise on commercial opportunities. Given the increasing focus on Environmental, Social and Governance (ESG) factors, there is greater investor scrutiny on sustainability agendas, including the welfare of workers and modern slavery.

Taking steps to mitigate forced labour risks is also a form of competitive advantage for FIs as ESG factors are incorporated in international ranking tables. For example, BankTrack's Human Rights Benchmark evaluates commercial banks on the degree to which they enact the United Nations principles on human rights and businesses, such as their due diligence process on human rights. Another example is the Financial System Benchmark that ranks financial institutions based on sustainability factors, including a commitment to respect the human rights of workers.5

Conversely, if forced labour risks are left unaddressed and materialise, this could lead to public criticism and supply chain disruptions. As a result, FIs could face reputational damage and loss of stakeholder trust with negative financial repercussions.

HOW CAN FIS MITIGATE FORCED LABOUR RISKS?

Given the regulatory, social and commercial impetus, it is important for FIs to adapt frameworks and implement appropriate measures to prevent, cease or mitigate adverse forced labour risks.

1. Due Diligence

The first step is for FIs to identify forced labour risks within their internal operations, subsidiaries and value chains. Through the systematic mapping of areas of risk exposure, FIs can assess the actual or potential adverse impacts of forced labour.

For instance, a Know Your Supplier onboarding process6 and grievance mechanism may be set up at an operational level to detect red flags early. This includes the collection of information, data and documents by distributing questionnaires to stakeholders7 and conducting independent audits that promote transparency.

Findings from such forced labour risk assessments could then inform sourcing and lending decisions, becoming a factor for business units to consider in determining whether to do business with a particular supplier or extend financing to a particular borrower.

2. Contractual Safeguards

FIs could integrate responsible business conduct expectations that target forced labour risks via contractual cascading. Typically, FIs include representations, conditions precedents and covenants in contracts, where parties agree to comply with codes of conduct and carry out action plans against forced labour. For example, as part of onboarding requirements, new clients may be asked to sign compliance statements that refer to the FI's modern slavery statement.8 These safeguards could feature in loan documentation as well.

Take project financing for example. In line with the Equator Principles, lenders may include contractual clauses where parties confirm their adherence to standards such as the International Labour Organisation Core Labor Standards and International Finance Corporation Performance Standards.9 To this end, one resource is the Equator Principles Guidance Note that provides sample contractual clauses that FIs may utilise in financing agreements.10 Beyond project financing, there is potential for such measures to be adapted to other types of financing, such as construction and real asset management.11

(a) Shared Responsibility Approach

Despite their financial leverage and bargaining power, FIs should be mindful of their shared responsibility to mitigate forced labour risks, which cannot be entirely delegated to stakeholders. With knowledge and resource constraints, small and medium-sized enterprises may require capacity building and investments to satisfy certain contractual undertakings. Consequently, FIs are encouraged to provide or enable access to technical or administrative assistance to stakeholders where reasonable and fair to do so. After all, anti-forced labour commitments are only effective if stakeholders have the means to fulfil them. Notably, FIs can use resources such as the American Bar Association's Model Contract Clauses to Protect Workers in Supply Chains12. Moving forward, guidance can be taken from the model contract clauses13 that the European Commission is expected to introduce in relation to its Corporate Sustainability Due Diligence Directive after it is adopted and enters into force. Such a 'shared responsibility' approach is also consistent with the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct.14

(b) Reasonableness

Moreover, FIs should consider if stakeholders can reasonably be expected to comply with anti-forced labour clauses, which must be tailored to the specific sector and size of each stakeholder. Clauses must be carefully drafted to ensure that obligations imposed are practical, fair and non-discriminatory.

(c) Non-Compliance

If business partners are non-compliant, FIs could first prioritise temporary suspension and remediation, as opposed to damages or immediate termination due to strict liability. By shifting the focus to remediation, FIs can influence contracting parties to pursue corrective steps that address the forced labour risks. However, if non-compliance persists with no reasonable prospect for change, responsible disengagement from the business relationship with reasonable notice may be warranted.

3. Sustainable Supply Chain Finance

FIs can undertake sustainable supply chain financing, which are finance techniques and practices in trade transactions that reduce negative impacts and create social, economic and environmental benefits for parties involved in bringing goods and services.15 Examples of supply chain finance mechanisms include sustainable trade loans, preferential discount rates in payables finance programmes and smart contract tools.

There is much commercial gain to be realised in innovating sustainable supply chain finance solutions. The fast-growing market builds on the fundamental need for working capital and cash optimisation between suppliers and buyers. As a result, according to a report by Business for Social Responsibility, the market is expected to hit a valuation of US$660 million and offer a US$6 billion revenue for financial service providers.16

Thus, these lending models are a way for banks to differentiate their product offerings from competitors, while incentivising sustainable behaviours from stakeholders. Sustainable or sustainability-linked supply chain financing offers untapped opportunities for FIs to maximise capital gains, as well as deter forced labour practices at various tiers in the supply chain.

4. Data Sharing Collaborations

To overcome information asymmetry between industry players, FIs should consult and engage stakeholders meaningfully to support data sharing efforts. FIs are increasingly collaborating with partners, such as Non-Governmental Organisations and law enforcement agencies, to enhance the availability and quantifiability of supplier sustainability performance data.17 Examples include joining multi-stakeholder organisations as a member and participating in industry group discussions. Hence, cross-sector cooperation bridges information gaps and aids long-term efforts against forced labour.

CONCLUSION

Forced labour is an insidious and urgent issue that plagues the lives of many in supply chains across the world. Although the financial services industry may seem unrelated to forced labour, there are inherent risks embedded in their corporate operations and business relationships. If not properly managed, these forced labour risks could pose litigation, regulatory and reputational risks for FIs.

Being intertwined with the larger economy, financing can play a central role in catalysing positive change. One unique opportunity is sustainable supply chain finance. Although a nascent field, it has great potential to drive progress against modern slavery and towards responsible supply chains.

Apart from formulating new measures against forced labour risks, it is vital for FIs to continuously verify the effectiveness of existing ones. Regular reviews enable FIs to plug gaps and improve policies in accordance with global developments. Overall, FIs are well placed to impact human lives by taking concrete, concerted steps towards mitigating the risks of forced labour.

Footnotes

1. International Labour Organsation, Walk Free, and International Organisation for Migration (IOM) 2022, Global Estimates of Modern Slavery (September 2022) (https://www.ilo.org/wcmsp5/groups/public/---ed_norm/---ipec/documents/publication/wcms_854733.pdf) at page 2.

2. International Labour Organisation Forced Labour Convention, 1930 (No. 29) (https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:12100:0::NO::P12100_ILO_CODE:C029) at Article 2.

3. The Association of Banks in Singapore, ABS Guidelines on Responsible Financing (1 June 2018) (https://www.abs.org.sg/docs/library/responsible-finance-guidelines-version-1-1.pdf) at page 1.

4. United Nations Department of Economic and Social Affairs, Goal 8: Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all (https://sdgs.un.org/goals/goal8).

5. World Benchmarking Alliance, Financial System Benchmark Methodology (December 2021) (https://assets.worldbenchmarkingalliance.org/app/uploads/2021/12/WBA21_financial-system-benchmark_v4.pdf) at page 39.

6. ING Bank, Working with suppliers (https://www.ing.com/Sustainability/Our-own-operations/Working-with-suppliers.htm).

7. Mizuho Bank, Ltd, Anti-Slavery and Human Trafficking Statement (https://www.mizuhogroup.com/binaries/content/assets/pdf/emea/anti-slavery-statement/mhbk-msa-statement-final.pdf).

8. Standard Chartered, General Banking Terms and Conditions (28 February 2023) (https://av.sc.com/sg/content/docs/sg-bb-general-banking-terms.pdf?adobe_mc=MCMID%3D79607085853724554790620589073664662055%7CMCORGID%3D625107C0600168480A495FE2%2540AdobeOrg%7CTS%3D1686897299) at pages 30 and 31.

9. Liechtenstein Initiative's Financial Sector Commission on Modern Slavery and Human Trafficking, United Nations University Centre for Policy Research: New York, Unlocking Potential: A Blueprint for Mobilizing Finance Against Slavery and Trafficking (September 2019) (https://www.fastinitiative.org/wp-content/uploads/Blueprint-DIGITAL-3.pdf) (FAST Blueprint) at page 96.

10. Equator Principles, Guidance Note for EPFIs on incorporating environmental and social considerations into loan documentation (December 2020) (https://equator-principles.com/app/uploads/Loan_documentation_EP_Dec2020.pdf) at page 14.

11. FAST Blueprint, at page 96.

12. American Bar Association, Contractual Clauses Project (https://www.americanbar.org/groups/human_rights/business-human-rights-initiative/contractual-clauses-project/).

13. European Commission, Just and sustainable economy: Commission lays down rules for companies to respect human rights and environment in global value chains (23 February 2022) (https://single-market-economy.ec.europa.eu/news/just-and-sustainable-economy-commission-lays-down-rules-companies-respect-human-rights-and-2022-02-23_en).

14. The Organisation for Economic Co-operation and Development, OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (2023) (https://www.oecd-ilibrary.org/deliver/81f92357-en.pdf?itemId=%2Fcontent%2Fpublication%2F81f92357-en&mimeType=pdf).

15. Bancilhon, Charlotte, Christoph Karge, and Tara Norton, Win-Win-Win: The Sustainable Supply Chain Finance Opportunity, Report. BSR, Paris (2018) (https://www.bsr.org/reports/BSR_The_Sustainable_Supply_Chain_Finance_Opportunity.pdf) (Sustainable Supply Chain Finance Opportunity) at page 5.

16. Sustainable Supply Chain Finance Opportunity, at page 6.

17. Standard Chartered, Partnering to fight modern slavery and human trafficking: working with NGOs in Asia (16 July 2019) (https://www.sc.com/en/feature/partnering-to-fight-modern-slavery-and-human-trafficking-working-with-ngos-in-asia/).

Originally published 28 June 2023

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.

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