Top of the corporate agenda: modern slavery failings and mandatory supply chain disclosure

The Financial Reporting Council Lab, an initiative that aims to improve corporate reporting for investors and businesses, has gone live with two new publications, signalling a market shift on supply chain issues. The report illustrates failings in modern slavery reporting and fresh guidance aims to assist companies in making disclosures about their supply chain in annual reports.

Statements made about compliance with the Modern Slavery Act are just one part of the emerging picture on mandatory human rights due diligence. In the UK we anticipate changes to the Modern Slavery Act this parliamentary session, and in the EU, the new draft Corporate Sustainability Due Diligence Directive proposes a new standard for human rights and environmental due diligence. EU nations such as the Netherlands and Germany are also proposing to join France, Switzerland and others in legislating to prevent and remediate adverse impacts on people.

Modern Slavery

The FRC Report commissioned by the UK Anti-Slavery Commissioner highlights serious shortcomings in the quality of companies’ modern slavery reports under the 2015 Act. One in ten companies has not provided an MSA statement despite the legal requirement to do so. Where statements were made, disclosures about how organisations measured the effectiveness of actions taken to minimise risks were poor, and only a minority identified emerging issues or a long-term strategy. Disclosure often lacked detail about how policies operated in practice or how effectiveness was measured against metrics and targets.

The Report is timely, as it comes ahead of the anticipated changes to the 2015 Act. The new Bill announced in the Queen’s Speech is introduced to ‘increase the accountability of companies to drive out modern slavery from their supply chains’. The Bill will mandate specific reporting areas to be covered in statements, require organisations to publish their statement on a government-run registry, and introduce civil penalties for organisations that do not comply with the requirements.

However, the question remains as to whether these changes go far enough. They fall short of the proposals in a recent Members’ Bill, which put forward creating a new criminal offence for false information in an MSA statement and liability for continuing to source from suppliers after a formal warning. Calls from industry, including from the Corporate Justice Coalition (which counts among its members the British Retail Consortium, Tesco and John Lewis) are focused on urging Government to show global leadership in the wake of COP 26 and G7 by introducing a sharp toothed law modelled on the 'failure to prevent' liability provisions of the Bribery Act. Against this context, the proposed new Bill seems lenient.

Supply Chain Disclosures

The FRC Lab Guidance intends to help companies prepare disclosures on their supply chains in their financial report. Investors are looking for information to help them decipher the impact of supply chain risks and how those risks will affect long term value creation. The guidance focuses on the size, scope, nature and resilience of supply chains, as well as sustainable procurement practices, reputation and brand. Issues for companies to consider when reporting include their access to raw materials, risks from supply chain disruption, the impact of inflation, and vulnerabilities in their digital supply chains that could lead to cyber-attacks.

So, what is the impact on business?

All businesses should be looking at their supply chain management in the context of these impending changes and amid the call for clear legislation that sets out corporate accountability for adverse impacts on people and planet. Scrutiny is set to intensify and those that are ahead of the curve will improve their reputation in the market whilst attracting ESG investment opportunities for growth.

For more information please contact Ilona Bateson.