Investors are increasingly focussed on how companies address modern slavery and wider human rights issues when making investment decisions.  Despite this, many UK companies are failing to adequately report on, and take sufficient steps to eradicate, modern slavery within their businesses and supply chains, according to the Financial Reporting Council’s (the “FRC“) recently published Modern Slavery Reporting Practices in the UK Report (the “Report”).

The Report, which analysed the reporting practices of 100 companies listed on the London Stock Exchange’s Main Market, highlighted that the majority of companies are failing to disclose sufficient information to enable stakeholders to make informed decisions about companies’ compliance with modern slavery legislation.  Such shortcomings in the quality of companies’ modern slavery reporting presents a number of compliance, reputational and financial risks to companies.

What are UK companies’ obligations under modern slavery legislation?

Legislators across the EU and UK are increasingly adopting legislation aimed at addressing modern slavery and wider human rights issues, which is demonstrated by the recent widespread adoption of mandatory human rights and environmental due diligence legislation (for further information, please see our earlier blog posts here and here).  In the UK, one of the most significant pieces of legislation is the Modern Slavery Act 2015 (the “MSA”).

Under Section 54 of the MSA, companies with an annual turnover of £36 million or more must produce an annual statement that sets out the steps that they are taking to address the risk of modern slavery in their operations and supply chains.  The MSA also requires reporting companies to publish their modern slavery statement on their website and include a direct link to that statement on their website homepage.  For further information on UK companies’ obligations under the MSA, please read our previous legal update.

The Report’s key findings

The Report found that:

  • 12% of companies failed to comply with their legal obligation to produce a modern slavery statement, whilst a third of the documents produced were considered inaccessible;
  • where companies did comply with their legal obligation, only one third of modern slavery statements were considered ‘clear and easy’ to read;
  • although 72% of companies did provide a link to their modern slavery statement on their website homepage, most links were not directed to their most recent modern slavery statement;
  • disclosures about key performance indicators which measure the effectiveness of the steps the company has taken to minimise modern slavery risks were poor;
  • less than half of companies provided a clear and comprehensive discussion of modern slavery concerns in the context of their organisational structure, operating and supply chains; and
  • the vast majority of modern slavery statements were wholly backward-looking, with only a minority clearly identifying emerging issues or a long-term strategy.

Based on these findings, the Report concludes that “too many companies appear not to view human rights issues in their workforce and supply chain as a principal source of risk for their business” and that “modern slavery considerations are still not a mainstream concern for many boardrooms“.

Why does this matter for UK companies?

There is not currently a provision for financial penalties to be imposed in the event a company fails to comply with its obligations under the MSA.  The only remedy available is for the Secretary of State to bring proceedings against the non-compliant company for specific performance.  That said, as discussed in our earlier blog post, if adopted as legislation, the Modern Slavery (Amendments) Bill will make it a criminal offence for individuals (including the directors of UK companies) to, amongst other things, knowingly or recklessly include false or materially incomplete information in their modern slavery statements.  This offence would carry a penalty of up to two years imprisonment for individuals and a fine of up to 4% (capped at £20 million) of the company’s annual global turnover.  Companies may, therefore, face significant liabilities if they do not take steps to address the non-compliance identified in the Report.

As well as potential adverse financial consequences, companies face reputational consequences if they fail to address the issues of non-compliance identified in the Report.  In the Report, Dame Sara Thornton – the UK’s Independent Anti-Slavery Commissioner – states that an estimated 16 million modern slavery victims work in the private sector globally, meaning companies carry a significant material and reputational risk of modern slavery being found somewhere in their supply chains.  Given that investors are increasingly demanding companies to be transparent on the issue of modern slavery, there is a risk that investors may divest from non-compliant companies and re-allocate their capital if they do not feel that the company is providing them with sufficient information on modern slavery.

To address the issues identified in the Report and ensure compliance with the MSA, companies may wish to consider the UK Government’s recently published Statutory Guidance.  Although the Statutory Guidance is primarily aimed at public authorities who encounter potential victims of modern slavery and those involved in supporting victims, the contents will be helpful to companies that wish to develop a more consistent approach to comply with their obligations under the MSA.