Improving supply chain labour standards can help mitigate operational, legal/regulatory and reputational risks, as well as present opportunities to benefit from innovative suppliers, access to more markets and contracts, loyal customers, productive/committed employees and secure supplier relationships.
International actors such as the G7, the ILO and through the Sustainable Development Goals, the United Nations, are putting labour conditions in the supply chain on their agenda.
What do we mean by labour practices in agricultural supply chains?
Crops, livestock and fishing are the agricultural subsectors where most breaches of international labour standards occur. The International Labour Organisation’s (ILO) Declaration on Fundamental Principles and Rights at Work defines the following as fundamental rights of workers, and commits member states to respect them, regardless of whether they have ratified its conventions: freedom of association and the right to collective bargaining as well as freedom from forced labour, child labour and discrimination. Additional labour rights relevant to agricultural supply chain companies’ labour practices include occupational health and safety, working conditions and wages.
Food and beverage companies increasingly acknowledge that labour issues, including forced labour and child labour, are occurring in their supply chains, and so are primed for engagement by investors on the topic.
What’s the scale of the problem?
Issues such as forced labour and human trafficking are a global problem, and not limited to developing countries: according to the US labour consultancy Verité: “161 countries are either a source, transit or destination country for human trafficking.” The majority (59%) of all child labour occurs in agriculture, equating to 98 million child workers globally. Most child labour can be found on small-holder farms, but also in livestock production, fishing and aquaculture. Agriculture sits alongside construction and mining, as one of the three sectors with the highest work-related fatalities, with at least 170,000 workers killed each year. Workplace accidents involving agricultural machinery or pesticides, as well as accidents caused by physically demanding work in harsh weather conditions are also common. Aside from forced labour, child labour and high fatality rates, workers in agriculture can face issues such as no right to freedom of association and collective bargaining, hazards to occupational health and safety, poor working conditions, no access to medical care or pensions, long hours and insufficient wages.
Risks and opportunities
Operational risks and supply chain disruptions
A company with poor labour practices in its supply chain is less likely to have a stable supply chain, and might have to change suppliers at short notice. The European supermarkets Waitrose and Aldi for example suspended a UK apple supplier over poor working conditions.13 Operational performance may also be weakened by increased worker turnover and decreased worker motivation and productivity. In food and agriculture businesses, poor working conditions hold a risk of producing poorer quality products, and may lead to issues regarding food safety. Food quality in turn is one of the main causes for supply chain disruptions. Additional operational costs may occur due to investigations, site shutdowns and for corrective measures.
Legal and regulatory risks, including law suits and fines
Forced labour is illegal in most countries. Trade regulations focused on forced labour can lead to imported goods being seized or held until they are proven to be free of forced labour. There is an increase in specific legislation requiring companies to report on the steps taken to ensure no forced labour takes place in their own operations and in their supply chains. As many as 62% of companies in the MSCI ACWI Index14 will be subject to either the UK Modern Slavery Act or the California Transparency in Supply Chains Act, or the proposed Business Supply Chain Transparency on Trafficking and Slavery Act in the US.15 There are also an increasing number of soft law mechanisms on human and labour rights, most notably the UN Guiding Principles on Business and Human Rights (the gUN Guiding Principles h). Included in these are mechanisms such as the OECD Guidelines for Multinational Enterprises, which allow individuals and NGOs to bring complaints to National Contact Points. These clearly define corporate responsibility to respect human rights, and while not mandatory, are taken increasingly seriously by companies, which are aware that soft law has the potential to become hard law.
Lawsuits against food and beverage companies over supply chain labour practices
Despite aiming to eradicate forced labour in their supply chains, several companies have been subject to lawsuits.
Examples include the US food processor and commodity trader Archer Daniels Midland and the private commodity trader, purchaser and distributer Cargill, both of which have been involved in a lawsuit regarding involvement in trafficking, torture and/or forced labour of children on cocoa farms in the Ivory Coast and/or Ghana.
In 2015, the consumer rights law firm Hagens Berman filed separate class action lawsuits against US food companies Mars and Hershey and Swiss Nestlé for
failing to report the use of child labour in their cocoa production. Further class action suits have been filed against the US warehouse club Costco and Thai agro-industrial and food conglomerate Charoen Pokphand Foods (CP Foods) over forced labour in their prawn supply chain and misleading labelling of those prawns.
Labour issues in agricultural supply chains are increasingly brought to light by NGOs and the media, with a high number of forced labour allegations being made in relation to palm oil, cocoa and fishing.19 For example investigations by The Guardian brought international attention to forced labour cases in the Thai seafood industry, and to human trafficking, poor working conditions and low wages of seafood workers in Ireland.20 Allegations by NGOs and media coverage has focused on companies at all levels of the supply chain - from major brands such as Carrefour or Walmart to suppliers such as Thai seafood processor Thai Union Frozen Products Plc or Malaysian agri-business Felda Global Ventures. Once an allegation or incident occurs, this can have long-lasting repercussions on brand value, especially for consumer-facing companies. The Corporate Human Rights Benchmark and the KnowtheChain benchmarks will publicly rank large global food and beverage companies on aspects related to supply chain labour practices.
Lower cost of capital in equity markets
A review of over 100 academic studies found that all studies conclude that companies with better CSR or ESG ratings benefit from lower costs of capital, thanks to markets recognising the lower risk of those companies.
Access to supply chain innovations
Building stable relationships with suppliers can lead to companies benefitting from more innovation within the supply chain: suppliers with innovative products or processes are most likely to share these with companies with whom they have positive relationships. Some companies, such as Unilever, expect the majority of innovation to come from their supply chain.
Access to government contracts
The US government is the largest single purchaser of goods and services in the world. Since 2012, President Barack Obama’s Executive Order 13627 requires any contractors and sub-contractors to prevent human trafficking and forced labour in the provision of government goods and services. Likewise, the Dutch government requires contractors to adhere to its sustainable public procurement policies, which since 2012 include provision on international labour standards.
Access to trade markets
Since 2010, EU regulation prohibits import of eillegal, unreported and unregulated fishing (IUU) f into the European Union. Likewise, since 2016 the US prohibits importing fish caught by forced labour.
Market share, customer loyalty and price premium
Companies with good supply chain management and a positive reputation can benefit from enhanced customer loyalty, and in some cases can charge a price premium. An Oxfam survey undertaken in Australia found that 84% of respondents want more information on where their products come from, and 60% believe consumer choices have an impact on working conditions at farm level, with nearly 50% stating they would stop buying products from companies whose policies and practices they are dissatisfied with. A Nielsen poll of over 28,000 consumers in Asia, the Middle East and Africa found that over half of them are prepared to pay a premium for products that “give back to society”. A study from Bonn University found that customers were willing to pay roughly 30% more for products produced according to Fair Trade Standards (which include labour criteria).
Improved ability to preserve reputation
A reputation that can withstand negative impacts if/when they occur to a company, or to a commodity the company has in its supply chain.
Increase in employee motivation
More motivated employees leads to higher retention, increased productivity and improved product quality and food safety. An example from the apparel industry shows that factories with improved labour practices reduced their product rejection rates by 44%.
Building long, stable relationships with suppliers reduces a company fs risk of labour abuses in its supply chain, and therefore limits the need to change or drop suppliers at short notice following unexpected allegations.
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From poor working conditions to forced labour - what's hidden in your portfolio?