Fighting modern slavery in Canadian supply chains

The deadline for the first year of reporting under Canada’s Fighting Forced Labour and Child Labour in Supply Chains Act (the Act) was 31 May 2024. Under the Act, which came into force 1 January 2024, eligible entities are required to publicly report on steps taken to reduce the risk of forced labour and child labour in their business and supply chain.

The stated objective of the Act is to build industry awareness and transparency about the risks and prevalence of child labour and forced labour in global supply chains in order to drive improvement in business practices. With the first year of reporting complete and further legislation on the horizon, we examine the initial successes and limitations of the Act once put into practice and consider opportunities to enhance efforts to eliminate forced labour and child labour in supply chains moving forward.

Without question, the Act and its associated reporting obligations have been successful in raising awareness about forced labour and child labour risks in business and supply chain activities. Between the announcement of the Act and the weeks following the filing deadline, there was a nearly 100 percent increase in online searches referencing related terms (such as “Bill S-211”, “Fighting forced labour in supply chains act”, and “modern slavery”).¹

Similarly, over the past year, entities and their advisors have been immersed in discussions about the Act and emerging global expectations around supply chain management, and benchmarking policies and practices against the reporting criteria of the Act for the purposes of drafting 2023 disclosures.

KPMG in Canada reviewed 5,794 report submissions for the Act uploaded onto the library catalogue of Public Safety Canada.^2,3 Reporting entities included organizations of all sizes across all sectors, including the public sector; the majority (approximately 80 percent) source goods and services globally, and 15 percent of entities also report under other global reporting requirements.

The reporting process has highlighted examples of positive performance in the management of forced labour and child labour within business activities and supply chains. Such examples provide useful benchmarks for industry improvement. Among reporting entities:

• 20 percent assert that they have undertaken mapping of their supply chain to some extent. However, only 5 percent clearly indicate that mapping extends beyond Tier 1 suppliers (also referred to as “direct”, “primary”, “level 1”).
• 40 percent state that they have some form of supplier risk assessment in place for modern slavery. 35 percent conduct due diligence programs within their own operations, and 40 percent carry out due diligence of suppliers.
• 60 percent reportedly provide some examples of human rights training for their workforce.
• Just under 5 percent of reporting entities demonstrate clear alignment with multiple reporting criteria, including supply chain mapping, supplier risk assessment, due diligence of operations and suppliers, evaluation of performance, and human rights training. Of these entities, the majority (70 percent) also claim adherence to global human rights standards.

Reporting under the Act, along with evolving global supply chain requirements, has generated commitments to performance improvement. Among reporting entities, 90 percent have publicly committed to implement additional measures, including the development of policies and procedures (30 percent), training (20 percent), and risk assessment / risk management (15 percent). Behind the scenes, many companies have been reflecting on gaps in their internal processes and associated risks and opportunities; they are taking targeted steps to understand their supply chain and develop appropriate mitigation and management measures.

These initial successes notwithstanding, the Act’s effectiveness in encouraging transparency has been limited in its first year.

Given the significant number of entities that qualified as reporting entities, there should have been more reports filed with the Registry. The Act set a low threshold for qualifying as a reporting entity; in contrast to jurisdictions like Australia or the UK, the Act required reporting not only by public companies, but by private companies, public bodies, and non-profit organizations. Some entities may have opted to face penalties for failure to report rather than scrutiny and criticism from public audiences. Some may have been unaware of their reporting obligations. Whatever the reason, the compliance rate for the first year of reporting is lower than expected.

Conversely, many companies opted to report but did so in a way that disclosed as little as possible about their business and supply chain. Among published reports:

90% of companies did not identify specific supply chain risks

20% of those that source goods globally declined to provide any information about where those goods are sourced

65% of companies declined to specify whether they are the importer of record, and 35% provided little to no description of import activities

These reports meet the reporting requirements of the Act, but not the stated intention of improving transparency and eliminating forced labour and child labour in Canada’s supply chains.

In the guidance published by the Ministry, the expectation was that:

“… the purpose of reporting is not to certify that an entity is ‘risk-free,’ but rather to demonstrate that the entity has taken steps to identify and address risks. The reporting exercise is intended to encourage transparency, not to penalize entities for having identified risks in their activities and supply chains.” ⁴

However, there are very real penalties to reporting entities who identify risks. Supply chains are opaque and complex, and reporting entities may lack complete visibility or influence over their supply chain partners. They cannot attest to information that they do not have. Also, the potential for criminal fines, import bans and investigations – and the absence of regulations or guidance on when those measures will be taken – means that reporting entities have to weigh the benefit of full transparency against the risk of unknown legal consequences. In that context, it is hardly surprising that the reports do not include the level of detail that the Ministry anticipated in its guidance.

In the upcoming year, this reluctance to identify risks and prepare detailed reporting may continue. In the context of emerging litigation risks related to sustainability claims (including recently passed amendments to Canada’s Competition Act via Bill C-59, aimed at preventing greenwashing), entities appear to be increasingly hesitant to disclose information that cannot be independently substantiated.

Filing reports, and building a knowledge base, is only the start of managing the risks of forced labour and child labour in Canadian supply chains. Disclosure requirements do not, on their own, result in meaningful change for people impacted by forced labour and child labour – a conclusion recently highlighted by a 2023 independent review of Australia’s modern slavery reporting law.⁵

As the Act moves into its second year, with the promise of further legislation on the horizon, there are opportunities to improve transparency and performance in the mitigation of forced labour and child labour in supply chains, without increasing the legal risk to the reporting entity. Canadian companies and their suppliers which invest in capitalizing on the opportunities below will also be better positioned to address key challenges existing in global and local supply chains, including:

• Making supply chains more integrated, modernized, resilient and efficient
• Increasing access to, and quality of, pertinent data
• Strengthening supplier relationships and influence
• Bolstering resourcing to meet the effort required for proper quality controls
• Improving tracking systems to enable improved transparency and risk management.

Public and private sector reporters can take advantage of this early stage in the establishment and implementation of expectations to align with evolving performance expectations, including:

• Accessing the appropriate measures needed to map their supply chain activities
• Screening for risks within the supply chain
• Adopting a targeted approach to detailed risk assessment as a basis for management measures that are tailored to business activities, risk characteristics and influence

Entities should also consider emerging Canadian and global requirements for human rights due diligence and assurance of sustainability claims and build this into management frameworks and reporting. Importantly, entities have an opportunity to harness existing supplier data collected through supplier management systems and use it to support ongoing screening and monitoring of supplier performance.

Measures to enforce the reporting requirements of the Act during this first year of implementation have not yet been made public. There is an opportunity for the Ministry to clarify its approach to enforcement, recognizing the challenges of balancing encourage transparency against the risks of disclosure. Compliance measures should take into consideration the effort, intention, and learning curve that is underway within entities and across industries and encourage progress rather than punish imperfection. Material improvement in the management of forced labour and child labour in global supply chains requires a cohesive response driven by both regulatory expectations and practical industry commitments.

As new legislation is considered, improved effectiveness can be supported by developing guidance resources that narrow the focus and expected level of detail in reports. Examples of such guidance have been provided by governments in Australia and the United Kingdom.

Twenty percent of reporting entities are members of industry groups. Industry associations can take a valuable leading role in defining good practice and supporting members in achieving this through collective efforts. By combining the voices of their members, industry groups can strengthen the leverage and influence over global supply chains of their members. Furthermore, mutually defined and agreed standards of practice provide clarity and useful benchmarks on appropriate actions for entities to take, reducing the risk of being an outlier. Material improvement in the management of forced labour and child labour in global supply chains requires a cohesive response, driven by both regulatory expectations and practical industry commitments.