The FRC Report
The Financial Reporting Council (FRC) recently published new research, in collaboration with the UK Anti-Slavery Commissioner and Lancaster University, which has identified significant shortcomings in the quality of companies’ modern slavery reporting. The research looked at a sample of 100 major companies’ modern slavery statements and their strategic and governance reports.
The FRC said, "The review suggests 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. With investors, lenders and stakeholders more widely, embedding environmental, social and governance (ESG) considerations in their decision-making processes, this research highlights the need for a more holistic and comprehensive approach to addressing the S in ESG through better reporting on human rights more widely, and modern slavery specifically".
Effective reporting in Modern Slavery Statements
The FRC report found that overall, modern slavery statements remain largely descriptive and superficial, with little attempt to critique performance and highlight areas of concern. The authors noted that “the majority of statements were fragmented, lacking a clear focus and narrative, or were unduly complicated” and that “disclosures on key performance indicators (KPIs) which measure the effectiveness of steps taken to minimise modern slavery risks were particularly poor”.
Effective reporting requires a clear understanding of modern slavery risks within companies’ operations and their supply chains, as well as their role in managing and addressing those risks. This remains a challenge as many have not yet undertaken robust human rights issues assessments (known as human rights salient issues identification processes) which will highlight risk hotspots, and in turn identify the companies’ role in managing, addressing, and reporting on these risks.
Some key statistics on modern slavery statements from the FRC report:
One in ten companies do not provide a modern slavery statement despite it being a legal requirement. Where companies did comply, only one third of these statements were considered clear and easy to read..
Only 39% of companies reported one or more KPIs relating to modern slavery risks, coupled with the rationale for using the KPI(s).
54% of companies reported that they assess forced labour or modern slavery risks before signing contracts.
Only 40% provided sufficient disclosure on slavery risks identified in their supply chain.
Modern slavery disclosures within Annual Reports and s172 statements
The FRC report also investigated the extent to which companies are reporting on modern slavery in annual reports as part of their requirement to describe how opportunities and risks to the success of the business have been considered and addressed. In this area, the research takes a particular focus on s.172 statements. This review found that in the annual reports of the 100 companies sampled, reporting on modern slavery issues was surprisingly minimal.
13% of companies referred directly to forced labour and slavery issues in their s.172 statement.
2% explained the long-term impact of modern slavery on their business.
1% referred directly to performance indicators on modern slavery.
52% of companies discussed modern slavery issues in other parts of their annual report
18% referred to performance indicators in the context of slavery and human trafficking
14% of annual reports provided a direct link to the corresponding modern slavery statement
Best Practice for Managing and Reporting on Modern Slavery
Comprehensive, best practice reporting on modern slavery and human rights risks should be the outcome of robust policies, processes, and practices. More than ever, business stakeholders require greater depth of information and detail when it comes to companies’ ESG performance, and poor reporting not only shows lack of transparency but could more acutely indicate poor management and understanding of those issues.
High quality reporting is vital to shining a light on how seriously businesses take social issues in their day-to-day operations. It is therefore unacceptable that many companies did not produce a modern slavery statement and that modern slavery considerations appear to not be a mainstream concern for many boardrooms. Looking ahead companies must clearly set out the actions they are taking to deal with modern day slavery in all aspects of their operations.
Understanding where modern slavery and human rights risks exist within a company’s operations and its supply chain is a key first step that shapes the management response. Clear policies are foundational to establish a company’s position with regards to those issues. Functional processes, tools and capabilities are also essential to ensure that ongoing monitoring, management, and reporting takes place. Companies will also need to establish effective grievance mechanisms and remediation pathways when breaches occur and maintain transparent reporting throughout.
Our global experience in the human right space has shown that best practice reporting is the result of the combination of human rights principles being clearly embedded in robust management systems and transparency about progress and challenges. It is the acknowledgement of the complexity and seriousness of this impact on our most vulnerable members of society that will be vital for moving the conversation from compliance to the need for further partnerships, collaboration, and action.
KPMG’s Human Rights Services
Our Human Rights and Social Impact team supports many global organisations in all aspects of human rights’ management and reporting, including mandatory modern slavery and human rights disclosures. This includes establishing policies and management processes, identifying salient human rights issues and evaluating grievance mechanisms in line with the UN Guiding Principles on Business and Human Rights.
Our UK team sits within KPMG’s Global Business and Human Rights Network of over 100 KPMG professionals from over 38 countries around the world. This enables us to offer clients global best practice and in-country expertise.
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Mandatory Modern Slavery Disclosures in the UK
Section 54 of the UK Modern Slavery Act of 2015 requires businesses with a turnover of £36 million or more to write an annual statement, setting out the steps that they are taking to address the risk of slavery in their operations and supply chains.
Although the UK Corporate Governance Code (the Code) does not include specific provision on modern slavery or human rights issues, a number of the Code’s principles and provisions cover the board’s ability to assess and manage the company’s risks and to consider the interests of wider stakeholders in making key decisions. Companies should also report on business objectives and strategy, principal risks and matters that directors have had regard to when performing their duty under s.172 of the Companies Act 2006 in the strategic report.
For further detail, see pp. 5-6 of the FRC report.