UK: FRC identifies "significant shortcomings" in modern slavery reporting

The Financial Reporting Council (FRC), alongside the UK Independent Anti-Slavery Commissioner and Lancaster University Management School, has published a report into modern slavery reporting practices in the UK, which finds that "many companies are still providing limited and often superficial commentary on this key business risk" and that too many companies see reporting more as a "compliance exercise" and do not treat human rights issues in their workforce or supply chain as a principal source of risk or mainstream concern for boardroom discussion. 

Based on a sample of 100 FTSE100, FTSE250 and Small Caps companies, the review follows previous evaluations of modern slavery reporting practices such as that conducted by the Business and Human Rights Resource Centre in 2018 and makes a number of similar findings. 

Modern slavery statements 

The consistent theme of the findings is that disclosures are largely descriptive with a lack of detail on how policies and processes are implemented in practice and little in the way of critical assessment of performance to assure stakeholders that modern slavery does not take place in the organisation or throughout its supply chain. Other criticisms raised include that statements are typically "fragmented, disjointed or lacking a clear focus and narrative" and that while some statements were longer than others, this did not necessarily mean they were more informative. The report calls out such statements' frequent use of "extensive boilerplate" and poor structuring.  

Taking the six suggested reporting areas for modern slavery statements in the Government's statutory guidance, the report highlights particular weakness in companies' disclosures on: (i) due diligence processes in relation to slavery and human trafficking; (ii) the steps taken to assess and manage the risk of slavery and human trafficking taking place; and (iii) effectiveness in ensuring they do not, measured against appropriate KPIs.

To help rectify this, the report calls on companies to disclose: 

1. how they engage with suppliers on modern slavery issues, seek to improve labour practices before contract approval and subsequently monitor performance (e.g. grievance processes, site visits, worker interviews); 
2. increased detail on the nature and scope of risk assessment processes, including any stakeholder engagement (particularly with potentially affected rights holders); and 
3. how companies' KPIs to drive performance and shape operations influence company exposure to slavery risk and whether/how companies review their policies and KPIs to assess performance on the ground. 

Annual reports

In addition to covering modern slavery statements, the report also includes findings on coverage of modern slavery in annual reports, with the Independent Anti-Slavery Commissioner noting that "the researchers have found a disturbing disconnection between the two" and the report calling for a more joined-up approach to modern slavery disclosures across modern slavery statements and annual reports. 

While acknowledging that the UK Corporate Governance Code contains no specific provision on modern slavery or human rights, the report points to those principles and provisions concerning the board's ability to assess and manage company risks and consider the interests of wider stakeholders in making key decisions. As such, there is particular criticism of companies' section 172 statements, of which only 13% of the sample referred directly to forced labour and slavery issues and only 2% explained the long-term impact of modern slavery on the business. 

Beyond the section 172 statement, the report also expresses surprise at the lack of annual reports which provide a direct link to the modern slavery statement (14%), discuss modern slavery in the context of principal risks and uncertainties facing the business (15%) or replicate the level of disclosure on modern slavery and human trafficking governance in the annual report. 

Takeaways

With the EU and various Member States pushing forward with substantive human rights due diligence regimes (see here), there is concern that the UK would fall behind on modern slavery and human rights more generally. The FRC's findings do little to counter that suggestion and one wonders whether this will provide the push the Government needs to legislate for the long overdue changes to the regime, and even bolster it with requirements on substantive action.