In 2015, a new UK law specifically outlawed slavery, servitude, forced labour and human trafficking – with very severe criminal penalties for anyone convicted. Although reputable businesses were not affected by that, there was a related change that has had an impact on all significant businesses that operate in the United Kingdom: the requirement to publish an annual “Modern Slavery Statement”, setting out the steps the organisation has taken to combat modern slavery in its own supply chain. That obligation is now fully effective, and it is possible to evaluate how private equity and venture capital firms are responding.
More specifically, since October 2015, “commercial organisations” – which are broadly defined, and certainly include fund managers – that are doing business in the UK, that provide goods or services, and that have an annual worldwide turnover of £36 million (€40 million or $46 million) have been required to publish a statement. The statement relates back to the previous financial year, and must be published in a prominent place on the organisation’s website (in practice, usually by including a link from the homepage). For most fund managers, and many of their underlying portfolio companies, the first required statement relates to the financial year that ended in 2016. Because UK government guidance suggests that statements ought to be published within six months of year-end, fund managers have been issuing their first statements over the last year or so.
The law is not prescriptive as to what must be included in the statement, but does include some guidance. In general, the statement will include details about the organisation’s policies on slavery and human trafficking, the due diligence it undertakes on its supply chains, the way in which it categorises the risk that its suppliers may be engaging in harmful practices, any Key Performance Indicators that it uses to monitor compliance, and training for its staff.
The law is even less prescriptive as to what organisations need to do about modern slavery in their supply chains: in theory, a company would be compliant if it issued a statement saying that it had taken no steps and did not intend to take any. Clearly, such a statement would carry reputational and (possibly) civil liability risks, but would not be a breach of the law. In any event, there are no specific sanctions for failing to issue a statement (unless the government sought a court order obliging a specific firm to comply and it still refused to do so – an unlikely scenario).
Of course, most European fund managers will not themselves have significant risk in their own supply chains. They will generally source goods and services locally, from reputable service providers. But that does not mean that they are doing nothing. A review of the statements published by various well-known private equity fund managers shows that firms have identified – or are in the process of identifying – all significant suppliers, categorising them by reference to the risk that they may be engaging in human rights abuses, reviewing and amending procurement processes and contracts, and undertaking appropriate background checks, due diligence and staff training. For many firms, this is clearly a work in progress, and the statements frequently include a declaration of intent rather than achievement; the second round of annual statements will need to include an update on actions actually taken.
And while it is clear that a fund manager’s legal obligation under UK law does not extend to reporting on what they do in relation to their portfolio companies, most firms have taken the opportunity to advertise their approach to responsible investing more generally. Robust ESG (“environment, social, and governance”) policies have become the norm for European private equity fund managers and a zero-tolerance approach to human rights abuse is expected, with due diligence and monitoring procedures to match.
Ensuring that human rights are properly protected by all portfolio companies is a significantly more challenging task than keeping an eye on suppliers to the manager itself, but a review of the statements made under the UK’s new modern slavery transparency rules confirms that it is a task being taken very seriously. And properly thought-through declarations may pay dividends: media scrutiny of these statements has already begun, facilitated by a modern slavery database set up by various NGOs.
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