Investment Patterns Leverage
Investors have recently joined the ranks of stakeholders championing the need for a more humane form of capitalism, highlighting their key role at the ‘top’ of supply chains and the significant influence they wield among business actors. Yet, discussions about how financial actors shape investment patterns and can use their leverage to reduce and eradicate forced labour in global supply chains are at an early stage.
Because social investment initiatives to combat forced labour are so new, there is far less research investigating their precise impacts and effectiveness compared to the other topics covered within this Forced Labour Evidence Briefs series. Publications to date on the topic of investment risk in this area have represented consortia of industry actors and interested parties in awareness-raising and advocacy efforts, with a focus on firms’ exposure to asset forfeiture and money laundering risks as opportunities for investment-driven change. In-depth empirical research on whether, to what extent, and how ‘ethical investment’ initiatives are influencing the patterns and prevalence of forced labour in global supply chains—or not—is urgently needed.
At the same time, to catalyse and increase the impact of ongoing efforts, it is necessary to tackle the systems-level investment patterns that fuel demand for forced labour in supply chains. Large swathes of investment activity in the contemporary global economy directly support and reinforce—and seek to generate short-term and ever-increasing profit through—prevailing business models. As the Commercial Contracts and Sourcing brief explains, such business models are key drivers of forced labour. More often than not, investors are not using their leverage to influence business decisions in a way that could improve prospects for decent work in supply chains—rather, they are creating pressures towards exploitation. As well, the legal and normative regimes cutting across several countries that oblige investors to maximise returns remain a powerful barrier against efforts to leverage investment to meaningfully address forced labour risks in supply chains.
No doubt, it is possible to engineer investment models that uphold worker rights, reinforce wage standards, and protect workers from forced labour. But there is a long way to go. For all the buzz around emerging initiatives like Environmental, Social, and Governance (ESG) investing— which promotes a focus not only on financial gain but also the environmental, social, and governance impacts of doing business—there is not yet an agreed-upon, established set of standards to guide this process, and social issues are consistently de-prioritised behind environmental ones in company disclosures. Furthermore, the effectiveness and potential impacts of ESG are contested; ESG has been linked to corporate tax avoidance, has been criticised as a ‘deadly distraction’1 from meaningful policy reform to address the negative social impacts of investment, and, in any event, is estimated to comprise only around a quarter of investment activity in today’s return-driven global economy.2
Solutions to the risks posed by prevailing investment dynamics ultimately need to confront systems-level dynamics and trends—such as the ways in which investment patterns are deepening financialisation of the economy—and the barriers that corporate business models present to actuating fair labour standards. As well, investors must confront the deep and longstanding historical links between investment, slavery, and the trade in enslaved people throughout the history of capitalism in the United States, England, and beyond. This history has helped give rise to powerful financial actors and investment organisations, created today’s business and financial practices, established global manufacturing and sourcing as an integral part of major economies, and deeply shaped contemporary patterns of inequity. The resulting imprint of slavery and of post-Emancipation forced labour systems must therefore be confronted within the solution space. While further research into effective solutions is needed, we lay out a series of early steps that could be taken by investors to promote decent work.
Investment patterns, and the leverage that financial actors have over them, are powerful forces in shaping the conditions under which decent work— or its opposite, forced labour—flourishes in supply chains. Recognising this, in recent years there have been repeated calls for financial actors, including private and sovereign wealth funds, asset management firms such as BlackRock and State Street, private and state-owned banks, parent companies, hedge funds, and financial services firms, to use their influence to eradicate forced labour in supply chains.3
These calls haven’t gone entirely unheeded. For instance, investor-led initiatives have sprung up, committing to anti-slavery action such as to “find, fix and prevent modern slavery, labour exploitation and human trafficking in their value chains.”4 Investors have also called out and voted against re-electing company board members in cases alleging forced labour and health/safety violations.5 All the while, toolkits, benchmarks, and briefs designed to aid and support investor decision-making have proliferated. Indeed, there is growing awareness that because investors sit at the ‘top’ of supply chains, they are uniquely positioned to demand corporate action, reporting, and improvement around social metrics and outcomes.6
After a few years of anti-slavery activists and advocates calling for change in investment patterns to support the eradication and prevention of forced labour in supply chains, and early steps towards heeding such calls, there is very little evidence to suggest that the necessary scale of change is being realised. In part, this is due to a lack of research and data on the effectiveness and on-the-ground impacts of investor-led solutions addressing forced labour. Compared to the other issues tackled in this series, finance and investment actors and dynamics (and their relation to forced labour) are vastly understudied. Still, the lack of progress in this space also owes to the fact that investor-led efforts that have emerged so far to fight forced labour—including ESG investing, investor initiatives, and opportunities to exert leverage over corporate governance—lack the scale and ambition necessary to be transformative. This is especially troubling when compared to the systemic compulsions within finance and investment that enable and give rise to forced labour.
For every investor that has exercised its power to raise labour standards, there are hundreds more pushing corporations to squeeze out more profit through cost-cutting and outsourcing strategies closely associated with forced labour. For every asset management firm urging a corporate board to address worksite issues, there are thousands pushing boards to maintain a narrow focus on financial performance.7 While social investment strategies are no doubt growing in popularity and becoming more mainstream, the reality is, there are no signs yet that they are making a dent in the system-level finance and investment trends and dynamics that contribute to the high risks of forced labour in many global supply chains. And there is reason to worry that ESG is distracting from and displacing more meaningful action.
Key dimensions of finance’s connections to forced labour remain off the table for discussion and change. For instance, while it is often mentioned that financial actors come into contact with the financial proceeds of forced labour, there is far less concern about how investment trends in fact contribute to the conditions under which it emerges. Further, there has been little discussion by those fighting forced labour today of the considerable wealth and power that financial actors amassed through historic slave trades and industries; these realities continue to buttress and shape their position in the global economy today. Further, there exist highly racialised and geographic inequities in wealth and financial dynamics such as terms of lending, common management practices, and even such basic accounting principles as depreciation.8
In short, the issue of investment and its relation to forced labour is much more complex and multi-faceted than tends to be mentioned in discussions about these themes. The rest of this section highlights under- discussed elements of the problem that need to be given greater prominence in anti-slavery efforts.
Read full brief here.
Learn more about Re:Structure Lab here.