The supply chain transparency provisions of the Modern Slavery Act 2015 come into effect today (29 October 2015).

The new rules, contained in S.54 of the Act, are a significant step forward in both promoting transparency in relation to company actions relation to modern slavery and also may be an important push towards greater private sector positive activity on human rights due diligence in general.

Comprehensive guidance on the transparency provision has been published by the UK Government. However, below we set out a few issues companies and those who scrutinise companies might want to start thinking about.

Do companies now have to report on the steps they take to identify and remedy any modern slavery?

There is no legal obligation yet. The provision are in effect, but the implementing Regulations provide that the first reports are only required from those companies with a financial year end of 31 March 2016 or later, so there is a five month period before the very first reports are legally expected.

Which companies have to report – is there a turnover requirement? 

Any company that carries on a business or part of a business in the UK and has a global turnover of £36 million must produce a report. What ‘carries on a business in the UK’ means will be judged by a ‘common sense’, rather than legalistic, approach. The intention is that there is a broad adoption of reporting, rather than a narrow legally-driven process.

What about non-UK parent companies or subsidiaries?

If a foreign parent company or subsidiary ‘carries on a business’ in the UK, it will be covered itself by the provision. If not, but subsidiary is part the supply chain of a company carrying out business in the UK, that company may report on the subsidiary’s activities. There will be some discussion and debate over the application of the rules to non-UK domiciled companies, but the intention is not for detailed legal analysis, but rather to promote more transparency. On this basis companies operating any in the world may chose to use the framework to produce a statement.

What’s more, business-to-business relationships and emerging supplier requirements may drive various suppliers to companies clearly covered by the legislation to start producing statements even though the are not covered by the Act.

What should be in the statement?

The UK government has deliberately not been prescriptive on the content of the statement. It is for the company to determine what it feels are the relevant and important points it wants to make and how much detail to provide. However, there is some guidance on the areas that could be included. These are:

(a) the organisation’s structure, its business and its supply chains

(b) its policies in relation to slavery and human trafficking

(c) its due diligence processes in relation to slavery and human trafficking in its business and supply chains

(d) the parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk

(e) its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate

(f) the training and capacity about slavery and human trafficking available to its staff.

Must the statement contain these elements?

No. A statement could even just say that the company is doing nothing on modern slavery in its supply chain and direct operations. This would be legally valid. It may not play well with the company’s wider stakeholders and investors, however.

How should a company go about planning and drafting a statement?

It is important that companies broadly assess what action they are already taking, could take and might be expected to take in relation to modern slavery risk in their direct operations and supply chains – both for goods and services. Based on this, companies should ask themselves whether they have a compelling story for how they identify and address the risk and consider what elements they want to disclose and how. It is probably better to be honest about the level of risk and acknowledge the need to start taking action to improve intelligence and response, rather than trying to gloss over issues and produce a ‘perfect’ report first time out. The expectation is that reports and effective action will improve over time and the fact of increased transparency will support this improvement.

Who is responsible for the statement?

While different functions may be responsible for compiling the statement in different companies, the statement must be considered by the company’s board and signed by a director. This is important, as it may bring in broader company duties on directors to ensure that relevant information disclosed by the company is accurate. It also will raise the issue of modern slavery risk and broader human rights impacts to a higher level than it has normally been considered in many companies.

How does the Act fit with other reporting requirements and initiatives on business and human rights?

There are various other reporting initiatives and requirements that need to be considered if companies are to take a strategic and broad-ranging approach to human rights due diligence, action and reporting. These include the implementation of the EU Accounting Directive requiring Public Interest Entities which must be introduced in relation to quoted and some non-quoted companies for financial years starting on 1 January 2017. In addition there are a range of voluntary frameworks that need to be considered including the UNGPs Reporting Framework developed by Shift and Mazars and currently being piloted by a number of big companies. There are also various investor focussed human rights benchmarks which will drive reporting, including the Corporate Human Rights Benchmark. Furthermore, the OECD Guidelines on Multinational Enterprises suggests that companies should communicate additional codes and other policies (including human rights) and their performance against those standards.

Should companies take a broader human rights approach or just stick with Modern Slavery?

Legally, companies will only currently required to produce a Modern Slavery Statement, however for most organisations their approach to modern slavery issues will be part of a broader approach to labour and human rights. This may also involve engagement with public bodies, other companies, trade unions, NGOs to seek broader collaborative solutions. As such, many companies we speak to are taking an integrated approach which seeks to capture the specific risks and responses related to modern slavery but uses the moment as a catalyst to further develop both their activities on human rights due diligence and appropriate collaboration.

What are some practical next steps to take?

The approach to modern slavery reporting, whether to take a minimalist or expansive view and how integrated the response should be will depend on each company, but here are a few steps to start thinking about:

* Identify who is responsible for putting the statement together
* Start to think about whether this should be a standalone statement or the beginnings of an integrated human rights process
* Map your supply chain and direct operations and start to assess the areas of particular risk and impact. Remember to include supply of services and labour, not just goods. You may have this information, or you may need to carry out or commission specific studies
* Map your responses in terms of policy and action against the key identified risks. This may include existing supply chain management and procurement initiatives – including social auditing, contract requirements, etc. You may want to start new actions and develop new policies
* Do you know how you would respond to specific instances of modern slavery if you come across them?
* Start outlining what might go into a statement and who has the information
* Take an honest look at what that statement might look like and assess how it would look from an external stakeholder – customer, NGO, union, investor – perspective. Do you need to do more? Do you need to describe what you do better? Do you need to set out your plan to improve over time? Do you need to start collaborating on difficult issues?

For more information on the support Ergon can provide in relation to the Modern Slavery Act, human rights due diligence and reporting more broadly contact Steve Gibbons.