In this post, we examine the new Modern Slavery Bill announced in the 2022 Queen’s Speech, a recent report published by the UK Financial Reporting Council (FRC) on compliance with the existing requirements under the UK Modern Slavery Act 2015 (MSA) and the FRC’s suggestions for modern slavery reporting in annual reports.
The new Modern Slavery Bill: mandatory reporting, financial sanctions?
As part of the Queen’s Speech on 10 May 2022 the government announced a new Modern Slavery Bill, expected to amend or replace the existing MSA, with the purpose of “strengthening the protection and support for victims of human trafficking and modern slavery and to increase accountability of companies and other organisations to drive out modern slavery from their supply chains”.
The detailed contents of the proposed new Bill have not yet been published, but it appears it will introduce mandatory content requirements for modern slavery statements (the present section 54 of the MSA only includes a list of topics companies “may include” in their statements), and require publication on a government-run registry (which is already available, and many companies have published here, but is not yet mandatory). It is also expected to strengthen the requirements on companies to publish modern slavery statements and increase the pressure on companies that do not take action. This will include financial civil penalties for non-compliance, but it remains to be seen what level of penalty may be imposed, for what forms of non-compliance, and how and by whom the new regime will be enforced. The existing reporting obligations under the MSA apply to businesses with a turnover of £36 million or more, and we expect this threshold to remain.
FRC report: pockets of good disclosure on modern slavery, but room for improvement
The proposed Bill comes hot on the heels of the Financial Regulatory Council (FRC) publishing its Report: Modern Slavery Reporting Practices in the UK. The report is based on research that was commissioned by the FRC, in collaboration with the UK Anti-Slavery Commissioner, and carried out by Lancaster University.
The report looks at how 100 companies listed on the London Stock Exchange’s Main Market (being the same set that the FRC examined in their 2021 Review of Corporate Governance Reporting) report on modern slavery, both in modern slavery statements mandated under section 54 of the MSA and in annual reports (focussing on the content of section 172 statements). Of course, these reporting obligations apply to a much wider group of companies, but the FRC’s sample focuses on some of the largest and most sophisticated multinationals listed in the UK.
In its report the FRC is encouraging companies to increase their level of reporting and disclosure on modern slavery (in places, beyond what is strictly required by law) and to align their reporting with what the FRC considers to be best practice.
The report concludes that “there are both pockets of good disclosure and areas for significant improvement when reporting on modern slavery…many companies are still providing limited and often superficial commentary on this key business risk…Fortunately, a large portion of the poor reporting practice observed…can be overcome by simple actions and should therefore be the first stop for companies seeking to improve their disclosures.”
FRC review of modern slavery statements
The key findings and best practice recommendations from the report in relation to modern slavery statements include:
- Include precise descriptions, detailed disclosures and critical assessment of performance. The report comments that many companies opted for broad-brush statements rather than precise descriptions on key issues such as their policy on withholding wages or imposing recruitment fees. In addition, it is noted that the lack of detail and critical assessment of performance is particularly evident for reporting on training, due diligence processes, risk assessment and policy effectiveness.
- Include forward-looking discussion of evolving issues and the company’s strategy for dealing with them. The FRC considers this to be critical information for shareholders to assess the company’s approach to addressing modern slavery risk. Only a third of statements clearly identified emerging issues and only 12% of companies provided a long-term plan. The vast majority of modern slavery statements were wholly backward-looking.
- Focus on making the statement readable with policies and data being presented in a clear and digestible form. Only one third of reports were judged as being clear and easy to read. Longer disclosures did not necessarily mean more informative disclosures, often consisting of extensive boilerplate reporting.
- Make sure the link to the modern slavery statement is visible on the website homepage and that the search function on the website returns the link to the latest statement. It is a requirement under section 54 MSA for the annual modern slavery statement to be visible and accessible from the homepage with a direct live link.
- If you choose to register with the Home Office online registry, make sure a direct link is provided to the most recent modern slavery statement. Companies are encouraged to register with the government modern slavery statement registry launched in March 2021, although this is not yet compulsory. The research found that the majority of companies (72%) link to either their 2020 statement or 2019 statement. The new Modern Slavery Bill announced as part of the Queen’s Speech will require organisations to publish their statements on a government-run registry.
- Companies should clearly demonstrate how they have engaged prospective suppliers on modern slavery issues and, where necessary, how they have sought to improve labour practices before contract approval. The report emphasises that it is a serious concern that between a third and a half of the modern slavery statements reviewed provided insufficient detail on assessment practices for contract approvals generally, and supply chain contracts in particular.
- Companies could use and report on key performance indicators (KPIs) to measure the effectiveness of the steps taken to minimise modern slavery risks. This is highlighted as an area where disclosure is particularly poor. Government statutory guidance encourages companies to include information about their effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains. A key part of this is measuring against appropriate KPIs (39% of companies reported one or more KPIs relating to modern slavery risk and 25% disclosed results against such KPIs).
- Companies could also review existing KPIs to determine whether they make their business and supply chain vulnerable to modern slavery. The example provided in the report is that a KPI to increase production turn-around time may in turn create an environment where supplier’s face pressure to meet unrealistic deadlines and as a result turn to slavery practices. Only 3% of companies made disclosures of this nature.
- Consider including meaningful commentary on policy effectiveness in ensuing that slavery and human trafficking is not taking place. For example, explain whether KPIs have been revised in respect of progress made or disclose the results of corrective action plans for slavery risks identified in the risk assessment.
- Ensure board-level responsibility for modern slavery statements is made explicit in the statement. Section 54 of the MSA requires in-scope companies to publish an annual modern slavery and human trafficking statement that is signed-off by the board of directors or at an equivalent level within the organisation. In the report’s sample, 3% were approved by a non-board member and 5% did not include information regarding final sign off.
FRC urges consideration of addressing modern slavery risk in annual reports
Although there is no legal requirement for companies to report on their approach to addressing modern slavery and human trafficking in their annual report, the FRC suggests that companies should be thinking about modern slavery as part of their responsibility to consider the interests of their stakeholders in their annual report (in particular in their ‘section 172 statement’).
A UK company which is required to publish a strategic report must make a ‘section 172 statement’ in that report, unless it qualifies as ‘medium-sized’ under the Companies Act 2006. The statement must describe how the directors have had regard to the matters set out in s172(1)(a) to (f) of the Companies Act when performing their duty under section 172 to promote the success of the company for the benefit of its members.
The FRC recommends the following in terms of best practice reporting in annual reports:
- Consider reporting on engagement with stakeholders on slavery issues in the section 172 statement. The report notes that most companies appear not to view modern slavery issues as sufficiently important to be considered within the wider category of interests covered in section 172 statements (with 9% of companies reporting evidence on engagement with stakeholders on slavery issues and 2% providing information on how stakeholder views helped inform decisions).
- Consider discussing slavery risk in the context of the company’s own employees, supply chains or the wider community in section 172 statement. The FRC notes that, in contrast to evidence from modern slavery statements, limited section 172 statements discussed engagement with various stakeholder groups in relation to slavery. The FRC comments that it is unclear why some companies disclose engagement with workers in their supply chain in their modern slavery statement but not in their section 172 reporting.
- Consider including modern slavery KPIs in the section 172 statement. The FRC notes that, although only one company in the sample did this, it is this level of reporting that the FRC would encourage companies to consider. The relevant company also reported on specific outcomes of policies, the impact of its activities and how it has improved its approach in the reporting year.
- If the risks of slavery are disclosed elsewhere in the annual report, ensure appropriate cross-references are included in the section 172 statement. Half of the companies in the sample discussed modern slavery issues in other parts of the annual report, whilst 45% referred to the issue directly when reporting on their purpose, culture or strategy.
- Consider additional disclosures in the annual report in relation to oversight of modern slavery issues, internal controls linked to oversight of human rights and slavery and details of when and how often modern slavery policies and governance arrangements are reviewed. The FRC notes that 42% of the sample identified the individual or team responsible for overseeing modern slavery issues in the annual report, compared with 95% disclosing such information in the modern slavery statement.
- Include a direct link to the corresponding modern slavery statement in the annual report. Only 14% of the annual reports examined included a direct link to the modern slavery statement. This is highlighted as a failure to signpost slavery-related commentary that sits outside the annual report. The report notes that companies who consistently fail to properly cross-reference information regarding their approach to modern slavery will struggle to see their work recognised.
The devil will be in the detail of the Modern Slavery Bill, and we await publication of a draft with interest. Nonetheless, it is clear the UK Government is determined to increase compliance rates, and to push companies to be more transparent and to make more detailed disclosures on the steps they are taking to address the risk of modern slavery linked to their business and supply chains.
Mandatory reporting on whether particular steps have been taken will make it more difficult for companies simply to omit reporting on aspects of their modern slavery compliance which are not up to scratch, and will make it easier for civil society organisations to benchmark companies against one another.
And, of course, as reporting expands so does potential litigation risk, if (in certain circumstances) a company makes statements in its modern slavery statements or annual reports which it cannot live up to.
Against that background, the FRC’s intervention is timely, and is likely to further raise awareness of issues related to modern slavery with (in particular) proxy advisers and investor groups. The authoritative nature of the report – drawing on the expertise of the UK Anti-Slavery Commissioner – means its recommendations will carry significant weight amongst key commentators on modern slavery compliance, and companies caught by the MSA (whether UK-listed or otherwise) would be well-advised to take heed of its suggestions.