VFMC: Tackling modern slavery through external manager engagement

VFMC is committed to responsible labour practices and is against all forms of slavery.

With the introduction of Australia’s Modern Slavery Act, combined with growing awareness of the prevalence of modern slavery in business operations and supply chains, we recently conducted an extensive programme of work on this topic.

Why we tackle modern slavery within our investment holdings

As is widely acknowledged, modern slavery practices are likely to be present in all supply chains.¹ Therefore, it is critical that all market participants assess and understand where these risks lie, including within investment supply chains. The focus needs to be on the risk of material harm to people even if the investment exposure is small, rather than on financially material exposures.

It is one thing to conduct a risk assessment; however, the critical challenge is to ensure positive change. We firmly believe that having conversations with our investment managers and portfolio companies (by reference to the risk assessment) raises awareness and acumen and, in turn, drives ongoing improvement.

How we tackle modern slavery within our investment holdings

We have put our modern slavery policy and statement into practice.

Firstly, we focused on building capacity and knowledge within our own organisation and with regards to our investment holdings. We conducted several firm-wide training sessions on modern slavery and included the topic in our investment stewardship induction materials for new starters.

We also engaged an external advisory firm to conduct a detailed assessment of over 11,000 investment holdings. This risk assessment sought to identify a potential indicative number of slaves at each entity within our investment supply chain based on geographic exposure and industry sector. It also categorised each exposure according to different levels of risk.

Secondly, we formally incorporated modern slavery risk within our investment process, in our direct investments and with regards to our external managers. We conducted specific due diligence on all incumbent investment managers to understand how they identify, assess, and mitigate the risk of modern slavery. Additionally, we have included the issue in our pre-investment due diligence processes and instated relevant contract clauses in all new investment management agreements.

Finally, while we conducted an extensive programme of work, we have found that talking about modern slavery has effectively raised awareness and driven action. We engage directly with our investment managers (see example below) and with companies on modern slavery, and by doing so we can bring a different perspective and ensure that the risk is comprehensively considered, rather than seen as a siloed issue.

Example: Engaging with our infrastructure managers on modern slavery and human rights

Every two years, we comprehensively review our external investment managers’ approach to investment stewardship. In 2021, for our infrastructure and property investment managers, we conducted a detailed interview and focused significantly on modern slavery and human rights. These conversations highlighted the variability in our managers’ understanding of modern slavery risk and consequently their risk management processes.

Most of our managers clearly articulated their risk management processes, as well as specific instances where potential issues regarding modern slavery had been identified within the supply chain of portfolio companies and what they had done to investigate and remedy the issues. These leading practices included:

• Integrating modern slavery risks into ESG and governance processes, underpinned by a clear modern slavery policy, including conducting modern slavery due diligence;
• Ensuring people are aware of risks through organisation-wide extensive training; and
• Undertaking a modern slavery risk assessment, with a cost overlay to assess materiality.

Other managers were at a more developmental stage and, for example, felt that they were not exposed to modern slavery risk because they operated in OECD countries. We used this as an opportunity to:

• Raise awareness of the issue;
• Educate the managers regarding our approach and share the approaches that we have seen others adopt; and
• Encourage a greater focus on modern slavery.

Our active engagement highlighted areas for improvement concerning modern slavery risk management for one manager. We organised a follow-up engagement to help them understand our expectations to identify, address, and mitigate modern slavery risks in their approach and support them to make progress in this area.

Some managers have also adopted our modern slavery risk assessment and due diligence approach for their underlying investee companies. For managers reporting under the UK Modern Slavery Act, we highlighted key gaps compared to the Australian legislation and suggested improvements. We see our relationship with our investment managers as a two-way collaboration. Simple conversations and sharing a different perspective can be effective in raising awareness, building maturity within managers’ organisations with regards to identifying and managing modern slavery risks, and driving change on the ground.

For year one, this process is a starting point and creating a baseline for risk and expectations.