Rathbones Group: Votes Against Slavery

Give a brief overview of your initiative, its objectives, and why you decided to undertake it.

Modern slavery is one of the great evils of our times, imposing terrible suffering, wrecking futures, and ultimately impoverishing us all by destroying human potential. Businesses have a crucial role to play in eradicating it. We contributed to the campaign to bring the business community into the fight through the UK’s landmark 2015 Modern Slavery Act. However, the Section 54 (s54) modern slavery reporting regime, which requires companies to publish a statement setting out what steps they have taken to ensure modern slavery is not taking place in their business or supply chains, was left sadly lacking in enforcement powers. Votes Against Slavery (VAS) is a collaborative campaign to fill this gap by harnessing the voting and engagement power of global investors. The aim is a radical improvement in supply chain transparency through s54.

VAS2022’s primary objective was to target 44 FTSE 350 companies whose modern slavery reporting failed to meet the requirements of s54, improve their reporting, and turn them into active participants in the fight. We told them that failure to comply would result in a lack of support for their annual report and accounts. Ensuring compliance at these companies creates a multiplier effect: their actions incentivise further compliance among contractors in their supply chains. The secondary objective was to use this influence to open the door to wider engagement on a wide range of social topics – the all-too-often ignored “S” in “ESG”.

We conducted desk-based research on every FTSE 350 company to identify those whose reporting fell short of best practice. We followed this with engagement, backed by the threat of coordinated votes against the company’s report and accounts. A major improvement on last year was an increase in the number of direct meetings with target companies to discuss not only their reporting but also their policy and action on modern slavery – from six in 2021 to 14 this year.

Having achieved a hit rate of 90% in 2020 and 100% in 2021, Rathbones launched the third version of VAS in 2022. Our consistent track record of effective stewardship enabled us to marshal our largest coalition to date, involving 122 investors managing £9.6 trillion. This included many asset owners as well as asset managers.

 

Describe how your initiative is aligned to Active Ownership 2.0.

Our initiative is inspired by the thinking behind Active Ownership 2.0: it focuses on outcomes, common goals, and collaborative action. The engagement group believed an emphasis on direct action was necessary. This engagement is focused on changing company behaviour, not on mere process or activity. We have increased our concentration this year on the quality of company reporting on modern slavery, beyond companies doing the bare legal minimum. In our meetings with companies, we have pushed for better practice by making comparisons with the approach taken by companies in other sectors.

The theory of change is clear: to use our vote on the report and accounts to accelerate compliance with the Modern Slavery Act’s vital reporting requirements, and by implication tackle the systemic risk of modern slavery across the UK economy and beyond. Our methods include research, informal dialogue, targeted letter writing, AGM voting, and meetings with senior leaders. We also work with local regulators.

The size and breadth of collaboration has been key in generating positive outcomes. Our largest component was European asset owners, as it has been at the outset of VAS. We were encouraged to find many investors approaching us from outside the PRI Collaboration Platform, historically the main portal for gathering investor support. Furthermore, we were notified that several investors had never engaged on human rights until they joined VAS.

Our collaboration network proved extremely helpful. On two occasions we struggled to make ourselves heard with the target companies, but VAS partners provided useful contacts to allow us to reach out to senior management. Our VAS partners also agreed to use their votes to encourage better practice and to remind the company in question that it was not merely Rathbones that was taking a stance on reporting on modern slavery. For one company in which Rathbones was not a shareholder, it was the threat of voting against the annual report and accounts by several shareholders involved in the collaboration that inspired a change for the better in the company’s reporting. These positive results demonstrated once again that more can be achieved by working collectively rather than individually on modern slavery.

We also believe that the impact of the engagement is wider than a specific improvement at a single company. This project is about addressing a structural social issue that affects the entire global economy. Votes Against Slavery aims to address the systemic nature of modern slavery by encouraging the highest standards of supply chain transparency at FTSE 350 companies, creating a multiplier effect to generate better reporting, which will trigger companies to take a closer look at the risk of modern slavery.

The most important feature of the engagement – and a cornerstone of our theory of change – is the link with AGM voting. Many engagements simply involve writing to companies to advocate improved disclosure. However, VAS members threaten to withhold their approval of the annual report and accounts of non-compliant companies. This is the strongest power of censure available to investors, but one of the least used. We believe the link to public chastisement through an AGM vote is unique among investor collaborations. All votes on the financial statements are legally binding in the UK, again showing the depth of commitment and ambition needed to involve yourself in VAS.

The fantastic success rate of the early engagement with companies meant that by the end of June 2022, 39 of the 44 target companies were compliant. The remaining five had committed to making changes to their 2022 statements that were due to be published later in the year. Because of these commitments, in the end we did not need to vote against any annual report and accounts. When we told one company that Rathbones and other shareholders in the collaboration would vote against the annual report at the AGM, this led to a compliant statement less than 24 hours later. Such is the power of VAS.

One challenge is the UK Government’s slowness in implementing changes to the reporting regime. In 2022, we collaborated with the Home Office to increase company awareness of the UK Government’s Modern Slavery Registry. In our engagements with companies, we emphasised the importance of submitting statements to the voluntary registry. We believed submissions would increase the transparency of companies’ efforts to eradicate modern slavery, thereby reducing the risk of it within our investments.

We also kept the Home Office informed of our progress – both to show the role investors could play in improving accountability and to provide a useful reminder that tougher regulation was needed. This is another unique feature of the engagement, showing how useful investors can be when working in partnership with regulators on ESG risks.

We believe that the sustained investor pressure, alongside the UK Government’s Registry, has improved the entire FTSE 350’s understanding of the risk of modern slavery in their companies and supply chains. There were no “repeat offenders” from our VAS engagement the previous year. This shows that VAS has long-term effects: previous offenders have developed more robust processes for ensuring compliance following our engagement.

Notwithstanding its work with us on the Modern Slavery Registry, the UK Government’s tardiness in improving the reporting regime makes VAS all the more important. “The Modern Slavery Act (2015) in its current form sets a very low bar for business”, says Independent Anti-Slavery Commissioner, Dame Sara Thornton. “As we await the implementation of new legislation to strengthen the Act, voluntary initiatives such as Votes Against Slavery will be essential for driving more responsible business behaviour.”

 

The results achieved in the initiative to date, including: evaluation of its success against the objectives; any adjustments to plans going forward; and any insights learned from this project that can be applied more broadly?

In this third year of the project, we set ourselves the ambition of achieving full compliance, as we did in 2021. Given the size of the collaboration and the standing we have built in this field, we will consider anything other than full compliance a failure. We deem the setting of ambitious goals to be essential in driving commitment across the collaboration.

By 30 June, 39 of the 44 non-compliant companies in the FTSE 350 had become compliant as a direct result of our engagement – a hit rate of 89%. The remaining five companies have told us they will incorporate our suggested changes when they release their 2022 statements, so we expect compliance from all target companies by year-end.

A unique feature of this engagement is companies’ speed of response and willingness to make changes. We have been told on several occasions that the collaboration are the only investors asking questions about modern slavery reporting – a fact that underlines the importance of this project. However, in our conversations with companies, we hear a real willingness to incorporate our suggested changes to strengthen the quality of reporting and ensure alignment with the Act’s reporting requirements. The threat of voting against the annual report and accounts at the target companies has driven this sense of urgency.

We have developed a robust list of questions to raise in our company meetings, which enable us to discuss the content of each company’s statement. This has given both VAS collaborators and target companies a greater understanding of how modern slavery could lurk in the supply chains of target companies. The insights from these meetings have been passed back to VAS collaborators – and through them to other target companies. By giving all parties a greater understanding of modern slavery risks, this has made engagements more effective. This enhanced knowledge was only feasible through VAS, with many companies unresponsive to requests that lack the VAS imprimatur.

A valuable insight from our meetings is the rise in concern about modern slavery and other human rights risks among senior management. This is in part because of a new recognition of the importance that investors place on modern slavery in companies they invest in. This heightened awareness will be key to reducing the long-term material risks to company valuations posed by modern slavery and human rights violations.