Market-Driven Mechanisms for addressing Modern Slavery
So far, we have summarized approaches to MS that are grounded on theories of change that address inequality, freedom of association, or purchasing practices of suppliers as key elements to curtail it. What is the role of investors in catalyzing further efforts? How are MS initiatives funded? The following section will aim to answer both of these questions by highlighting market-driven mechanisms that are beginning to play a more central role in the fight against MS.
The Role of Investors
Since the late 2000’s, there has been increasing attention paid to Environmental, Social, and Governance (ESG) factors when deciding on asset allocation. In 2006, the UN launched the Principles for Responsible Investment and 63 investment companies committed to using ESG criteria to make investing decisions; by 2018, there were over 1,715 signatories (Eccles and Klimenko 2019).
According to Ruggie, the rise of investments aligned with ESG criteria can be traced back to the 2008 financial crisis. In its aftermath, investors started to look for alternatives to mainstream financial perspectives (Ruggie 2019). By 2019, investments labeled as meeting some form of ESG rank or criteria are already 25% of assets managed worldwide. This amount is likely to increase as millennials enter the financial market with stronger commitments to sustainability than previous generations (Currie and Unmack 2019; Ruggie 2019). Furthermore, ESG investments have sometimes outperformed “regular” investments, meaning that the returns are either equivalent or slightly better than regular portfolio options (Eccles, Ioannou, and Serafeim 2014; Khan, Serafeim, and Yoon 2016; Lefkovitz 2019). An additional factor that has played into the rise of sustainability investments is the long-term planning of payouts of institutional investors such as pension funds that have also begun to play a more hands-on role of the assets they manage via proxy voting and shareholder resolutions that push companies towards more sustainable behaviors (Eccles and Klimenko 2019).
An example of investor activism is the Interfaith Center on Corporate Responsibility (ICCR), an organization founded in 1971 to both actively invest in initiatives pushing for social change in apartheid South Africa, and to divest or withhold investing in companies that were supporting the regime (ICCR 2018a). In 2018, they launched the Investor Alliance for Human Rights bringing together 137 asset managers with assets of around $3.5 trillion (ICCR 2018a). The ICCR’s approach is grounded on establishing corporate dialogues with a pre-defined agenda and goals. Company representatives meet with shareholders and other stakeholders under Chatham House rules to reach common ground and agreements for long-term change. If no agreement is reached, then the ICCR moves on to shareholder resolutions. In the US, a shareholder that earns at least $2,000 worth of stock can file one resolution per year and goes to a vote at the annual general meeting. The ICCR files an average of 200 resolutions per year and has detailed materials on how to file them successfully (ICCR 2018b).
The rise in the use of ESG as a decision-making criteria when choosing how to invest has meant that there needs to be information available to transparently portray which funds actually meet ESG criteria. This is not as straightforward as it appears to be at first glance: what is the threshold with which one considers a fund or company to be compatible with ESG? How does one weigh all three factors and score them? (Pineiro-Chousa, Romero-Castro, and Vizcaíno-González 2019) Some of the traditional indexing firms have stepped up to the challenge and come up with their own solutions.
S&P
The S&P 500 Environment & Socially Responsible and the S&P International Environmental and Socially Responsible Indices were launched in May of 2015 (S&P Dow Jones Indices 2019c). In order to belong to either, the company must already be a member of either the classic S&P 500 for the former or the S&P Developed BMI index for the latter (S&P Dow Jones Indices 2019d, 2019d). The goal was to provide investors with an option that tracked the performance of the underlying indices, while selecting only those that have relatively higher environmental and social scores (S&P Dow Jones Indices 2019d). All business activities related to fossil fuels, tobacco, or the military are excluded. The underlying information to warrant exclusion is provided by a third-party partner, Sustainalytics. Then the companies are measured against the RobecoSAM Corporate Sustainability Assessment (CSA), which includes 100 questions that weigh the averages of social and environmental performance and result in aggregate scores that are used as the basis for inclusion (S&P Dow Jones Indices 2019d). Note that there is no inclusion of a governance factor in this process.
As of October 31, 2019, there are 299 members of the S&P 500 E&S and its top 10 constituents are primarily technology companies (Microsoft, Apple, Amazon, Alphabet (Google)) and financial services firms (Visa, JP Morgan Chase). Overall, tech companies represent 23% of the index, followed by health care (15%) and financial services (13.9)% (S&P Dow Jones Indices 2019c). Notably, in early 2019 Facebook was excluded from the index due to growing privacy concerns (Cox 2019).
DJSI
The Dow Jones Sustainability Index (DJSI) was launched in 2009 as the first large scale index to track sustainable investment options at a global level (Robeco Sam 2019). After the merger of S&P and the Dow Jones indices in 2012, the index became part of the greater S&P Dow indices group (ETF 2012).
The methodology for the World version of the index is as follows: the initial pool of 10,000 companies that are part of the S&P Global are initially ranked by market capitalization and the 2,500 largest ones are invited to complete the Robeco Sam CSA assessment. A significant difference with the S&P index is that the DJSI does not exclude specific sectors (S&P Dow Jones Indices 2019a). What it does instead is provide ethical exclusion tags by which investors can self-select their exclusion criteria. The industries tagged include alcohol, tobacco, gambling, uranium mining, firearms, among others (S&P Dow Jones Indices 2019b). As was the case with the S&P sustainability index, the DJSI top 10 constituents include technology companies (Microsoft and Alphabet), and several health care companies (Novartis, Abbott). The overall breakdown shows that the largest percentage by sector is information technology (21.8%), followed by healthcare (19.9%) and financials (16%) (S&P Dow Jones Indices 2019a).
Other common rating actors include MSCI (Blackrock relies on MSCI data (Huber et al. 2017)), ISS, and the CDP (focused primarily on environmental issues) (SustainAbility 2019). The growing number of ESG and sustainability focused rankings has called into question the lack of standardized metrics and inconsistencies among them, and the fact that they may actually be unable to identify risks that are relevant to investors (Doyle 2018).
Funding the fight against MS
The other side of the market-based approach to addressing MS has to do with the funding itself of the initiatives being deployed and implemented on the ground. The following section will briefly describe three donors and what sets them apart.
Humanity United
Founded in 2008, Humanity United is part of The Omidyar Group, the philanthropic portfolio of the Omidyar family. Its efforts are focused on funding initiatives against forced labor and human trafficking, and strengthening peace-building and conflict resolution (Humanity United 2019b). The forced labor and human trafficking portfolio dedicates its resources to specific hotspots and commodities and supports regulatory action, corporate accountability, documentation, and advocacy; the human trafficking portfolio seeks to, among other elements, support new labor recruitment systems that better protect workers (Humanity United 2019a). The four initiatives that branch from this portfolio are: 1) Know the Chain benchmark, 2) Partnership for Freedom, 3) Working Capital, and 4) The Freedom Fund. The last three are each in their own right funders of specific programs working to eliminate MS.
The Partnership for Freedom (PFF) was launched in 2013 as a public-private endeavor that operates by running thematic yearly challenges around key problems related to MS. In the 2013–2014 cycle, the challenge sought to reward a project that would improve survivor support in the US. The 2015 challenge created incentives for innovations to address labor trafficking. The winner got $250,000 to develop their idea for improving traceability in the seafood supply chain and address trafficking risks (Partnership For Freedom 2019a). The 2017 challenge focused on survivor support and their integration with local communities in three specific US cities. Of the 13 cities that applied, Atlanta, Chicago and Minneapolis were chosen as winners. The support includes two year funding for the salary of a senior expert to strengthen anti-trafficking policies (Partnership For Freedom 2019b).
Working Capital is a venture fund solely dedicated to scaling innovations in transparency in supply chains. The funding comes from Humanity United, Walmart Foundation, C&A Foundation, Disney, UK Aid, among others (Working Capital 2019c). Their current investment portfolio includes worker engagement technologies to facilitate communication, blockchain for traceability, ethical sourcing platforms, risk assessment and predictions within supply chains, and ethical recruitment (Working Capital 2019a). The firm states that it chooses its investments by balancing the strength and targeting of the solution, the breadth and depth of the impact on the workers, the potential changes in corporate behavior, and the capacity of the investee to carry out impact measurement and mitigate negative risks (Working Capital 2019b) The amount invested in each partner is undisclosed.
The Freedom Fund was launched in 2013 as a joint effort between Walk Free, Legatum, and Humanity United. It identifies forced labor hotspots and builds long-term relationships with local partners that implement specific programs to address certain issues (Freedom Fund 2019a). As was previously mentioned, the Freedom Fund has a strong commitment to evidence-based decision making and seeks to drive systemic change by combining seven hotspot projects with global initiatives and movement building to strengthen institutions and increase awareness (Freedom Fund 2019b). The 2018 impact report provides a detailed breakdown of the $40.3 million invested and number of people impacted via legal services assistance, community support, education, or micro enterprises.
Global Fund to End Modern Slavery
The Global Fund to End Modern Slavery (GFEMS) is a newer initiative in this field that has as a mission ending MS by making it economically unprofitable (Global Fund to End Modern Slavery 2018). Founded in 2017, it is currently implementing its first round of grants funded by public and private donors that include the US Department of State and the UK’s Department for International Development (DFID) (Freedom Fund 2018). Its theory of change identifies the challenge as one in which fragmented efforts that have limited engagement with the private sector and little impact assessments are unable to meet the scale of MS today. Therefore, it seeks to mobilize more resources and engage with both private and public actors to fund impactful initiatives that can demonstrably decrease the prevalence of MS (Global Fund to End Modern Slavery 2018). Its funding efforts focus on rule of law, business engagement, and sustained freedom. The current portfolio includes $15 million investments in prevalence research, migrant labor, sex trafficking, apparel, and construction (Global Fund to End Modern Slavery 2019). Although GFEMS has not gone through several rounds to test its effectiveness or effect in decreasing prevalence, it is motivating to find a deep commitment to prevalence estimations that draw from public health and that target very specific locations and interventions that can contribute towards decreasing the scale of MS around the world.
References
Cox, Jeff. 2019. “Facebook Gets Dumped from an S&P Index That Tracks Socially Responsible Companies.” CNBC. https://www.cnbc.com/2019/06/13/facebook-dumped-from-sp-esg-index-of-socially-responsible-companies.html (November 2, 2019).
Crawford, Robert J. 1998. “Reinterpreting the Japanese Economic Miracle.” Harvard Business Review (January–February 1998). https://hbr.org/1998/01/reinterpreting-the-japanese-economic-miracle (November 22, 2019).
Currie, Anthony, and Neil Unmack. 2019. “Breakingviews — Breakdown: ESG Investing Faces Sustainability Test.” Reuters. https://www.reuters.com/article/us-global-asset-management-breakingviews-idUSKCN1SY1VM (November 2, 2019).
Doyle, Timothy. 2018. “Ratings That Don’t Rate.” http://accfcorpgov.org/wp-content/uploads/2018/07/ACCF_RatingsESGReport.pdf (November 2, 2019).
Eccles, Robert G., Ioannis Ioannou, and George Serafeim. 2014. “The Impact of Corporate Sustainability on Organizational Processes and Performance.” Management Science 60(11): 2835–57.
Eccles, Robert G., and Svetlana Klimenko. 2019. “The Investor Revolution.” Harvard Business Review (May–June 2019). https://hbr.org/2019/05/the-investor-revolution (October 17, 2019).
Freedom Fund. 2018. “Our Impact | The Freedom Fund.” Freedom Fund. https://freedomfund.org/impact/overview/ (November 2, 2019).
— — — . 2019a. “Home.” Freedom Fund. https://freedomfund.org/ (October 19, 2019).
— — — . 2019b. “Our Approach — The Freedom Fund.” Freedom Fund. https://freedomfund.org/programs/our-approach/ (November 2, 2019).
Global Fund to End Modern Slavery. 2018. “Theory of Change.” https://static1.squarespace.com/static/5a60c34a0abd04e55389efa6/t/5a95b4c7e2c4838425aa489b/1519760584412/GFEMS+ToC.pdf (November 2, 2019).
— — — . 2019. “Inaugural Funding Round.” Global Fund to End Modern Slavery. https://www.gfems.org/past-opportunities (November 2, 2019).
Huber, Betty Moy, Michael Comstock, Davis Polk, and Wardwell LLP. 2017. “ESG Reports and Ratings: What They Are, Why They Matter.” https://corpgov.law.harvard.edu/2017/07/27/esg-reports-and-ratings-what-they-are-why-they-matter/ (November 2, 2019).
Humanity United. 2019a. “Forced Labor & Human Trafficking.” Humanity United. https://humanityunited.org/portfolios/human-trafficking-in-labor-migration/ (November 2, 2019).
— — — . 2019b. “Portfolios.” Humanity United. https://humanityunited.org/portfolios/ (November 2, 2019).
ICCR. 2018a. “History of ICCR.” https://www.iccr.org/about-iccr/history-iccr (November 2, 2019).
— — — . 2018b. “Shareholder Resolutions.” Interfaith Center on Corporate Responsibility. https://www.iccr.org/our-approach/shareholder-engagement-101/shareholder-resolutions (November 2, 2019).
Khan, Mozaffar, George Serafeim, and Aaron Yoon. 2016. “Corporate Sustainability: First Evidence on Materiality.” The Accounting Review 91(6): 1697–1724.
Lefkovitz, Dan. 2019. “ESG Investing Performance Analyzed.” Morningstar Blog. http://www.morningstar.com/content/morningstar/en/blog.entry.html/2019/03/12/esg-investing-perfor_0.html (November 2, 2019).
Partnership For Freedom. 2019a. “Partnership For Freedom | Rethink Supply Chains.” https://partnershipforfreedom.org/rethinksupplychains/ (November 2, 2019).
— — — . 2019b. “Pathways to Freedom City Challenge.” Pathways To Freedom. https://pathwaystofreedom.org/city-challenge/ (November 2, 2019).
Pineiro-Chousa, Juan, Noelia Romero-Castro, and Marcos Vizcaíno-González. 2019. “Inclusions in and Exclusions from the S&P 500 Environmental and Socially Responsible Index: A Fuzzy-Set Qualitative Comparative Analysis.” Sustainability 11(4): 1211.
Robeco Sam. 2019. “DJSI Index Family.” Pure play asset management | Robeco.com. https://www.robecosam.com/csa/indices/djsi-index-family.html (November 2, 2019).
Ruggie, John. 2019. “ESG Investing: Coming into Its Own — and Not a Moment Too Soon.” Presented at the Responsible Investment Association of Canada Annual Conference Keynote Address, Montreal. https://www.business-humanrights.org/sites/default/files/documents/Montreal%20RIA_John%20Ruggie%20speech.pdf (May 1, 2019).
S&P Dow Jones Indices. 2019a. “Dow Jones Sustainability World Index Factsheet.” https://eu.spindices.com/indices/equity/dow-jones-sustainability-world-index (November 2, 2019).
— — — . 2019b. “Dow Jones Sustainability World Index Methodology.” https://eu.spindices.com/indices/equity/dow-jones-sustainability-world-index (November 2, 2019).
— — — . 2019c. “S&P 500 Environmental & Socially Responsible Index — Factsheet.” https://us.spindices.com/indices/equity/sp-500-environmental-socially-responsible-index (November 2, 2019).
— — — . 2019d. S&P Environmental & Socially Responsible Indices Methodology. https://us.spindices.com/indices/equity/sp-500-environmental-socially-responsible-index (October 31, 2019).
SustainAbility. 2019. “Rate the Raters 2019: Expert Views on ESG Ratings.” https://sustainability.com/wp-content/uploads/2019/02/SA-RateTheRaters-2019-04.pdf (November 2, 2019).
Working Capital. 2019a. “Approach.” Working Capital. https://workingcapitalfund.com/approach/ (November 2, 2019).
— — — . 2019b. “Assessing Potential Impact before Making an Investment.” Working Capital. https://workingcapitalfund.com/assessing-potential-impact-before-making-an-investment/ (November 2, 2019).
— — — . 2019c. “Partners.” Working Capital. https://workingcapitalfund.com/partners/ (November 2, 2019).
