FRC Report Highlights Shortcomings In UK Modern Slavery Corporate Reporting - Shareholders

On 25 April 2022, in collaboration with the UK Independent Anti-Slavery Commissioner, the Financial Reporting Council ("FRC") published a report on Modern Slavery Reporting Practices in the UK (the "Report"). The Report analyses the reporting practices of 100 major companies, including FTSE 100, FTSE 250 and small market cap companies, summarising the extent to which they are measuring the impact of their initiatives and interventions. The Report findings suggest that modern slavery considerations are still not a principal concern for a vast majority of companies, supported by the following figures based on the companies sampled:

only 29% provided clear disclosure on slavery risks in their own business;
40% provided sufficient disclosure on slavery risks in their supply chains;
only 12% disclosed the results of corrective action plans for slavery risks identified in the risk assessment; and
39% did not provide any material commentary on policy effectiveness.

With an estimated 16 million modern slavery victims globally working in the private sector, failings to assess the risk of modern slavery in business and supply chains can carry significant reputational harm. Further, growing investor and consumer demand for transparency on modern slavery risks and the trend of greater regulatory focus in the UK, as well as the EU, adds to the potential cost of non-compliance.

Companies are advised to conduct careful due diligence on their business, policies, and suppliers to identify modern slavery risks. Once the risks have been identified, companies should look to implement (i) practical measures to mitigate such risks, and (ii) effective reporting practices to track progress being made in this area.

Modern Slavery Statements

Section 54 of the Modern Slavery Act 2015 (the "UK MSA") requires companies with a turnover of £36 million or more to publish an annual modern slavery statement to address their approach to tackling modern slavery risk in their operations and supply chains. Reporting entities are obligated to publish their modern slavery statements on their website and include a link to the statement in a prominent place on their website's homepage, which encourages company stakeholders, including shareholders, employees, and customers to hold businesses accountable. Alongside this, the Home Office launched the government modern slavery statement registry ("Modern Slavery Registry") in March 2021 to help companies improve their statements by reviewing statements of their competitors or other players in their particular industry.

The Report found that one in 10 companies did not provide a modern slavery statement at all and therefore failed to comply with the section 54 reporting requirements. Of those companies that did have a modern slavery statement, the Report identified a number of issues including:

Broken links or links to outdated statements: In 6% of the sample, the homepage links to the modern slavery statement were broken. In addition, 72% of the sampled companies that are present on the Modern Slavery Registry provided links to their 2020 statement and 14% of cases provided links to their 2019 statement.
Lack of detail and clarity: The FRC research team concluded that 64% of the statements were fragmented, disjointed, or lacked a clear narrative. In particular, disclosures often failed to provide adequate information on how company policies operated or how progress was measured in practice. Longer statements did not necessarily contain more information but instead were padded out with meaningless boilerplate language. A small minority of reports were deemed clear and easy to read.
Backward-looking: The Report found that the vast majority of modern slavery statements were entirely backward-looking, as only a third of statements clearly identified emerging modern slavery and human trafficking issues and only 12% of companies provided a long-term plan to address issues identified. This conclusion suggests a more reactive, rather than proactive, attitude to addressing modern slavery risks.

Modern Slavery in Corporate Annual Reports

Although there is no legal requirement for companies to report on steps being taken to address modern slavery and human rights risks in their annual reports, the UK Corporate Governance Code encourages companies to describe in their annual reports how risks to the success of the business have been considered and addressed. Similarly, section 172 of the Companies Act 2006 requires directors to have regard to the interests of their employees, the need to foster the company's business relationships with suppliers, and the reputational desirability of maintaining high standards of business conduct, among other wider stakeholder interests. For periods beginning on or after 1 January 2019, all large UK companies must include a separate statement in their strategic report that explains how their directors have considered wider stakeholder needs when performing their section 172 duty (a "Section 172 Statement").

The Report found that a large proportion of companies do not appear to view human rights issues in their workforce and supply chains as a principal source of risk for their business. Indeed, just 15% of companies discussed modern slavery in the context of principal risks and uncertainties facing the business. Further, only 14% of annual reports provided a direct link to the corresponding modern slavery statement and just seven companies in the full sample provided any details in their annual reports on when and how often their anti-modern slavery policies are reviewed. The Report suggests that the lack of proper evaluation and appropriate cross-referencing reduces visibility and transparency on modern slavery issues, which ultimately undermines the effectiveness of the company's approach to tackling these issues.

Notably, only 13% of companies referred directly to forced labour and slavery issues in their Section 172 Statement, with just 2% explaining the long-term impact of modern slavery on their business. It is essential that company leadership sets the tone for the rest of the company on how modern slavery risks should be managed, and to communicate a long-term anti-modern slavery strategy to help harmonise attitudes at all levels of company decision making.

Improving Modern Slavery Reporting

The Report highlights serious shortcomings in modern slavery reporting in UK companies, and it is clear that improvement can be made in a number of respects. We are ready to help our clients step into a desirable position to shift company attitude in tackling modern slavery risks within businesses and supply chains:

preparing an annual modern slavery statement in accordance with the legal requirements under the UK MSA, other relevant legislation, and market standards;
reviewing and drafting anti-modern slavery policies and designing forward-looking strategies, as well as considering Environmental, Social, and Governance (ESG) policies more broadly;
providing training to employees on both the legal and practical modern slavery risks; and
undertaking due diligence to identify red flags from suppliers and other third parties.

Georgia Kinsella, a trainee solicitor in our London office, contributed to the writing of this alert.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.