Strengthening social responsibility in transnational trade (‘S’ factor in ESG)
Dr Binod Chapagain
As data shows, 70% of cocoa comes from West Africa alone, and cocoa grown in the Ivory Coast makes up 43% of the total world cocoa and 60% of the country’s export revenue (1). However, it is shocking to know about 2.1 million children in the Ivory Coast and Ghana may be exposed to the worst child labor conditions on cocoa farms. Many of these children are trafficked to cocoa farms, enslaved, unable to leave, and forced to work without pay. More importantly, the big producers of our chocolates – Mars, Hershey and Nestle, among others, source cocoa beans from these countries.
Something similar is going on in pet food and other industries. We are feeding our pets foods produced by enslaved laborers in the Southeast Asia or similar fishing industries around the world (2) or wearing our clothes that are made by children in forced labor in South Asia. These are just the tips of an iceberg!
Although, many companies have been making efforts to clean their products, evidence suggests that such inhuman practices still exist in their value chains, either in chocolate or pet food or seafood or garments and many others.
Environmental, Social and Governance (ESG) is an approach that focuses on how a company fosters innovation to respond greenhouse gas emission and climate change, workers pay and safety and supply chain management. However, the question comes if the companies are giving equal importance to all three E-S-G factors.
In this blog, I analyze the ‘social’ factors and highlights issues that warrant urgent consideration by investors and businesses.
ESG as a solution
To improve practices and social images, businesses are looking for responsible investments, and one of the ways they have done this is to integrate environmental, social and governance (ESG) factors. The ESG covers a wide range of spectrum, including, but not limited to, labor practices, wages, working conditions, product sources, health and safety measures, supply chains, greenhouse gas emissions, and their financial relevance.
The scale of businesses’ social cost is massive. In 2017, the International Labor Organization estimated that there would be about 40 million people victims of slavery (5.4 victims for every 1,000 people) and 25 million in forced labor (3). It was estimated that the share of women and girls among them would be 71%. The report also estimates that about a quarter of the forced workers are in domestic sector, where as it spreads across many sectors, including, 18% in construction, 15% in manufacturing, 11% in agriculture and fisheries. Some of the emerging countries in Asia like Malaysia, Thailand and South Korea, for instance, are regional labor hubs for countries, like Bangladesh, Cambodia, Indonesia, Myanmar, Nepal, Lao PDR and the Philippines, among many others. The migrant workers are formally and informally employed by multiple industries in these countries and many of them are still in modern-day slavery.
To prevent human trafficking in the region and protect the rights of the migration workers, the local governments have taken multiple measures (4). However, despite these efforts, the industries have come under international scrutiny for their abusive labor practices, mainly for discrimination from their employers and local authorities (5). Health and safety of the workers, holidays and rest hours, overtime work and labor rights are some other examples of challenged practices. These examples demonstrate the missing ‘S’ factor in businesses despite government efforts.
With the changes in the international business environment, businesses are now facing formal and informal pressures to demonstrate their positive contributions to society. It is important to note that the businesses which have credible ESG standards, will have buyers’ and their stockholders’ trust. A leader of one of the research firms KPMG, Brand Whalen says (6), “Numerous studies confirm that organizations with strong ESG records tend to have a more stable and loyal investor base, lower cost of capital, and better access to financing”.
What can be done?
To improve ‘S’ factor and to offer better working conditions at workplace and eliminate different forms of slavery practices, multiple actors can play an important role – from local governments, researchers, national and international consumers, business investors to the companies themselves. For example:
- Customers at different levels ensure that they buy forced-labor and/or slavery free products. If they look for the certified products, this gives a big push to produce ESG certified items.
- The governments strengthen their policies and procedures and incentivize the businesses that produce and/or sell products with ESG/Sustainable business certification. The incentives will help businesses to make meaningful integration of ESG in the long-term.
- The civil society have important role to play to enhance understanding of local people and businesses about sustainable business practices and consequences of abusive practices and controversial businesses. They play the role of ‘watchdog’ as well as offer critical help to vulnerable people to prevent and protect them from inhuman practices.
- The investors, banks and other financial institutions invest their resources on the businesses that ensure that the money does not contribute to any practices like bonded labor, forced labor, trafficking, and children, among others. The careful due diligence of ‘S’ factor by investors will significantly contribute to develop the sustainable businesses that respect human rights, protect environment, detail on social policies, and bring transparency to their equity holders and investors.
- Researchers have key roles to investigate on the existing practices as well as identify innovative investment opportunities that serve as double-edged sword – contribute to enhance efficient clean businesses as well as pose challenges to the ‘dirty’ practices.
- Moreover, the sincere commitments of the business leaders and CEOs are the key. If they take actions to invest their resources in clean value chain and products, this is going to bring a bring change. The business which makes its products clean, evidences suggest that they increase return on investment steadily. Here are the affirmations: “90% of the cost of capital studies show that sound ESG standards lower the cost of capital. 88% of the studies show that solid ESG practices result in better operational performance, and 80% of the studies show that stock price performance is positively influenced by good sustainability practices” (p. 44) (7).
Questions for moving ahead
ESG is important for businesses to consider what Larry Fink, BlackRock CEO, suggests in his letter to CEOs. He writes (8), “Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?”
The views expressed in this blog are those of the author and do not reflect the positions or views of neither IFSD not any other organisations the author is associated with.
(1) Ethical Unicorn (2018). Does your chocolate come from slaves
(2) Ian Urbina (2015). ‘Sea slaves’: The human misery that feeds pets and livestock
(4) Department of State (2018).Trafficking in Person Report
(5) Art Prapha (2018). Thai CSO survey reveals progress and gaps of fishery programs
(6) Dennis T. Whalen (2018). ESG matters…Now what?
(7) Gordon Clark, Andreas Feiner & Michael Viehs (2015). From the stockholder to stakeholder
(8) Larry Fink (2018). Larry Fink’s annual letter to CEOs: A sense of purpose