Implementing forced and child labour due diligence, a guide for TSX and TSXV issuers.

Due diligence begins with an assessment of the likelihood that the goods and services your company buys are made, fully or in part, by forced or child labour. 

Consistent with the UNGPs, the Act is designed to reduce child and forced labour “at any step of the production of goods;” due diligence should therefore extend throughout the supply chain. For practical reasons however, the process does allow companies to prioritize the highest risk parts of their operations and supply chains. The scope of due diligence can then be expanded over time. 

To conduct a prioritization exercise, you should identify general areas in your supply chain where the risk is most significant. Consider which products your buy, where they are coming from and the associated risk profile. For example, agricultural products sourced from countries with a high prevalence of forced labour should be prioritized. 

After the risk prioritization exercise, you need to map your supply chains by identifying your relevant suppliers/ vendors (“vendors”) and mapping these to your supply chain. This information is required to identify the first tier of your supply chain (your ‘direct’ or ‘tier 1 suppliers’) and can often be sourced directly from your company’s information systems, e.g. the billing or accounting system. 

Ideally you should assess risk throughout your supply chains and map the second tier (i.e., your suppliers’ suppliers) and beyond. It may not be possible to identify every supplier at every stage of your supply chain, however.

An alternative approach is to consider which raw materials and stages of manufacturing have gone into making a given good.  For example, a lithium-ion battery is likely to contain raw materials such a cobalt, 73% of which is mined in the Democratic Republic of Congo where there is a heightened risk of child labour. The raw materials will probably have gone through multiple stages of processing in China, as they are turned into the finished product. The US Government has banned imports from various Chinese battery manufacturers, active throughout the battery supply chain, on forced labour grounds.

Next, you will need to engage with your vendors to gain the necessary insights into their supply chains. For example, understanding what level of risk management they have in place to ensure forced or child labour is not occurring in their own operations or supply chain.

This might be as simple as asking for a confirmation of what policies and processes they have in place. If however, it’s a supplier of a higher risk product or service, more in-depth due diligence may be required (e.g. a site visit or engaging an independent third party assessment).

Finally, identify and collate data on the relevant risk indicators. There is no prescriptive list of risk indicators. Rather you should select those that you think are most relevant to your operations and supply chain. For example, we typically use the following risk indicators when analysing risk for clients:

Gather data on these risk indicators from your own organisation, suppliers and other credible third party sources. Our modern slavery due diligence technology can do this for you, so contact us if you would like help.

Once you have identified the relevant risk indicators and collated the necessary data, you need to conduct the assessment itself. We typically build a risk assessment matrix with each risk indicator appropriately weighted and prioritised. The output of this assessment should be a list of impacts, categorised by risk. 

For further information on the risk assessment process, see our Essential Guide to Modern Slavery Risk Assessment.

Once you have identified the impacts, you will need to determine which ones to tackle first. We advise splitting the impacts into those associated with your operations and those associated with your supply chain. Impacts should be further subcategorised into actual and potential ones. 

Actual impacts are incidents where your business activity is resulting in individuals being coerced into forced or child labour. Actual impacts must be addressed as a priority, in particular those associated with your company’s own operations.

Where an actual impact has occurred and is associated with your company’s own operations, the company should take immediate action to stop the resulting child or forced labour. Your company should seek expert advice and engage with the relevant Government authorities.

In situations where the impact is in your supply chain, you should use what influence or leverage your company has with the supplier, to end the abuse.

It may also be appropriate to provide remediation to the affected workers. Seek advice from human rights experts if you are unsure about the appropriate mitigation measures to take.

Potential impacts result from policies or practices that create the opportunity for people to be coerced into forced or child labour. For example, the charging of recruitment fees to workers increases their exposure to debt slavery, a form of forced labour.

In cases of potential impact, you should adjust the policies or practices that have given rise to the risk. The changes should be integrated into your company’s operations. Where it is a supplier or another third party’s activities that are creating the potential impact, you may try to alter their policies and practices by explaining the issue to them, implementing a supplier code of conduct, and changing contractual terms to address the issue.

You should try to work with suppliers to address risks, as this is the best way to protect workers from forced and child labour. If the supplier refuses to engage and address the issue, you will have to stop buying from them.

The UNGPs encourage companies to make a policy commitment to respect human rights. We further recommend that companies maintain a forced and child labour risk management policy, which identifies likely risks and appropriate mitigations. We have found such policies to be invaluable when problems emerge.

Supply chains change continuously, with most companies taking on new vendors and expanding the range of goods they buy from existing ones throughout the year. You should assess new vendors and goods as they are onboarded. Companies should do everything they can to avoid initiating commercial relationships with suppliers that are not managing this risk.

Likewise, the risk landscape of your supply chain will change over time. Monitor your vendors and address new risks as they emerge. Monitoring can include adverse media monitoring.

By employing a proper adverse media monitoring process, you may avoid ethical and reputational damage. For example, in December 2020 we identified that garments and personal protective equipment made in a Chinese factory employing North Korean forced labour was likely being sold by five companies in the US and Canada. This was nearly a year before the CBC aired a TV report identifying one of the Canadian retailers in question.

Continuous monitoring is a critical part of forced and child labour due diligence but is time consuming. RightsDD technology monitor supplier human rights risk across various industries and suppliers.  Contact us if you would like further information. 

Engage with relevant stakeholders throughout the process. This will help you assess risk better and decide which risk mitigations to apply.

Include a comprehensive overview of your forced and child labour due diligence process in the report and questionnaire that you submit to the Canadian Government.

Consider whether any forced labour issues that you identify constitute a material issue. TMX and Chartered Professional Accountant’s (CPA) Primer for Environmental & Social Disclosure provides valuable guidance on ESG disclosures. The Canadian Securities Administrators (CSA) has yet to issue specific guidance on human rights issues, but their staff notices on ESG Related Investment Fund Disclosure (for issuers that are investment funds) and Climate Change-Related Risks (for all issuers) may prove useful.

Include an overview of your due diligence in any sustainability report that you publish, ideally include it in your annual report as well. This will help third parties, including investors, understand what you are doing to reduce the risk within your organization. ESG ratings agencies and NGO initiatives such as KnowTheChain reward transparency.

If your company is subject to the Australian and/or UK Modern Slavery Acts’ reporting requirements, you can expand the above outlined process to cover all relevant modern slavery risks (notably human trafficking). You can then report on it in your modern slavery statements. See our guide to reporting under the two acts for further information.

Don’t exaggerate your efforts or understate the risk profile of your operations or supply chain. Only claim that your operations and/or your supply chain are 'low risk' if your due diligence genuinely supports this conclusion. 

The US is the destination for three quarters of Canada’s exports. Many issuers will reexport goods to the US that have been imported from a third country or manufacture goods from imported materials. If this is the case for your company, you should know that importing goods into the US that have been made, grown or mined by forced labour, is strictly prohibited. This ban extends to goods containing materials that have been made, grown or mined by forced labour.

US customs detain billions of dollars of imports on forced labour grounds. They may either turn back or destroy goods and fine importers.

The 2022 Uyghur Forced Labor Prevention Act obliges US customs to assume that any good sourced or containing materials from the Chinese region of Xinjiang is the product of forced labour. Importers should not attempt to import such goods unless they are able to demonstrate that the goods are not tainted by forced labour.

For further information on the Uyghur Forced Labor Prevention Act, see our analysis.

All TSX and TSX Venture issuers need to determine whether they are required to report under the Act. Forced and child labour due diligence will protect workers in your operations and supply chain. It will also allow your company to comply with the Canadian Fighting Against Forced Labour and Child Labour in Supply Chains Act. In practice, it is also likely to help protect the company from legal, reputational and operational risk.

Using a structured approach and documenting key decisions will pay off in the long-term. Consider training your team on forced labour slavery, it will make clear your company’s zero-tolerance stance on the subject and build knowledge and confidence in your people.