October 7 is World Cotton Day–an annual event created in 2019 after four cotton-producing countries (Benin, Burkina Faso, Chad and Mali) applied to the UN for special recognition of the crop. Cotton has much to celebrate–it is the primary source of livelihoods and revenue for up to a billion people. That said, the positive benefits do not extend to everyone in the value chain, as significant human rights challenges have persisted in many countries. Change, however, may be upon us. Cotton could be set to face major dislocations driven by responses to human rights violations, with significant implications for investors.
Human rights abuse on an industrial scale
Forced labor and/or child labor is believed to occur in approximately 25 percent of the 75 cotton-producing countries.[1] One example of the pervasiveness of these practices is in China’s Xinjiang region, where systematic human rights violations are reportedly taking place against ethnic Uyghurs and other Muslim minorities on a mass scale. Forced labor in the cotton supply chain has been highlighted as a part of this program.[2] In September 2020, the US House of Representatives voted overwhelmingly in favor of the Uyghur Forced Labor Act, which seeks to prohibit goods imported into the US from Xinjiang due to modern slavery concerns. If the Act passes into law, cotton is one of the industries at risk of being significantly impacted. Over 80 percent of China’s cotton is grown in Xinjiang,[3] and it is estimated that one in five cotton products globally is from this region.[4]
Accordingly, stakeholders are turning their attention to cotton in the hope that the economic impact of severing ties to Xinjiang will end China’s program of forced labor. In August 2020, the Investor Alliance for Human Rights, along with human rights groups, petitioned the US Customs and Border Protection (CBP) to impose a ban on cotton-made goods linked to Xinjiang. Since 1930, the Tariff Act has made it illegal to import into the US goods produced wholly or in part using forced labor. However, due to a loophole, the Act was seldom used, but following an amendment in 2016, the CBP has become considerably more active in enforcement.
Exiting Xinjiang
The group of petitioners is seeking a blanket ban on both finished items assembled by companies in Xinjiang and other finished goods, produced inside Xinjiang or not, that contain inputs (e.g. yarn or fabric) linked to the region. The CBP does not generally target whole industries; however, the agency prohibited all cotton products made in Turkmenistan in 2018, due to modern slavery practices. Banning Xinjiang’s cotton products could be more far-reaching than Turkmenistan’s: China is often ranked as the number one global producer of cotton while Turkmenistan is a much smaller player (estimated at 11th globally).[5] If the CBP agrees to a similar enforcement order on Xinjiang’s cotton to the one it issued on imports from Turkmenistan, businesses with supply chains connected to Xinjiang could face severe disruption. Companies will need to ensure robust due diligence is carried out on their cotton supply chains to prevent unwittingly sourcing products linked to the region.
Breaching US law could prove expensive. In another case, the CBP acted on allegations of forced prison labor at PureCircle, a stevia-producing company, which had a material effect on the company’s sales and stock price. Furthermore, in August 2020, PureCircle consented to pay a settlement fine of USD$ 575,000 to the CBP, despite vigorously denying the allegations.[6]
Beyond reputational risks
Recent and emerging developments taking place at the CBP and elsewhere suggest that the impacts of being associated with modern slavery are extending beyond reputational risk. Regulatory and operational costs are likely to become more significant. As a result, it will be critical for companies to ensure their management systems designed to prevent human rights violations are up to the task. In September, the Committee on Legal Affairs of the European Parliament published its recommendations on the draft legislative proposal on corporate human rights due diligence, setting out specific standards on responsible business conduct concerning corporate human rights and environmental due diligence. The European Commission’s regulatory proposal, which the recommendations will feed into, is expected to be tabled next year.
Sustainalytics recently launched a new Modern Slavery Thematic Engagement in response to the changing risk landscape. One of the intended outcomes is to ensure companies’ risk management strategies are fit-for-purpose, and that disclosure is improved to allow investors to understand better how businesses are taking effective action. Specific recommendations to companies include focusing on purchasing practices and living wages. Modern slavery is a problem that extends far beyond individual companies and therefore is also essential to address root causes and promote collaboration with the view to effectively and holistically alleviate structural issues.
Sustainalytics is hosting a panel discussion on October 15, 2020 at 3:00 p.m. CET/9:00 a.m. EDT on modern slavery, and the role investors and companies can play in addressing modern slavery – register here. For more information regarding Sustainalytics’ Thematic Engagement and its broader Engagement Services, please contact us.
Sources:
[1] Verite, “Countries Where Cotton is Reportedly Produced with Forced Labor and/or Child Labor”, accessed (28.10.20) at https://www.verite.org/project/cotton-3/
[2] US Congress, “H.R.6210 – Uyghur Forced Labor Prevention Act”, accessed (28.10.20) at https://www.congress.gov/bill/116th-congress/house-bill/6210/text?r=1&s=1
[3] Investor Alliance for Human Rights (31.08.20), “Re: Petition under 19 U.S.C. §1307 concerning the Xinjiang Uyghur Autonomous Region of China”, p.8, accessed (28.10.20) at https://drive.google.com/file/d/193Gyu5UhSxSqYUaX5uozvYesrkaIWv-F/view
[4] The Guardian (23.07.20), “Virtually entire’ fashion industry complicit in Uighur forced labour, say rights groups”, accessed (29.10.20) at https://www.theguardian.com/global-development/2020/jul/23/virtually-entire-fashion-industry-complicit-in-uighur-forced-labour-say-rights-groups-china
[5] Anti-Slavery International (03.19), “Turkmen Cotton and the Risk of of forced labour in global supply chains”, accessed (29.10.20) https://www.antislavery.org/wp-content/uploads/2019/04/Turkmenistan-Turkey-report.pdf
[6] PureCircle (30.01.17), “PureCircle shipments cleared, reaffirming company’s proper labor policies”, accessed (30.10.20) https://purecircle.com/news/us-customs-clears-purecircle-of-labor-allegations/
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