Investors aiming to tackle the risks of modern slavery should consider supporting the incorporation of performance-based incentives into financial instruments, according to IFM Investors.
In a new paper, the pension fund-owned asset manager highlights that modern slavery remains deeply embedded in the global economy and by extension, in the portfolios of institutional investors across the world.
Despite increasing awareness and evolving regulatory frameworks, modern slavery risks often remain hidden within opaque supply chains. Unlike environmental risks, which are supported by standardised metrics, modern slavery remains difficult to detect, therefore posing difficulties for investors attempting to conduct due diligence.
However, IFM said that, across all asset classes, investors can enhance their influence by requesting transparency and access to detailed information where feasible, and use that information to structure investment agreements that incorporate specific clauses to mitigate modern slavery risks.
“Incorporating performance-based incentives into debt instruments can reward companies for achieving specific goals related to risk mitigation and ethical practices,” IFM said.
Maria Nazarova-Doyle, global head of sustainable investment at IFM Investors, told IPE that social factors were more complex to capture, but that “precedents are growing”.
While institutional investors are paying closer attention to modern slavery, she added, “they still face major hurdles in addressing it”.
“Detection is difficult, tools are fragmented, disclosure is inconsistent, and the issue often hides deep in supply chains where oversight is weakest.
“Any meaningful progress will require collaboration between asset owners, asset managers, companies, regulators, civil society, governments, and potentially affected workers and communities to drive greater transparency, consistent data, and collaborative solutions,” she added.
Addressing these risks requires systemic and coordinated action across the investment chain, requiring investors to move beyond passive reliance on disclosures and instead embed modern slavery considerations across the entire investment lifecycle, IFM noted.
IFM’s report stresses that tackling modern slavery is not only a moral imperative but is a material investment issue that impacts portfolio resilience and long-term returns.
The report had input from investors including NEST in the UK and Aware Super in Australia.
Tom Sanders, senior ESG analyst at NEST, said: “Respect for human rights and eradicating modern slavery in business are strongly associated with value chain resilience and a stable business operating environment. As investors, we recognise the operational, financial, legal and reputational risks companies face when they fail to manage modern slavery and human rights risks.”
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