Managing child labour risk in investment portfolios

In today’s global market, asset managers and stewardship professionals face many challenges, not least among them is the risk of child labour within corporate supply chains. This issue remains both sensitive and notoriously elusive, often buried deep within the complex webs of international production. Moreover, the exacerbating effects of climate change heighten this risk, transforming child labour into a critical environmental, social, and governance (ESG) concern requiring immediate and strategic attention.

The hidden challenge of child labour

Child labour persists as a deeply entrenched problem, with at least 160 million children—approximately one in ten globally—actively engaged in the workforce. The International Labour Organisation (ILO) identifies climate change as a “threat multiplier” that aggravates this issue. Environmental catastrophes such as droughts, floods, and crop failures force more families into poverty, compelling them to make the dire choice of pulling their children from school to work, particularly in agricultural sectors where 70% of child labour occurs.

For instance, research shows increased child labour in agriculture in villages across Cambodia and Tanzania following natural disasters. This trend is not confined to agriculture alone; in urban areas of Uganda and Pakistan, rising food prices have similarly increased the likelihood of child labour among families not typically engaged in farming.

Child labour in developed nations

It is a misconception that child labour is solely a problem in less economically developed countries. Developed nations are also grappling with these issues. Recent child labour scandals involving major US companies like Tyson Foods Inc. and Perdue Farms Inc., as well as a meatpacking company owned by Blackstone Inc., underline that even regions with stringent production standards are not immune. Shockingly, the number of children illegally employed in the US has surged by 88% since 2019, indicating significant lapses in compliance and monitoring.

The role of investor engagement

Engagement is an essential tool that investors can use to confront the complexities of child labour in their portfolios. By actively communicating with companies, investors can influence corporate practices to address systemic issues contributing to child labour. Experts highlight that underlying much of the child labour is systemic poverty. Thus, investors must engage with companies on how they and their suppliers support local communities. Are they ensuring fair wages, addressing gender pay gaps, maintaining safe working conditions, and investing in critical services like children’s education and healthcare? Establishing fair pay and safe working standards reduces the need for children to work alongside their parents, addressing the root causes of child labour.

Legal and regulatory pressures

In response to these growing concerns, regulatory bodies are stepping up. The European Union, for example, has introduced the Corporate Sustainability Due Diligence Directive, which holds companies legally accountable for addressing environmental and human rights violations, including child labour, in their supply chains. This legislative move underscores the increasing pressure on companies and investors to ensure ethical practices throughout their operational and investment decisions.

The child labour index

An AI-driven tool, the Child Labour Index, has been developed to combat the opacity and complexity of monitoring child labour risks. This tool evaluates companies across three critical dimensions:
1. Disclosure levels: How transparently companies report their practices and risks related to child labour.
2. Public perception: How the public views the company’s efforts to combat child labour.
3. Commodity-level exposure: The degree of risk exposure related to child labour in the company’s supply chain, particularly in high-risk commodities.

As the challenge of child labour continues to evolve, particularly with the impacts of climate change, asset managers and stewardship professionals must remain vigilant. Utilising advanced tools like the Child Labour Index, engagement and staying abreast of regulatory changes are essential steps in mitigating risks and promoting sustainable investment practices. By addressing these issues proactively, the financial community can contribute significantly to the global fight against child labour and uphold the integrity of their investment portfolios.

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