BEFORE WE START, WHAT KIND OF INVESTOR ARE YOU?

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    23 October 2020

    Our approach to investment is centred on fundamental analysis of a company’s business and the industry in which it operates. This includes an assessment of all opportunities and risks that could impact a company’s profitability, including ESG factors, as they have the potential to materially impact a company’s earnings and valuation.

    Shining a spotlight on the challenge

    In respect to modern slavery, our approach has been to identify companies at risk and thereafter engage with management and boards to understand their approach to managing this risk. Given that neither we nor our investee companies have insights or capacity to examine the entire gambit of modern slavery, including forced marriage or sexual exploitation elements, we have limited our scope to focus on labour rights and forced labour for this analysis.

    Informed by research provided by bodies such as the World Economic Forum and Alliance 8.7, we have identified that Australian companies with operations in the following areas have heightened risk of exposure to modern slavery:

    • supply chains into Asia
    • mining operations in Asia and Africa.

    Given its extensive supply chain into Asia, we consider that Ansell has above-average risk (within our investment universe) for exposure to modern slavery. The company manufactures in Vietnam, Malaysia, Sri Lanka and Thailand and also relies on third-party supply chains with even broader manufacturing footprints. This risk assessment was also confirmed by the 2018 allegations made against Top Glove, a competitor and supplier to Ansell, which are discussed below.

    We view the company’s indirect exposure to natural rubber latex as adding to its risk profile, as it is a low tech, rural, cottage industry and thereby more difficult to supervise. We note that the UN’s International Labour Organization (ILO) has previously noted widespread labour abuses in the plantation sector1.

    Ansell has above average risk, but is actively managing it

    Having been subject to the modern slavery requirements of the UK and California since 2015 and 2010 respectively, Ansell is more advanced than many other Australian corporates in assessing, managing and reporting on modern slavery risks. The company manages these risks through the combination of internal policies that inform expectations of supplier behaviours and the assessment of these suppliers’ activities. These include:

    1. Corporate Responsibility Policy: addresses Ansell’s commitment to acting ethically and having regard to the quality of life of employees and society at large. This recognises the broader impacts that Ansell can have on the wellbeing of its employees, communities and the environment.
    2. Policy and Standard on Human Rights: sets out that Ansell will respect human rights in its employment policies, business operations and its relationship with stakeholders, including suppliers.
    3. Third-Party Social Accountability Policy: sets out Ansell’s commitment to ensuring Ansell and its suppliers operate ethically and with respect for the environment. The policy covers expectations regarding child labour, involuntary labour, workplace health and safety, and acceptable compensation. Further, the policy sets out that suppliers will provide Ansell access to monitor compliance with its policy, including on-site inspections and manufacturing facilities, and employer-provided housing. In addition, all direct suppliers may be required to undergo regular compliance self-assessment questionnaires and/or compliance audits conducted by Ansell auditors or accredited third party auditors.

    Ansell also assesses its suppliers’ compliance with its policies via a self-assessment audit process. Note that Ansell’s efforts in managing these risks have been assisted in recent years by an increase in audit activities mandated by the Malaysian Government.

    Questioning management and the board

    We have engaged with Ansell management and board representatives to discuss these issues and risks on a number of occasions over the past 12 – 18 months. In addition to discussions regarding the policies and practices outlined above, we sought to understand the level of executive commitment and involvement. The depth of the management commentary left us confident that Ansell is acutely aware of the potential risks inherent in its business directly and through the actions of third-party suppliers.

    A couple of examples offered by management illuminated their dedication to managing this issue. Firstly, the CEO spoke of his visit to personally examine foreign worker dormitories. Secondly, the company has provided training on modern slavery at a manufacturing plant level, as well as training for staff with responsibility for management of its supply chains.

    Overall, following these discussions, in combination with its internal policies and external audit actions, we are confident that Ansell is managing this issue in a thorough and competent manner.

    Insights from Top Glove’s scandal

    Our discussions with Ansell also covered the issues that arose at Top Glove. As one might expect, managing labour (and in particular, migrant labour) is a complex issue. Unfortunately, while a company may have genuinely good intentions, competing priorities can result in adverse outcomes.

    The allegations made against Top Glove, via an expose in the Guardian2, were significant and include subjecting thousands of migrant workers to practices amounting to modern slavery, which included:

    • Forced labour including forced overtime. Migrant workers were forced to work 16 hours per day, with only one day off per month.
    • Debt bondage and withheld wages. This included claims of non-payment as well as reducing pay where workers failed to meet production targets. In addition, in some instances new workers were required to pay a recruitment fee, putting them in debt to the company at the commencement of their employment.
    • Unsafe factory conditions and over-crowded living quarters.
    • Passport confiscation.

    Given Ansell is a customer of Top Glove, we were keen to understand what action Ansell had taken in regard to addressing these issues. Ansell’s cause was assisted by Malaysian Government intervention, which mandated external auditing of glove manufacturers to eradicate unethical practices. In addition, Ansell’s size and importance to Top Glove meant it was able to press Top Glove to conduct the audits at plants supplying Ansell ahead of the rest of their facilities.

    During our discussions, Ansell offered some insight into the complexity Top Glove faces, as it faces similar dilemmas within its own manufacturing operations. These include:

    • Calibrating the right number of working hours. In the past, Ansell has lost staff because they wouldn’t offer enough hours to staff whilst competing manufacturers offered more. This reflects the desire of migrant workers to earn as much as possible to support family in their home country.
      Enforcement of maximum working hours for migrant labour has followed. This resulted in an effective reduction in labour supply and consequently an increase in hourly wages. While this would in isolation be deemed a success and a positive outcome for the migrant workers, it has actually had an entirely opposite outcome. Due to the spike in labour rates, automation is now a more viable alternative and as such investment in labour saving technology is being made. Suddenly these migrant workers may be out of a job.
    • Passport confiscation is not as straightforward as it seems. According to Ansell, the Malaysian Government prefers that foreign workers’ passports are held by their employer. Equally, workers in some instances prefer their passports are held by their employers, as they are otherwise expected to present these documents on demand. There have been some claims of police demanding bribes to return documents that were presented on demand.

    Understanding the complexity of modern slavery

    Top Glove is an interesting case study from the perspective that it highlights a number of realities relating to modern slavery and which have direct application to Ansell. As one would expect, governments are taking a greater interest in ensuring that they are not indirectly and unknowingly supporting unethical practices. In addition to raising these concerns with Malaysian authorities, the UK government actively notified UK supply chain operators of the unethical work practices. This led the UK’s National Health Service (NHS) to review its £35m annual purchase program with Top Glove.

    As well as the obvious moral imperative to ensure fair treatment of workers, this example highlights the financial imperative to manage these ESG risks. Failure to do so can have a detrimental impact on a company’s profitability as well as its reputation and social licence to operate.

    Above all else, the discussions with the Ansell board and management illustrated the complexity of the situation. While combating modern slavery may leave a company at a competitive disadvantage in regard to labour costs and access to labour, a failure to address unethical practices puts a company’s social license to operate in jeopardy. Perhaps one of the most unfortunate outcomes is that taking action on these practices, while well intentioned, can result in higher labour rates and accelerate the adoption of automation.

    As set out above, our engagement gave us a great deal of comfort that the board and management are actively managing the modern slavery risks inherent in Ansell’s business. As such, there has been no change to our valuation of the company. We will continue to engage and regularly assess whether this or other ESG risks are significant enough to necessitate an adjustment to our valuation.

    Footnote

    1. Enhancing standard employment contracts for migrant workers in the plantation and domestic work sectors in Malaysia, International Labour Organization, July 2020

    2. NHS rubber gloves made in Lalaysian factories linked with forced labour, The Guardian, December 2018

    Important Information

    This material was prepared and is issued by Nikko AM Limited ABN 99 003 376 252 AFSL No: 237563 (Nikko AM Australia). Nikko AM Australia is part of the Nikko AM Group. The information contained in this material is of a general nature only and does not constitute personal advice, nor does it constitute an offer of any financial product. It does not take into account the objectives, financial situation or needs of any individual. For this reason, you should, before acting on this material, consider the appropriateness of the material, having regard to your objectives, financial situation and needs. The information in this material has been prepared from what is considered to be reliable information, but the accuracy and integrity of the information is not guaranteed. Figures, charts, opinions and other data, including statistics, in this material are current as at the date of publication, unless stated otherwise. The graphs and figures contained in this material include either past or backdated data, and make no promise of future investment returns. Past performance is not an indicator of future performance. Any economic or market forecasts are not guaranteed. Any references to particular securities or sectors are for illustrative purposes only and are as at the date of publication of this material. This is not a recommendation in relation to any named securities or sectors and no warranty or guarantee is provided.

    23 October 2020

    Tim Johnston

    Deputy Head of Australian Equities
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