Government institutions and businesses in Canada must soon comply with new legislation aimed at combatting forced labour and child labour or “modern slavery”. Bill S-211, an Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff (the Act), passed its third reading by the Senate on May 3, 2023. The Act is expected to receive royal assent and will then be in force on January 1, 2024.
Other jurisdictions, including the United Kingdom and Australia, have introduced similar legislation, which has sparked activism by shareholders globally. A similar trend may follow in Canada.
Scope of the Act
The Act will impose reporting obligations on both federal government institutions and business entities that:
- are listed on a stock exchange in Canada; or
- have a place of business in, do business in, or have assets in Canada and meet at least two of the following conditions for at least one of its two most recent financial years:
- have at least C$20 million in assets;
- have generated at least C$40 million in revenue; or
- employ an average of at least 250 employees.
Reporting and delivery obligations
Government institutions and entities to which the Act applies will be required to report annually to the Minister of Public Safety and Emergency Preparedness on various aspects of the government institution or entity’s operations as it relates to forced labour and child labour at any step of the production of goods that it produces, imports, purchases, or distributes, including, among other things, the government institution’s or entity’s:
- policies and due diligence processes in relation to forced and child labour;
- activities and supply chains that carry a risk of forced or child labour being used and the steps it has taken to assess and manage that risk;
- steps taken during the previous financial year to prevent and reduce the risk that forced labour or child labour is used in their supply chain; and
- process for assessing its effectiveness in ensuring that forced and child labour are not being used in its activities and supply chains.
The reports must be made publicly available and must be published on the websites of government institutions and business entities. In addition, a federally incorporated corporation will be required to deliver its report to each shareholder together with its annual financial statements. Failure to comply with these reporting obligations may result in criminal liability and a penalty of up to C$250,000.
Modern slavery legislation in the UK and Australia
In 2015, the UK introduced the Modern Slavery Act 2015 (the UK MSA) and in 2018, Australia passed the Modern Slavery Act 2018 (the Australian MSA). The UK MSA and Australian MSA require entities to publish a modern slavery report annually. Like the Canadian Act, the Australian MSA requires government institutions and business entities to publish a report and prescribes the information to be included. By contrast, the UK MSA does not apply to government institutions and provides guidance on what may be included in the report.
Financial penalties for non-compliance with reporting requirements are unique to the Canadian Act.
Impact of “modern slavery” legislation on shareholder activism abroad
In 2022, the UK Financial Reporting Council conducted a study entitled “Modern Slavery Reporting Practices in the UK”. The studyconcluded that many companies listed on the London Stock Exchange were providing “limited and often superficial commentary on this key business risk.” Yet, most companies in the sample (87%) followed the reporting requirement and included a link to their modern slavery statement on their website.
The government of Australia, in its scheduled review of the Australian MSA, also found that most companies’ statements were likely compliant (72% in the second year after coming into force).
Notwithstanding compliance with the legislation, shareholders have taken action in the UK and Australia on modern slavery issues. In addition to moral concerns, modern slavery issues present various risks for investors, borne out of the risks to companies, namely legal and compliance risk, project and operations risk, brand and reputational risk, and financial and credit risk.
In 2021, the Modern Slavery and Human Rights Policy and Evidence Centre released a report entitled “Data for investor action on modern slavery”. The report noted an uptick in investor-led initiatives in the UK and the Asia-Pacific region (including Australia) targeting modern slavery in supply chains. For example, in the UK, an investor coalition led by Rathbones named “Votes Against Slavery” (VAS) was set up in response to a perceived lack of compliance with reporting requirements under the UK MSA. This initiative encourages companies to disclose evidence of how they are identifying modern slavery by, in some instances, threatening to abstain from voting on the approval of the annual report and accounts of non-compliant companies at their annual general meeting. VAS is backed by more than 132 investors across Europe with £8.17 trillion in assets under management.
In Australia, investment managers such as BlackRock have taken action, for example, by declining to re-elect directors who failed to effectively address allegations of worker exploitation in a company’s supply chain. Moreover, the first shareholder resolution on modern slavery was led by the Australasian Centre for Corporate Responsibility in 2019. Further, Investors Against Slavery and Trafficking in the Asia-Pacific, a coalition comprising 41 investors with AU$8.2 trillion in assets under management urged the 100 largest companies on the Australian Stock Exchange to take the risks of modern slavery and human trafficking more seriously.
Investors may follow suit in Canada
Canada’s mandatory reporting requirement together with the imposition of potentially severe financial penalties under the Canadian Act suggest that Canada may experience less shareholder activism than the UK and Australia in response to modern slavery issues.
Nevertheless, compliance with the Canadian reporting obligations will enhance the transparency of supply chains and has the potential to highlight greater legal and reputational risks for companies. This information may spark shareholder activism in Canada with the aim of encouraging boards and management to take further action to address and avoid modern slavery.
What to keep in mind
Exposure to human rights-related risks will vary by company, industry, and geographic location. Given the broad reach of the Act and the level of information required to be reported, entities that are captured by the Act should:
- review their operations, governance procedures and codes of conduct to determine whether the issues of child labour and forced labour are adequately addressed and bring them into compliance with the Act;
- begin gathering information that will be needed for the annual report under the Act; and
- prepare for the possibility of shareholder activism in response to information contained in the publicly available reports delivered under the Act.
The author would like to thank Brittany DiTrani and Brian Wood for their significant contribution to this article.