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FRC highlights UK modern slavery reporting requirements compliance failures

Out-Law News | 27 Apr 2022 | 1:03 pm | 2 min. read

Companies that fail to provide clear and substantive modern slavery statements risk reputational damage, according to one legal expert, after a study by Lancaster University, published by the UK Financial Reporting Council (FRC), found that 10% of companies do not publish one.

Tom Proverbs-Garbett, corporate governance expert at Pinsent Masons, said the FRC’s report (28 pages / 3.99MB PDF) was “alarming to read given the critical importance of stamping out modern slavery.” The research looked at a sample of 100 companies listed on the London Stock Exchange’s Main Market, concluding that one in ten of those companies did not provide a modern slavery statement - despite it being a legal requirement. The report also found a “disturbing disconnection” between modern slavery statements and information provided in end of year annual reports.

Section 54 of the 2015 Modern Slavery Act requires businesses with a turnover of £36 million or more to publish an annual statement, setting out the steps that they are taking to address the risk of slavery in their operations and supply chains.

Proverbs-Garbett said: “A common (and understandable) theme emerging from recent FRC publications is the need for corporate reporting to provide a consistent, linked narrative. If a particular part of the annual report or associated publication is said to be of importance to a company, one would expect to find that issue addressed across the strategic report, risk profile and in the financials. Yet this is often not the case, and it is no different here.”

When companies in the sample did publish modern slavery statements, the FRC said that only around a third of those were considered clear and easy to read. The overwhelming majority of companies did not provide a clear and comprehensive discussion of modern slavery concerns in the context of their organisational structure, operating and supply chains – or failed to do so in sufficient detail.

The majority of modern slavery statements reviewed were “fragmented, lacked a clear focus and narrative, and often contained boilerplate language,” according to the report, with disclosures about the effectiveness of steps to minimise modern slavery risks “particularly poor”. Only a quarter of companies disclosed the results of the steps they had taken, and just 12% confirmed they have made informed decisions based on those results.

Proverb-Garbett said: “Investors and observers will be looking closely at this, alongside the section 172 statement which requires directors to show how they have acted to promote the success of the company, and vague or insubstantial statements risk reputational consequences even if the organisation and its supply chain are otherwise scrupulous. The report also asks why – when the intention behind the legislation is to encourage companies to proactively monitor and remove such an abhorrent practice from supply chains – companies tend to publish backward looking statements, rather than following up targets year on year and linking activity in this area to overall strategy. This poses challenges for legislators.”

He added: “In 2020 the government indicated its intention to strengthen the current reporting requirements, so the FRC’s research provides timely advice that boards should carefully consider. Having the discussion now should mean they are more prepared for what will come and able to demonstrate a real commitment to the ‘social’ when reporting on ‘environmental, social and governance’ matters. Most importantly, it will show their determination to assist the collective effort of ensuring human rights are respected throughout the supply chain.”