PART ONE: Financial and Material Impacts of Child Labour
An Overview
Child labour is often included in the 'most critical forms of ESG violations'. This is due to a multitude of factors, as identified by HACE experts:
The extent of the issue. There are an estimated 160 million children in child labour, equating to 1 in every 10 children globally. This number is expected to increase. There are currently 160+ commodities proven by the US Department of Labor to be produced with child labour, many of which are in multiple countries. These include high-profile commodities such as cocoa, tobacco and ready-made garments, but also much less spoken about commodities such as bricks, salt and glass.
The shocking nature of the issue. When the media reports on a company's child labour scandal in the news, descriptions of the conditions that children are working in, for example, often elicit a much more emotive response from the general public than other ESG issues.
The invisibility of the issue. Companies have little visibility into their global supply chains, creating blind spots for risk of child labour. Therefore, their investors have no way to monitor real-time company performance on child labour. One illustration of this invisibility is that 70% of child labour occurs within the Agriculture sector e.g. working on farms producing agricultural crops. Other examples include children working in mines extracting minerals and therefore in the less visible, bottom tiers of a company's supply chain.
All of these factors combine to mean that investors have limited visibility into their portfolio’s performance on child labour, which is a significant and dangerous blind spot to have. These characteristics of child labour create a complex, pervasive and systemic risk to finances and material assets for both company and investor.
Along with increasing legislation, criminal penalties and fines associated with child labour in supply chains, there are other extensive impacts to a company associated with child labour such as:
Significant damage to brand image
Disruptions in operational performance
Legal ramifications
Decreased value in the eyes of the consumer
Reduced attractiveness as an investment or partner for financial institutions
Lack of ability to procure public contracts
Share price and subsequently, market capitalisation, are the most significant areas that may be impacted by a company's child labour scandal breaking in the news. Social sustainability is quickly becoming a significant factor in maintaining both business stability and business growth. A study by the Reputation Institute found that 'companies with poor social performance scores lost an average of $1.2 billion in market capitalization'.
A drop in share price may be related to a direct, company-specific scandal, a portfolio company's scandal affecting their investors' share price or even a sector-level news item or report detailing high-level child labour information.
A decrease in share price can lead to the following negative effects at a company-level:
Increased risk of takeover
A poor indicator of executive performance, which increases risk for C-Suite job loss
Decreased opportunities for financing and funding
Less financial compensation for C-Suite
From the case studies explored in this series, it will be clear that the mechanism of any impact of a child labour scandal on share price will vary on a case-by-case basis. As with any share price analysis, it is difficult to attribute causation to a specific reason or event. Therefore, case studies discussed here will simply state the facts of the case and show the parallel effects on share price, along with other, more definitive impacts on the companies involved.
PART TWO: Hyundai and Blackstone/PSSI scandal analysis expected 24th August.