PART TWO: Financial and Material Impacts of Child Labour

Hyundai and PSSI/ Blackstone scandal analysis

There have been many prominent child labour scandals in recent months and years. This blog post will explore two of them, similar in that they are both based in the United States.

Our first case study broke in the media in July 2022, when a Reuters’ investigation into child labour in Hyundai Motor Group's supply chain in the US reported ongoing developments that would continue for 8 months and escalate to an unforeseeable extent. The initial story reported children as young as 12 working in a metal stamping plant, owned by SMART Alabama LLC, which is a unit majority-owned by Hyundai and supplies parts used by the automaker.

Several of the children employed were not attending school, which means their work constitutes child labour, according to the International Labour Organisation's definition. In addition to this violation, the work that the children were undertaking is classified as hazardous, by both Alabama and federal law, through their proximity to heavy and dangerous machinery, while also violating ILO Convention 182. Many of the children and their families were undocumented, migrant workers, putting them in a further vulnerable position where they may not have felt comfortable reaching out to authorities. 

In October 2022, SL Alabama, another supplier of Hyundai, was fined $30,000 for child labour violations, along with further fines to JK USA, a temporary labour recruitment firm that placed 5 minors between 13-16 years old at the plant. The story develops into systemic failures within Hyundai's supply chain to identify, monitor or effectively remediate child labour.

Shortly after this, SOC Investment Group, which works with funds that own a collective 27,000 shares in Hyundai and have a total of $250 billion AUM, called to the Hyundai chairman for action on the child labour violations found. The Executive Director of the SOC Investment Group said they were putting similar pressure on tech giants such as Apple and Tesla, and that "investors like us need to step out and say, ‘the value of the fines is not capturing your risk even remotely. Your product might be tinged for a long time.’” 

Hyundai Motor Group headquarters in Seoul. Source: Chu - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=12875176

Our second case study began in November 2022, when another child labour scandal broke in the mainstream media. A company called Packers Sanitation Services Ltd (PSSI) was found to be using child labour to clean abattoirs in various states in the US. The US Department of Labor initially found 31 employed children, but within months over 100 children had been identified between the ages of 13-17.

This particular case of child labour was illegal on multiple levels and broke various International Labour Organisation conventions. Children were working overnight, which is classed as hazardous work regardless of work tasks as per ILO Convention 182. However, they were carrying out tasks that also constituted hazardous work, such as caustic chemical use and operating or cleaning of heavy machinery. Several children reported caustic chemical burns. Pictures released by the US Department of Labor show workers clearly of a young age wearing inappropriate Personal Protective Equipment for their size. The work also affected children's school attendance, as child labourers were falling asleep in class and some children dropped out of school, constituting illegal child labour as per the ILO definition of child labour.

PSSI was acquired by Blackstone in 2018 from Leonard Green & Partners. Blackstone received a $135 million dividend in 2019 and a $297 million dividend in 2020 from PSSI. The 2022 child labour scandal came after news stories broke earlier that year on high worker fatality and amputation incidences within the company.

There were allegations towards PSSI of document tampering and witness interference and intimidation throughout the investigation. After further examination of PSSI by the Department of Homeland Security after additional allegations of child trafficking, PSSI eventually paid a settlement of $1.5 million, which is broken down into a $15,138 fine for each child labourer employed.

Blackstone's asset owners, the New York State Common Retirement Fund, questioned Blackstone on why a company in their portfolio was found to use child labour, demanding information on how the asset manager will rectify the situation. The CEO of PSSI was replaced and they released a $10 million dollar fund to tackle the systemic issue.

New York state Comptroller Thomas DiNapoli stated "I would appreciate hearing from you regarding Blackstone and PSSI's plan to eliminate any improper dependence on child labor, as well as its plan to implement strict measures that would prevent this from occurring in the future," in his March 8 letter to Stephen A. Schwarzman, Blackstone's CEO; Jonathan Gray, President and COO; and Joseph Baratta, Senior MD and Global Head of Private Equity.

"We believe both are vital to avoid any further financial and reputational harm to the company which could result from this situation," said the letter.

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 THREE: Cocoa industry and Big Tech scandal analysis expected 14th September.