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ESG, Hyundai, and Modern Slavery

This article is sponsored by Corporate Citizen Project.

While it may seem incomprehensible today, some 40 million people worldwide fall under a modern definition of slavery. Chattel slavery, where one person owns another person, is illegal worldwide, but modern slavery includes such practices as forced labor, debt bondage, human trafficking, and forced marriage. Nearly 62% (24.9 million) of people living in modern slavery are subjected to forced labor, and women make up 71% of all people experiencing some form of slavery.

Last month, Institutional Shareholders Services, one of the two largest shareholder proxy advisors in the world, introduced a Modern Slavery Scorecard designed to assess the risk of slavery to investors in more than 7,400 companies. According to the ISS announcement, the new scorecard “assesses 25 quantitative and qualitative factors developed by ISS ESG’s modern slavery and human rights specialists.” ISS declined to reveal any specifics, citing that these metrics were “proprietary”.

While the details of what the new scorecard covers are vague, Ropes & Gray, a law firm with practices in ESG, corporate social responsibility, and human rights compliance, has reviewed the scorecard and offered some insight into what ISS is doing.

According to the law firm, these 25 ISS ESG measures focus on operations and supply chains. The data that goes into a company’s score is a combination of “100 sector-specific rating criteria;” research on a company’s adherence to “international norms on human rights, labor standards, environmental protection and anti-corruption;” and ISS’s own ESG country rating.

An ISS ESG score has three components, according to Ropes & Gray:

  • The risk assessment component provides slavery risk based on company, industry, and location-specific risks;
  • The disclosure and performance component assigns the company a score from 0 to 100 based on its policies and procedures, including supply chain monitoring practices, living wages, working hours, and so on;
  • The controversies component identifies potential involvement in modern slavery controversies, sometimes by identifying broader labor rights controversies that can be indicative of modern slavery risk.

Ropes & Gray did not provide any substantiation over exactly how ISS would go about making its qualitative determinations.

ISS’s proprietary methodology seems to have failed in at least one instance. Hyundai Motors, which ISS awarded a respectable “C-” ESG rating, slightly above average for the industry, was recently revealed to be using child labor at a factory in Alabama.

Specifically, In an exclusive report published last Friday, Reuters reported that Hyundai used child labor at its majority-owned parts supplier in Alabama. Children as young as 12 have worked at SMART Alabama’s metal stamping plant even though state and federal law prohibit minors under 18 from working in metal stamping and pressing operations. The Montgomery, Alabama, Hyundai assembly plant uses the parts to build its Elantra, Sonata, and Sante Fe models, accounting for nearly 37% of the company’s U.S. sales.

In its supplier code of conduct published in June 2021, Hyundai says regarding child labor that its suppliers “should ban any and all forms of child labor in principle,” that they should not employ “young workers” in “high-risk jobs as defined by safety and health standards,” and that they should not “receive goods from businesses that are engaged in child labor.”

In a statement, SMART denied allegations that it “knowingly employed anyone who is ineligible for employment,” adding that the company depends on temporary employment agencies to fill jobs and expects those agencies to follow the law.

The recent revelations about Hyundai seem to illustrate the limitations of ISS’s Modern Slavery Scorecard, according to The Corporate Citizenship Project, a think-tank focused on a data-driven look at corporate governance issues.

“Once again, ISS ESG is very short on details regarding their Modern Slavery Scorecard. How do they make their determinations on industry or location-specific risks? How do they assign a 0 to 100 score on labor disclosures? How do they identify ‘labor rights controversies’ that could be indicative of modern slavery risk? We don’t know the answers to those questions. But, we do know that they appeared to fail to identify Hyundai as a potential culprit in modern slavery,” said Bryan Junus, Chief Analyst for The Corporate Citizenship Project.

“It is critical for companies to end all forced labor practices worldwide. However, we are skeptical that ISS’s Modern Slavery Scorecard will succeed in making a difference in that regard.”

This article is sponsored content and originally appeared at Corporate Citizen Project.