ESG’s spotlight on local labour issues

KUCHING (March 13): As Corporate Malaysia takes itself to task with environmental, social and governance (ESG) compliance, one section that comes under heightened scrutiny is labour, more specifically the welfare of labour workers both domestic and foreign.

Malaysia’s labour market has long been plagued by claims of unfairness by companies who seek to minimise costs while maximise profits, undercutting workers’ wages or right to decent living whilst under their employment.

Of late, pressure was piled on from the US Customs and Border Protection (US CBP) and their withhold release orders (WROs) on several Malaysian companies over allegations of forced labour.

The US CBP takes a very strict stance on the matter. Federal statute 19 USC 1307 prohibits the importation of merchandise mined, manufactured, or produced, wholly or in part, by convict labour, forced labour, and/or indentured labour, including forced or indentured child labour.

The issuance of a WRO will require the detention at all US ports of entry. CBP provides importers of detained shipments an opportunity to export their shipments or demonstrate that the merchandise was not produced with forced labour.

Of particular interest are rubber glovemakers, the demand of which surged greatly especially in the midst of this pandemic. In spite of this, the hightened demand was no deterrent to the US CBP’s investigation towards unfair labour practices.

On March 29, 2021, the US CBP directed personnel at all US ports of entry to begin seizing disposable gloves produced in Malaysia by Top Glove Corporation Bhd (Top Glove).

The CBP Office of Trade, in consultation with the Secretary of the Treasury, published a forced labour finding against disposable gloves produced in Malaysia by Top Glove in the Customs Bulletin and in the Federal Register.

The finding communicates that CBP has sufficient information to believe that Top Glove uses forced labour in the production of disposable gloves. Merchandise covered by the forced labour finding is subject to seizure upon arrival at a US port of entry.

“This forced labour finding is the result of a months-long CBP investigation aimed at preventing goods made by modern slavery from entering US commerce,” said Troy Miller, Senior Official Performing the Duties of the CBP Commissioner in a statement.

“CBP will not tolerate foreign companies’ exploitation of vulnerable workers to sell cheap, unethically-made goods to American consumers.”

The finding expands upon a WRO that CBP issued in July 2020. These findings were later modified on September 9, 2021 to permit the importation of disposable gloves made at Top Glove facilities in Malaysia immediately.

“CBP modified a finding after thoroughly reviewing evidence that Top Glove has addressed all indicators of forced labor identified at its Malaysian facilities,” Miller said in its September 9 follow up.

“Top Glove’s actions in response to the Withhold Release Order, which include issuing more than US$30 million in remediation payments to workers and improving labor and living conditions at the company’s facilities, suggest that CBP’s enforcement efforts provide a strong economic incentive for entities to eliminate forced labor from their supply chains.”

After Top Glove, the US CBP issued WROs on other Malaysia glovemakers, specifically Supermax Corporation Bhd and its subsidiaries on October 20, 2021, a group of companies collectively known as Smart Glove on November 4, 2021, and on Brightway Group on December 20, 2021, all on the basis of forced labour.

 

Palm oil sector another sector under pressure

RUBBER gloves is not the only labour-intensive sector under target – palm oil, of which Malaysia is the world’s second largest exporter of, is also at stake.

Back in September 30, 2020, the US CBP detained palm oil and palm oil products made by FGV Holdings Bhd (FGV), its subsidiaries and joint ventures.

CBP’s Office of Trade directed the issuance of a WRO against palm oil and palm oil products made by FGV based on information that reasonably indicates the use of forced labor.

The order is the result of a year-long investigation that revealed forced labor indicators including abuse of vulnerability, deception, restriction of movement, isolation, physical and sexual violence, intimidation and threats, retention of identity documents, withholding of wages, debt bondage, abusive working and living conditions, and excessive overtime.

The investigation also raised concerns that forced child labour is potentially being used in FGV’s palm oil production process.

“The use of forced labor in the production of such a ubiquitous product allows companies to profit from the abuse of vulnerable workers,” said Brenda Smith, executive assistant commissioner of CBP’s Office of Trade.
“These companies are creating unfair competition for legitimately sourced goods and exposing the public to products that fail to meet ethical standards.”

Soon after, Sime Darby Plantation Bhd (Sime Darby Plant) and its affiliates were slapped with US CBP’s WRO effective December 30, 2020.

The WRO issuance against Sime Darby Plant’s palm oil is based on information that reasonably indicates the presence of all 11 of the International Labour Organization’s forced labor indicators in Sime Darby Plantation’s production process.

And in its latest update on March 8, 2022, the US CBP has seized four shipments of Malaysian palm oil in Baltimore since February 11 due to information indicating that the commodity was manufactured by forced labour.

In a statement earlier this week, the agency said the palm oil shipments were valued at nearly US$2.5 million or about RM10.5 million.

The shipment, consisting of 108 super packs of palmitic acid, was seized on March 1. This was on the back of three earlier shipments of a combined 270 super packs of palmitic acid confiscated on February 11.
The US CBP, however, did not identify the Malaysian company which produced the palmitic acid in its statement.

On January 28, the US CBP issued a notice of Finding that certain palm oil and derivative products were made wholly or in part with palm oil produced by Sime Darby Plantation Bhd, its subsidiaries, and joint ventures with the use of convict, or forced or indentured labour.

The US CBP’s Acting Area Port Director in Baltimore, Marc Calixte said there is no place for forced labour in today’s world, and the agency stands firm against foreign companies that exploit vulnerable workers.

“The US CBP will continue to ensure that goods made with forced labour do not enter our nation’s commerce and we will help to root out this inhumane practice from the US supply chain,” he said.
The US CBP said its officers initially detained the first three shipments on Nov 30, 2021 and the latest shipment on Dec 3, 2021.

The agency also said that it provides importers of detained shipments an opportunity to export their shipments or demonstrate that the merchandise was not produced with forced labour.

The importer did not respond to the US CBP within the three-month period for taking one of these actions, and the agency therefore seized all four shipments.

A drag down in EMS manufacturing

BEYOND the US CBP, pressure also comes from workers themselves and migrant worker rights specialists like Andy Hall. One such example is the AIA IMS Bhd (ATA IMS) case, whereby a group of migrant workers in a Malaysian factory launched legal claims against UK home appliance maker Dyson in relation to allegations of extensive violations of their legal rights.

These includes forced labour, physical and psychological injuries, false imprisonment, cruel and degrading treatment and exposure to extremely hazardous working conditions.

The claimants all worked at a factory owned by Johor-based ATA Industrial (M) Sdn Bhd, a wholly owned subsidiary of ATA IMS where many Dyson products were made.

Among issues raised by these workers include allegations of being paid below minimum wage, having their passports retained for the duration of their employment, living in unsanitary and overcrowded living conditions, forced to work overtime with shifts as long as 18 hours, among others.

ATA IMS in May denied allegations of forced labour at its factories.

Meanwhile, in a statement to Reuters, Dyson said it has terminated its relationship with ATA IMS following an audit of the Malaysian company’s labour practices and allegations by a whistleblower.

The termination is also a significant blow for Malaysia, a key electronics manufacturing hub that has faced scrutiny this year over exploitation of foreigners who make up a large share of its factory workforce.

Dyson, privately owned by British billionaire James Dyson, said it received the results of an audit of working conditions at ATA in early October.

It said it had learned in September about allegations from a whistleblower at an ATA factory and had commissioned a law firm to investigate those claims.

The activist, Andy Hall, shared a letter the US CBP had sent him informing him it had agreed to investigate an ATA unit after he flagged complaints received from workers.

AmInvestment Bank Bhd (AmInvestment Bank) in its March 1 report noted that ATA IMS’ results for its nine months of financial year 2022 (9MFY22) came in above the firm and consensus estimates.

However, it maintained its loss forecast for FY22 as labour shortages remain an ongoing concern to the group.

Recall that the labour shortages dragged ATA’s 2QFY22 into losses.
“As for FY23 and FY24, our loss forecasts stem from concerns regarding the group’s ability to secure fresh orders from new customers,” it deliberated in its report.

“We conservatively assume that the group’s growth over the next 2 years will only come from existing/remaining customers, which does not provide sufficient economies of scale to remain profitable.”

ATA’s 9MFY22 revenue fell 33 per cent year on year primarily due to manpower shortages, which led to underutilisation of factory capacity. This resulted in the group’s 9MFY21 core profit plunging 88 per cent y-o-y to RM13 million.

Following the termination of contracts from its largest customer (which accounted for 80 per cent of revenue), the group has undertaken drastic downsizing measures to reduce cost.

AmInvestment Bank thus remained cautious on the outlook for ATA IMS despite efforts to mitigate the damage to its reputation and restore investors/stakeholders’ confidence.

“We view that any concrete progress/results from the proposed solutions can only materialise over the medium term period with no guarantee of a positive outcome.

“As such, we opine that the company’s short-term operational risks remain high (largely stemming from the ongoing manpower shortage crisis, forced labour allegations, potential asset overhang, diseconomies of scales and dented reputation), which intensify the challenges in securing new customers and orders.”

Another EMS player embroiled in labour issues is VS Industry Bhd (VSI). This came to light during a recent conference call organized by a foreign brokerage firm for its clients with migrant worker activist, Andy Hall, whereby reference was made to VSI with regards to foreign labour practices.

Following a discussion between both parties, Hall a joint statement with VSI to Bursa on December 6 commented, “I continue to mention in my capacity as an independent guest speaker at conferences and investor briefings that there is a need to conduct further due diligence with regards to the situation of migrant workers at suppliers of many multinational corporations in Malaysia.

“My areas of concern include the legality of the use of outsourced migrant workers through third party agents, the risks inherent in the government’s recalibration scheme as well as working hours, living wage and social dialogue issues, amongst others.

“It is also important to ensure migrant workers’ livelihoods are sustained, while not compromising their welfare.

“It would not be an ideal situation if in the end, any workers, whether Malaysian or migrant, lose their jobs due to exploitation of situations that could and should be remedied.”

“Nevertheless, I do believe my concerns are valid and should be treated seriously by companies, the government and investors in Malaysia and globally.

“Hence, I urge both suppliers, buyers and brands to urgently remediate serious social non-compliance issues and ensure a much needed strengthening in the overall sectoral and corporate approach to engaging and improving social compliance, as the ‘S’ is often left behind in the ESG concerns for the industry.”

However, in an update on Thursday March 10, VSI informed to Bursa that they have appointed of PwC Consulting to undertake a holistic review on the company’s labour practices, and such the collaboration between the company and Andy Hall has come to an end.

“Meanwhile, PwC Consulting’s assessment is ongoing and this review process is supported by an independent labour rights consultant. VSI shall make further announcements if there are any material development in respect of this matter.”

ESG still a minefield, say analysts

AS can be seen, how a business manages financial and non-financial risks has become increasingly important in the decisions made by investors.

According to an analysis by RHB Research Institute Sdn Bhd (RHB Research), an organisation’s ESG practices provide an increasingly vital metric for where they should park their funds.

“The Covid-19 pandemic has taught investors that, no matter how foreseeable a risk may be, the impact an event has on society and businesses hinges on the ability to plan for significant disruptions and changes in the operating environment,” it said in its ESG report.

“ESG issues have, therefore, leapt even more to the forefront, as a signpost of a resilient business. This is why many institutional investors are now building ESG portfolios, and forming their own in-house ESG methodologies.”

While corporate Malaysia has made some progress on the governance front, the evironmental and social elements have impacted stock prices the most.

The plantations, oil and gas and energy sectors have come under the environmental spotlight in recent years.

More recently, shortfalls in the social pillar have been detrimental to EMS, gloves, and plantation companies, not just from a share performance perspective, but has involved the affected company losing sizeable and material contracts, in addition to damage to management’s reputation.

“Social pillar issues have typically involved matters concerning the treatment of their workforce and migrant workers in particular. Unfortunately, the domestic labour shortages and high reliance on large numbers of relatively low-skilled workers by many economically important sectors makes the social pillar a minefield for the affected corporates.

“The government may ultimately have to step to implement a holistic and comprehensive reform of migrant worker supply – from sourcing to housing, remuneration, working hours, overtime, repatriation and so on,” it said.

In the longer term, to minimise dependence on manual labour, Malaysia needs to move further up the value chain to increase participation in higher tech industries jnvolving the use of more automation and robotics.

Accordingly, RHB Research said investors need to perform stringent screening to avoid companies that may present ESG risks.

 

Expert: Leverage on early ESG adoption

FOR businesses, ESG adoption can be leveraged as a very systematic framework to help lay the foundations and accelerate the business to become a respectable and sustainable global giant, especially for family run businesses which is a huge part of Asia’s business culture.

According to Chua Zhu Lian, partner in charge of group strategy at Vision Group, early adopters have strong financial incentives in the form of tax and subsidies, favourable acces to capital markets (both equity and debt) as well as increase in business value.

“Major news such as the CBP’s WRO that has dented large companies, including government linked corporates in sectors such as gloves and plantation should already trigger immediate attention by businesses in Sarawak to prioritise ESG and sustainability before there is a need for costly damage controls and permanent damages on the company’s long built reputation, especially when such adversities hit the businesses in an extremely public manner,” he commented during an interview.

He commented that allegations can be in areas such as forced labor with extremely strong language being used to describe the abuse.

Businesses that have not initiated basic ESG groundworks such as getting a good ESG rating will have a much harder time clearing their name, even if the statement suggest that a certain abuse as “potentially being used”, he added.

“Also, imagine the potential repercussions on access to workers should such a statement become viral among the workers community in the new age of social media,” Chua put forward.

“As the famous saying goes “a hundred years of accumulated effort, ruined in one day”, we believe it wil be wise to take early precautions instead of letting many years of company reputation, sometimes guarded mattersby multiple generations be ruined by one statement or one bad move.”

Expanding on labour issues, Chua said a good point of reference for companies to reflect on labour issues would be the labour indicators set out by the International Labour Organization (ILO), which is a key baseline adopted by the US CBP in their investigations.

The ILO is a United Nations (UN) agency whose mandate is to advance social and economic justice through setting international labour standards. ILO was founded in October 1919 under the League of Nations and it is the first and oldest specialised agency of the UN.

Some of the key ILO indicators include excessive hours, debt bondage, physical and sexual violence, abusive working and living conditions. Through positive and continuous rectification efforts, some affected companies have successfully lifted their import ban by the CBP.

Cooperation between the ILO and Malaysia takes place under the framework of the Malaysia Decent Work Country Programme (DWCP) 2021-25, in line with the Twelfth Malaysian Plan (2021-25) and the Sustainable Development Goals (SDGs). Presently, ILO development cooperation in Malaysia covers the following areas: labour law reform, labour law compliance, industrial relations and social dialogue, forced and child labour, supply chains, social protection, migrant workers and SME development.

“Another strong indicator on the ground sentiment would be what is currently trending on social media, the main issue being income in Malaysia not catching up as quickly to on the ground inflation felt by the masses as well as appreciation in value of assets,” Chua enthused.

“We can observe attempts on social media to aggregate the current trends of wages in multiple industries to advocate for pay transparency and better salary with significant following from Malaysians.

“Some companies have swiftly adapted by adjusting their existing business model to venture into higher value add businesses in order to maintain profitability amidst upward adjustments on wages; one of the common strategies being, expanding further downstream and processing raw materials such as oil and gas, palm oil and mined minerals into semi-processed/intermediate goods or even finished goods and building an own brand around the final product.”

Chua have also seen a handful of relatively labour-intensive industries improving working conditions for their labour force including enhancements on worker’s accommodation, providing common facilities to improve social interactions between workers and ensuring occupational health and safety (OHS) standards are in line with the latest global standards.

Some other sustainable ways of addressing labour issues would be to adopt Industry 4.0 technologies to move away from excessive reliance on labour or even to explore blockchain technologies to improve supply chain trackability and digitalisation of essential working documents or to ramp up on internal R&D capabilities to lead in terms of product differentiation and production efficiency.

 

The Sarawak advantage on ESG matters

“A comprehensive and well strategised implementation of ESG can transform the state beyond just carbon neutrality and clean fresh air, it can be a game changer to spearhead a new growth trajectory for the entire Sarawak economy and change the course of its’ future.

Let’s zoom into the Sarawak competitive advantage in areas of ESG compared to the region. We are blessed with a huge land mass, good rainfall as well as rich natural and rainforest resources.

“With good foresight from the state government, Sarawak had a great head start in sustainability, marked by ground-breaking initiatives such as Regional Corridor Development Authority (RECODA) led SCORE project, supported by proactive plans to shift reliance to renewable energy, especially hydropower with Sarawak Energy Berhad also leading in terms of sustainability communications and partnerships.

“As a result, Sarawak enjoyed favourable FDIs into the state and saw emergence of strong local champions such as Press Metal and OM Materials (Sarawak) Sdn Bhd (OM Sarawak).

“Given the strong top-down pressure from global and domestic authorities and investors, we foresee Sarawak to continue benefiting from the inflow of foreign and domestic businesses who wish to tap into the strong sustainability fundamentals, especially industry with immediate pressures to meet their ambitious ESG goals.”

Chua foresee challenges in ESG implementation in Sarawak, including the lack of resources by SMEs to embrace ESG standards globally.

Hee believe the start of a journey of a thousand steps for mass adoption always lie with a good education and certification framework to systematically upskill the local community.

“Policy makers can also consider creating a locally and globally well-recognised certification in order to accelerate ESG adoption state wide,” he opined.

“New age technologies such as cloud computing, Internet of Things (IoT), Artificial Intelligence (AI) and blockchain can also help with automating the ESG process and ensuring better data integrity on the ESG data points.

“On a macro level for the state government, sustainability for our future generation of citizens means a sustainable society, a sustainable economy, a sustainable prosperity; measured in terms of sustainable GDP growth, job creation, income per capita growth and water security.

“On a micro level for businesses and individuals, sustainability for the next generation of our families means sustainable quality of life, sustainable harmonious living among diversity, sustainable business opportunities; measured in terms of business income growth, wages growth, wealth accumulation and availability of fresh air.

“In a nutshell, Sarawak has created the perfect ecosystem of sustainability that can be tapped by local businesses and human capital, as well as around the world, to grow hand in hand with the state’s ambitions to become a sustainable digital state.”