Good evening Mr. Chair and committee members. It's a pleasure to participate in this meeting, and I would like to thank you for inviting me.
I'll be speaking here as an academic, and not as an investor.
My opening remarks will draw on my research on extended supply chain responsibility, which studies the efforts by governments and other stakeholders to increase the responsibility of lead firms for corporate misconduct that occurs in their global supply chains.
The central point I will make is that ending forced labour in global supply chains requires Canadian and Chinese companies to develop sophisticated new organizational capabilities that they currently lack. Creating these capabilities requires important structural changes that should not be ignored in the debates on extended supply chain responsibility policies. It also has implications for our discussions on the investments.
Forced labour continues to be an endemic issue in global supply chains. The committee has already heard testimony that large amounts of goods sold on Canadian markets are made with forced labour originating in, among other places, China’s Xinjiang Uyghur Autonomous Region. You have also heard testimony about the investment of Canadian pension funds in Chinese companies that have been blacklisted by the United States for their complicity in human rights violations.
Recognizing these concerns, the Canadian government has followed the leads of several other western countries and introduced legal frameworks designed to encourage corporations to take responsibility for tackling forced labour in global supply chains and even holding them legally liable for human rights violations.
This includes Bill S-211, which was passed last week. It requires companies to report on the policies they've implemented to reduce the risks of forced and child labour in the supply chains of Canadian firms. Currently there are other bills under discussion that would require companies to adopt mandatory corporate sustainability due diligence.
The young age of these extended supply chain responsibility policies in Canada and elsewhere implies that we still have limited information about their effectiveness. My own research on private governance programs suggests policies that impose a high supply chain liability on Canadian companies will compel critical structural changes in their supply chain models that are costly and require time to be developed.
Academic research on voluntary private governance programs highlights that it is difficult for well-intended companies to rule out labour violations throughout their global supply chains. In private governance programs, lead firms—big firms—generally impose supplier codes of conduct on their tier 1 suppliers that identify the ESG standards to which they need to adhere and explain the penalty for non-compliance. They next use social auditing to verify suppliers’ compliance to these standards and impose penalties if violations are uncovered. To ensure the standards cascade down to lower-tier suppliers, lead firms require their tier 1 suppliers to use the same private governance mechanisms on lower-tier suppliers, and this goes on and on.
Evidence shows that private governance programs work relatively well for detecting and dealing with labour violations among tier 1 suppliers with whom lead firms have long-standing contractual relationships. However, they fail to make a real change among lower-tier suppliers with whom lead firms have no direct contractual relation; these are often difficult to monitor by lead firms and sometimes even unknown to lead firms. It is unfortunately in these lower tiers of global supply chains that most human rights abuses happen.
Developing lead-firm interventions that can prevent labour violations in lower-tier suppliers is complicated and remains under-studied. However, what is known is that it requires lead firms to develop new capabilities that enable them to improve transparency, traceability, inclusiveness and, ultimately, control throughout global supply chains. This includes the development of supply chain mapping capabilities to improve their awareness of who is involved in their supply chains and where labour violations are most likely to sprout. It also includes the capability of supporting tier 1 suppliers to improve their monitoring of labour conditions among sub-suppliers and acting upon violations.
It also includes a capability of building new partnerships with NGOs and competitors to develop best practices on detecting and tackling forced labour—