Labor Lens Investing: The business case for fair labor practices
Executive Summary
This paper describes a promising new effort to fight global labor exploitation using financing strategies to advance and expand the global trend toward fair labor practices. It focuses on private market investment innovations and opportunities, where investors interested in improving global labor conditions while achieving positive financial results are most likely to meet their objectives.
Labor Lens Investing is an investment approach that uses investors’ leverage through supply chains to advance protections of internationally recognized labor rights.1 Over the past two decades, progress has been made to improve labor standards in global supply chains, including some companies’ responsible sourcing programs, civil society and shareholder advocacy, and regulations in the home markets of major brands, among other factors. However, despite these efforts, poor labor conditions persist in parts of the supply chain in many industries and sourcing countries. An as yet underutilized strategy, Labor Lens Investing aims to improve labor conditions and business outcomes by strategically directing capital to leverage the scale and scope of global supply chains and to generate solid investment results. A small but expanding group of private investors believes that increasing the labor focus of both private and public holdings will result in better business outcomes, better labor conditions, and solid investment returns. That is the Labor Lens Investing hypothesis.
Poor labor conditions in global supply chains offer investment opportunities that private equity and venture capital investors have begun to take seriously, envisioning both robust investment possibilities and promising levers for improving labor standards and conditions. The first wave of Labor Lens investors believes that improving labor conditions will result in more productive and more sustainable businesses, in turn generating positive investment results. While this idea is unproven to date, initial research is promising.
This paper is meant to ground prospective Labor Lens investors in an understanding of market conditions, to show them examples of what is already being done, to inform them about issues they should consider, and to suggest ways that Labor Lens Investing can progress from an emerging niche to a fruitful investment option for mainstream investors.
It has four main sections:
The Need for Labor Lens Investing;
The Labor Lens Investing Market;
Investment Models & Structures; and
The Path Forward & Recommendations.
Section I explains the need for Labor Lens Investing. Improving working conditions in global supply chains is a complex global challenge with significant opportunity to positively impact the lives of millions of workers. The International Labour Organization (ILO) estimates that as many as 25 million people work in conditions amounting to forced labor,2 generating approximately US$51 billion3 in annual profits across the globe gained from human trafficking and forced labor. Often, the companies at the end of the supply chain have limited visibility into the lower tiers of their supply chains and therefore limited leverage to influence labor standards at the policy level in sourcing countries. It is worth noting that local customs, cultures, and laws are also a strong contributing factor to the norms surrounding labor standards, and should not be overlooked by stakeholders actively looking to improve working conditions across the globe.
Section II details ways in which supply chains can be leveraged to improve labor standards globally. This section provides an overview of the Labor Lens Investing Market, including the emerging landscape of actors and stakeholders, and the ways in which they are navigating and responding to opportunities as well as reputational, business, and compliance risks. Growing awareness of these risks is aligning stakeholders around the need for broader adoption and more rigorous enforcement of compliance standards and more effective monitoring, evaluation and research protocols to document it, each of which is outlined. This section also discusses the emergence of increasingly robust global, national and industry-specific laws and regulatory frameworks supporting labor rights standards. These advances, aligned with the increasing pressures from consumers, investors, industry stakeholders, and regulators, are rapidly shifting the economic and policy forces influencing working conditions.
Section III provides an overview of a handful of promising new investment models and structures that create more transparency and accountability in supply chains, enabling more constructive engagement between employers and labor, aligning consumers and producers, and increasing productivity through better labor practices. Through innovation and collaboration with existing business operations, these models reduce risks across the board.
Section IV lays out the path forward and recommendations for building a community of practice aligned around Labor Lens Investing. The paper concludes that Labor Lens Investing, albeit emerging, is gaining traction and shows significant potential.