Hong Kong Should Use Its Financial Might to Fight Human Trafficking

Hong Kong is witnessing a growth in responsible investing that takes into consideration environmental, social and governance (ESG) factors. Can it leverage its financial hub status to become a regional leader in the fight against human trafficking?

Human trafficking is the world’s third most lucrative crime. Every year, it generates an estimated $150 billion in profit. At any given time in 2016, 40.3 million people were trapped in some form of modern slavery like commercial sexual exploitation, forced marriage, or forced labor. Of them, about 40 percent toiled in the private sector – in domestic homes and shady factories, on construction sites, or on farms or fishing boats. And two thirds of these modern-day slaves live in the Asia Pacific region.

Hong Kong is itself both a destination and transit hub for human trafficking, and definitely needs to step up measures against human trafficking within its borders. The city has been put on the Tier 2 Watch List  of the US Government’s Trafficking in Persons Report for the third consecutive year (a downgrade to Tier 3 would attract sanctions), while the 2018 Global Slavery Index named (and shamed) Hong Kong as one of the governments that has done the least to combat human trafficking relative to its GDP.

At the same time, human trafficking is notoriously hard to prosecute due to its complex nature. The proportion of all the victims who were identified and assisted was less than 0.2 percent.

We desperately need new stakeholders and strategies.

As such, Hong Kong has the additional duty – and also an opportunity – to become a regional leader by leveraging its strong finance infrastructures to fight this crime that knows no borders.

A Financially Risky Crime

The financial sector intersects with human trafficking in many ways. To sustain such a big shadow economy, capital has to come from somewhere; and profit – which may end up funding other crimes – has to be laundered to be usable.

At the same time, with growing media attention on supply chain scandals involving forced labor, public scrutiny is mounting. More and more consumers and investors are demanding that businesses make their supply chains transparent, at times even bringing litigation against companies involved.

Two global trends are in particular providing pressure and incentives: more regulators around the world are requiring companies to report on their compliance with ESG disclosure requirements, and more institutional and private investors, including in Asia, are engaged in responsible investing, i.e., sustainable and ESG investing.

Human trafficking is thus no longer just a reputational risk for companies; it’s increasingly an operational, legal, regulatory and financial risk, too.

What Regulators Can Do

The financial sector in Hong Kong, ranked the world’s number three global finance center, has a strong foundation to build on. Be it the city’s existing regulatory efforts to curb money laundering, to counter terrorist financing, or mitigate climate change following the principles set down by the Financial Task Force on Climate-related Financial Disclosures: these are all useful starting points for combatting human trafficking.

Another helpful development is that since 2016 Hong Kong has made ESG disclosures semi-mandatory: listed companies must now disclose their policies in relation to a list of environmental, social and governance aspects, including preventing child and forced labor. But the current framework is weak: it only requires disclosure of policies, not their implementation, and there is no penalty for insufficient policies. At the moment, the rules are little more than a box-ticking exercise. Much more can be done to substantiate the disclosure requirements and make this framework more effective.

At the end of November this year, the Hong Kong Financial Services Development Council (“FSDC”) – a government advisory body – issued a policy recommendation paper calling for Hong Kong’s regulators and government funds to scale up ESG integration and promotion of ESG investing, as Hong Kong is “at risk of being left behind” as a financial service center: Hong Kong is only ranked 24th among 45 stock exchanges based on ESG reporting. This policy paper is timely and encouraging, but of course it remains to be seen how many of the recommendations will actually be accepted.

Creating a more robust ESG ecosystem aside, the Hong Kong government should consider a proposed bill that would require companies doing business in Hong Kong – not just the listed ones – to publish an annual anti-slavery and human trafficking statement and to disclose the steps they have taken to ensure that slavery has no place in any part of their business operations or supply chains. If Hong Kong adopts the bill, it will become the first in Asia to set this bar, following the footsteps of the UK Modern Slavery Act and the California Transparency Act.

What Businesses and Investors Can Do

At the global level, the first coordinated effort to bring together governments, banks and NGOs to fight human trafficking was launched in September this year, when the UN General Assembly established the Financial Sector Commission on Modern Slavery and Human Trafficking (or “Liechtenstein Initiative”). In its first briefing paper, the initiative emphasized the need to go beyond compliance: the gravity of modern-day slavery demands that we urgently move from transparency and compliance frameworks to more active human rights due diligence and engagement. For this to happen, businesses, investors and civil society all have a key role to play.

Civil society in Hong Kong is already setting examples for how to hold the market accountable for human trafficking. NGOs are engaging businesses – and banks in particular – to train anti-money laundering professionals and frontline bank-tellers to enable them to spot human trafficking red flags. Others provide toolkits for companies and investors to help them screen for forced labor and ask the right questions.

Investors can also step up by taking more active ownership of the funds or companies they invest in, and by becoming more vocal in demanding stricter supply chain screening or monitoring from the companies or funds they invest in. To do more they can also consider impact investing, investments made with the intention to create a positive impact. Around the world, new financial products emerge, such as a fund that invests in supply chain technology to fight worker abuse, or a new platform that helps investors identify and reward companies that demonstrate commitment to fighting forced labor. Hopefully similar products may soon emerge in Asia.

And this brings us to the businesses. Hong Kong is a regional and global hub for businesses of all sorts. While corporate social responsibility is on the rise, many definitely can do more to combat human trafficking, especially those in, for example, banking, transport, hospitality, and trading. However, the whole finance industry in particular has a crucial role to play in making human trafficking matter to companies and investors: by providing better research and analysis.

Closing the Data Gap

A key challenge, and one that was also highlighted at Hong Kong’s 2018 Stop Slavery Summit as well as in a NYU Stern School of Business study from 2017, is putting the “S” back in ESG. In the context of human trafficking, this means the need for more relevant human trafficking-related data being reported or extracted from companies. Among other things, this will enable better analysis of such data and how they relate to the long-term value and risk profile of a company – and  hence financial return for investors. It will also make available more comparable data to assess one company or fund’s performance against another.

For example, is there room for the development of a standardised disclosure framework for modern slavery in supply chain, taking a leaf from the Carbon Disclosure Project ? How can we better integrate the United Nations Guiding Principles on Business and Human Rights in ESG reporting standards? The many businesses in the finance sector in Hong Kong, including banks, asset managers, research and rating agencies, CSR and ESG consultants, and financial news providers, can all help generate the data needed for us to make ESG reporting more meaningful and relevant for investors.

Beyond Box-Ticking

At the end of the day, human trafficking is more than just a matter of statistics or a financial risk. It is another human being robbed of his or her freedom, exploited, or subject to emotional or physical abuse. Hong Kong can continue to be part of the problem – or choose to be part of the solution. Whether it is improving the availability and quality of data, providing tools for data analysis, promoting active ownership, launching new financial products, or testing more effective regulations or models of public-private collaboration: with its world-class financial and legal systems and professionals, Hong Kong is uniquely positioned to become a regional leader in the fight against human trafficking. Hong Kong can choose to show that when government and private sector put their hearts and minds together, there is hope for ending modern slavery.

Tze-wei Ng is head of advocacy and engagement with the Sustainable Finance Initiative, a new platform aimed at building a community of private investors in Hong Kong eager to move their capital into investments with a positive social and environmental impact. She’s also a contributor to Rights Co-Lab, a network of researchers exploring the intersection of private sector and human rights. She is a fellow of the Global Governance Futures 2030 program. The views presented here are her own.

Image credit: Daxis via Flickr (CC BY-ND 2.0)