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• The International Bar Association’s Human Rights Institute (IBA-HRI) found that in the context of the developing world, tax practices considered most relevant to potential human rights impacts include transfer-pricing and other cross-border intra-group transactions (see Lipsett). Multi-national enterprises may “take advantage of gaps in the interaction of different tax systems to artificially reduce taxable income or shift profits to low-tax jurisdictions in which little or no economic activity is performed” (see OECD). The Task Force also identified the following as areas of greatest concern: the negotiation of tax holidays and incentives, the taxation of natural resources, the use of offshore investment accounts and, finally, secrecy jurisdictions due to their role in facilitating tax abuses. (See Lipsett).
• Highly digitized business models have been associated with challenges to existing taxation frameworks, including where the business is highly involved in the economic life of a jurisdiction without any significant physical presence, as well as where a high number of assets are intangible (such as algorithms and software). (See OECD).
• Aggressive taxation practices such as those identified above can “deprive governments of the resources required to provide the programmes that give effect to economic, social and cultural rights, and to create and strengthen the institutions that uphold civil and political rights.” (See Lipsett). Lost revenue from taxation can lead to decreased funds available for spending on “services such as health, education, housing, access to water and other human rights.” It has been noted that countries in the global south lose much more money to tax evasion and illicit financial flows than they receive in international aid.
• The connection between tax and inequality has been explored by the IBA-HRI, which has noted that “the global shadow economy is contributing to a growth in global inequality, which is also having a major impact on democracy.”

• Reputational Risks: “Over recent years, the tax affairs of major businesses have been subject to unprecedented levels of scrutiny, debate and controversy.” The FT, has noted that despite the “dry, complex nature of corporate tax planning,” campaigners have begun to focus on the issues with “zeal.”
• Regulatory Risks: Concerns over the facilitation of base erosion and profit shifting through uneven legislation has led to a multilateral international tax policy initiative under the OECD, resulting in a multilateral convention, the sharing of information between tax administrations, disclosure of previously secret tax rulings and “legislative changes made to amend/abolish 110+ [‘harmful preferential tax regimes’].”
• Operational Risks: Public outcry over taxation inequality has “contributed to significant political instability in many developing countries” which has also been to the detriment of companies operating in these areas. Such outcry has not been limited to developing countries: in the UK several companies have appeared before the Public Accounts Committee or had their high street stores occupied by protestors, and US companies have been the subject of major news investigations.
• Legal, Financial and Operational: Risks also arise where public outcry leads to a re-examination of tax settlements. Calvert Investments, referencing the International Accounting Standards Board, has noted: “Reputational damage [from a perception that a company is not paying its fair share of tax to a host country] may lead to liabilities for external costs associated with a company’s operations, greater difficulty in permitting that could lead to project delays or cancellation or the loss of favourable tax status or other forms of government financial assistance.”

*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.

Taxation policy is a key element in facilitating the achievement of the SDGs. As such, this red flag indicator is relevant for a range of SDGs, including:

• Do we have a policy on tax planning that includes a human rights perspective? Do we have a considered and disclosed position on use of “tax havens”?
• How transparent are we about our taxation strategy including as regards our operations in developing countries? Do we disclose how our approach to taxation planning aligns with our business purpose and sustainability strategy?
• To what extent do we review the structures and practices of tax planning through the lens of our responsibility respect human rights, (rather than merely the amount of tax paid, which is an outcome of these practices).
• Are we involved in projects for which tax rules are being created? Is our approach to these negotiations aligned with our sustainability commitments/ responsibilities?
• How meaningful is the interaction between our departments and external advisors responsible for taxation strategy and our corporate responsibility/ sustainability/ human rights teams, with a view to internal alignment?

*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.

In 2012 Starbucks announced that following “loud and clear” messages from customers, the company would make “changes which will result in Starbucks paying higher corporation tax in the UK – above what is currently required by law.”

• The B Team’s Responsible Tax Principles were developed through dialogue with a group of leading companies, convened by The B Team with contributions from civil society, institutional investors and international institution representatives.
• The International Bar Association’s Human Rights Institute released a 2013 report entitled Tax Abuses, Poverty and Human Rights. The Report addresses tax abuses from the novel perspective of human rights law and policy. It is based on extensive consultation from diverse perspectives and offers insight into the links between tax abuses, poverty and human rights.
• The Business and Human Rights Resource Centre portal on Tax Avoidance.
• Oxfam (2017) Making Tax Vanish: How the practices of consumer goods MNC RB show that the international tax system is broken. Contains an in-depth analysis and critique of the taxation planning practices of one company as well as the company’s response.
• M Lazala, Business & Human Rights Resource Centre (2015) Tax avoidance: the missing link in business & human rights?
• Tax Justice Network is a UK-based international research and advocacy network focusing on the link between taxation and, inter alia, human rights. It publishes the Corporate Tax Haven Index.
• OECD (2019) Tax and Digitalization discusses the tax challenges that arise from digitalization in furtherance of a work program to culminate in 2020 with an agreed global, long-term solution.
• The OECD’s Tax portal includes its Action Plan on Base Erosion and Profit Shifting and Inclusive Framework.

Where the business model is substantially dependent on gaps in legal frameworks, the company may engage in:

• Practices associated with maintaining this business model feature risk perpetuating a “race to the bottom,” as countries compete with lower regulatory standards to attract corporate investment.
• Lobbying against measures or laws that protect people from human rights impacts, for example lobbying against:
  • (increased) minimum wage laws, affecting, inter alia, the right to just and favorable conditions of work, including decent remuneration;
  • Indigenous title to land affecting, inter alia, Indigenous people’s rights;
  • restrictions on emissions into land, sea and air, affecting the right to an adequate standard of living;
  • laws that support informed choice, affecting the right to health.
• Legal strategies that prevent the state from protecting people from human rights impacts (potentially various), for example:
  • seeking to use investment treaties (including stabilization clauses) to limit states’ abilities to enact or amend legislation or regulations that increase human rights protection;
  • seeking to enforce intellectual property rights against public health imperatives.

• Reputational and Operational: risks arise due to inconsistencies between what the company says in public and in private regarding regulatory protections, and in what it does in different parts of the world based on different levels of regulatory protection. Reputations may also be open to attack where the company invests considerable resources in weakening human rights protections.
• Legal and Financial Risk: where a company mounts an unsuccessful legal challenge to government regulation aimed at public protection, it may face financial penalties. For example, tobacco company Philip Morris was ordered to pay the Australian government millions of dollars after unsuccessfully suing the nation over its plain-packaging laws.
• Financial Risks: can arise where investors consider companies’ attempts to influence public policy in their investment decisions. For example, US-based Trillium Asset Management reportedly monitors the levels and recipients of corporate giving, corporate policies on political contributions and membership of industry (lobbying) associations as part of their background research for stock selection in their socially responsible investment funds.
• Business Continuity Risks: where business contributes to the degradation of resources or people on which the business relies, e.g. by lobbying against laws that protect consumers or the community or limit environmental degradation.

*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.

Addressing impacts on people associated with this red flag indicator can contribute to a range of SDGs depending on the impact concerned, for example:

Applying purpose and principles to lobbying activities:

• In 2017 Campbell’s Soup withdrew from the Grocery Manufacturers Association citing “our purpose and principles,” including positions on food labelling. When the United States Food and Drug Administration agreed to extend a deadline for food and beverage companies’ to introduce a “Nutrition Facts Panel,” the company announced it was “continuing to strive to meet the original deadline.”
• The CEO Water Mandate’s Guide to Responsible Business Engagement with Water Policy (2010) contains “Principles for Responsible Water Policy Engagement.” Principles 1 and 2 provide that “responsible corporate engagement in water policy must be motivated by a genuine interest in furthering efficient, equitable, and ecologically sustainable water management” and that companies should ensure “that activities do not infringe upon, but rather support, the government’s mandate and responsibilities to develop and implement water policy…”.

Contributing to a regulatory environment that enables respect for rights:

• Oil and gas companies have jointly pressed a government to improve transparency requirements before proceeding with bids for concessions, in order to level the playing field and avoid human rights performance becoming a competitive issue. (See Shift’s Using Leverage guide at p. 22).
• In 2014, eight apparel brands wrote to the Cambodian deputy prime minister and the chairman of the local Garment Manufacturers Association to say they were “ready to factor higher wages” into their pricing.

Incentive and benefit structures, a key component of the sales promotion strategy of many companies, are designed to reward salespeople for revenue generated for the business. However, such structures can lead to negative outcomes for people where targets are excessively high, practices are subject to inadequate oversight, promotion activities towards third parties lead to over – or inaccurate prescription or recommendations, and, in some cases, where incentives are profit-based.

• Excessive sales targets and inadequate oversight can lead to predatory sales behavior. In the retail banking industry, this has included:
  • Unauthorized transactions on client accounts;
  • Sale of insurance products to clients who do not meet eligibility requirements (and therefore cannot take advantage of them);
  • Targeting the elderly or people conversing in their second language;
  • Sale of loans to people who cannot meet repayment obligations. (Privacy and Information rights; Economic security rights; Right to an adequate standard of living; Right to housing).
• Heightened risks arise where salespeople are required to use discretion in evaluating customer fitness for access to a product and/or have the ability to access/ modify private customer information without adequate oversight.
• Influencing third parties leading to excessive or inappropriate prescription or recommendation of products: Where incentive structures influence a professional’s exercise of discretion, people may be given advice or products that are not appropriate for their personal circumstances, affecting their health and/or finances:
  • Provision of baby formula to mothers in poverty by hospitals/ doctors receiving samples from companies, with subsequent impact on child health as mothers abandoned breastfeeding but could not afford an adequate amount of formula (see OHCHR) (Right to life; Right to health);
  • Sale of “sub-prime” loans by mortgage brokers receiving commissions from lenders, at interest rates above market and/or to borrowers who could not afford repayments (see CESR) (Right to an adequate standard of living, including Right to Housing); and
  • Over-prescription of potentially addictive painkillers facilitating or leading to addiction (Right to life; right to health).
• In the context of essential medicines, sales incentives that reward based on profits on products (rather than revenue) can drive up the price of essential medicines, reducing access to medicines for vulnerable persons (Right to life; Right to health).

• Reputational, Financial and Business Opportunity Risks: Scrutiny from governments, investors and civil society is becoming increasingly sophisticated and granular, including to the level of the existence and effect of sales targets. One example is the well-known Access to Medicine Index for the pharmaceutical industry, which includes Market Influence within its measurement areas, including “sales-based performance incentives and bonuses for sales agents.” Consequently, companies are unable to claim ignorance of expectations and best practices; to do so risks loss of investment, reputational risks and loss of access to business partners applying such standards in their criteria for engagement.
• Regulatory Risks: The impacts flowing from excessive sales targets and inadequate oversight can affect the reputation of an entire industry and potentially lead to increased regulation. The Banking Royal Commission in Australia was established in 2017 to inquire into and report on misconduct in the banking, superannuation and financial services industry, including fraudulent lending to elderly customers and the widespread provision of inappropriate and predatory financial planning advice. It was reported in 2020 that “about 40 pieces of … legislation sit on [the government’s] parliamentary agenda.”
• Reputational, Financial, Business Continuity, Regulatory and Legal Risks: As the impacts associated with this red flag tend to accumulate over time and exacerbate exiting social vulnerabilities, when impacts reach public consciousness, they tend to do so explosively, in the form of scandals, exposés and the partial collapse of industries. Companies face resulting litigation, increased scrutiny and regulation and reputational damage. For example, in the context of aggressive sales tactics and over-prescription in the opioid crisis, drug companies faced lawsuits, saw their reputation damaged and stock lose value. Reportedly 70% of Americans support “making drug companies pay the cost of addiction treatment services and cover the cost of naloxone, used to revive people who’ve overdosed.”

*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.

Addressing risks to people associated with this red flag indicator can contribute to, inter alia:

Promotional practices influencing third parties

• Do we have a policy in our marketing practices with regard to potential human rights impacts, and do we include our marketing practices as part of our human rights due diligence?
• What evidence do we have as to whether our salespeople are acting in practice in line with our marketing policies and prescribed processes?
• What are the different contexts in which our products/services will be sold/recommended to individuals? How might poverty, a lack of information or other vulnerabilities affect potential impacts from our products? What strategies do we have in place to ensure that our products are not sold/recommended in circumstances where the products might lead to harm to our customers?
• Do we provide adequate training to our sales professionals to enable them to make decisions guided by our human rights responsibilities?
• How might our salespeople, or the professionals they influence, be incentivized to act otherwise than in accordance with our policies?
• Do we have sufficient oversight over our salespeoples’ activities? How do we internally/ externally audit our practices?
• What grievance mechanisms do we have, who can access them and how do we act on results?

Sales targets and predatory sales behavior

• Who are our most vulnerable potential customers? How can our products/ services potentially be connected to negative impacts on people?
• Do our salespeople exercise discretion in evaluating the appropriateness of a product for customer? How is this guided or constrained?
• How can we track any increases in sales to potentially vulnerable people?
• In practice, how do our salespeople experience the relative pressures to both deliver on sales targets and protect vulnerable people from potential impacts associated with our products/services? Do they find the two to be in tension and do they know how to address those tensions in practice?
• Do our salespeople have the ability to access/modify private customer information? What protections/ oversight is in place?

Profit-based incentives and access to medicine

• How do we incentivize our sales teams across geographies in which we operate? Do our incentive structures reward for profits on products (as opposed to revenue)?
• Could our incentives structures be playing a role in high/ rising drug prices?
• If so, do we whether higher prices could exacerbate existing vulnerabilities among potential consumers and limit access to essential medicines?
• Can we find a way to decouple sales agents’ incentives from sales targets?

Sales incentives and over-prescription in pharmaceuticals

• Do we offer sales bonuses based on sales volume in the context of drugs prone to over-prescription?
• Could we avoid deploying sales agents for such medicines, or decouple sales bonuses from volumes?

*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.

Avoiding sales agents altogether: Johnson & Johnson, Otsuka and Teva do not deploy sales agents for at least some antibacterial and antifungal medicines.

• Sales Incentives and Over Prescription: The Access to Medicine Foundation’s Antimicrobial resistance benchmark “evaluates how 30 pharmaceutical companies are responding to the global threat of antimicrobial resistance” including their sales promotion practices.
• Profit-based Incentives and Access to Medicine: Information on pharmaceutical companies’ performance on “Market Influence,” including sales incentives, can be found in the Access to Medicine Index.
• Financial Services Misconduct: e.g., Submission of Dr. Kym Sheehan and Prof. David Kinley of Sydney Law School to the Australian Royal Commission into Misconduct in the Banking and Financial Services Sector.
• Misleading marketing practices of infant formula in developing countries: OHCHR (2015) Breastfeeding a matter of human rights, say UN experts, urging action on formula milk.

The replacement of people with robots is estimated to displace 400 million workers and automate 15% of worked hours across all sectors between 2016 and 2030. While very few jobs are fully replaceable with robots, research shows that many jobs have a significant percentage of automatable activities. Automation’s greatest impact is forecast to be on jobs that consist of routine activities in predictable environments.

Automation of processes through robots can have a number of positive impacts.

In the short term, it can:

• Remove unsafe jobs: in mining, robots can help remove people from dangerous underground jobs, for instance, in Resolute’s Syama mine in Mali.
• Help people with restricted physical ability work.
• Make jobs more accessible for local workers: in mining, robots can provide a simpler visual interface which makes it easier for companies to train local workers, rather than rely on highly- skilled workers from outside the area.
• Increase the number of jobs: in fulfilment centers, robots can increase throughput thus enabling the center to hire more workers to deliver more orders.
• Help manage labor shortages: for example, labor shortages exacerbated by Covid-19 are incentivizing investment in agricultural robots.

In the long term, the history of labor market shifts shows that the overall effects of roboticization can be positive, as the new jobs created outpace the jobs lost and create greater economic prosperity. McKinsey estimates that  automation could create between 555 and 980 million jobs by 2030, primarily by virtue of raising incomes through higher productivity, higher wages and lower consumer costs.

At the same time, McKinsey estimates that by 2030, 400 million workers will be displaced by automation and 75 million will need to change occupational category. This shift will put enormous pressure on workers around the world.

Automation will more negatively affect people who are already vulnerable: low paid and precarious workers and minorities that are over-represented in automatable jobs or under-represented in sectors that are likely to experience job growth. For example:

• In the US, African American and Latino workers are projected to be disproportionately affected by automation because they are over-represented in sectors such as transportation, food service and office clerks.
• In Bangladesh, automation in the ready-made garment (RMG) industry is forecast to disproportionately affect women, who comprise 80% of the workforce in the sector.

The negative impacts of automation on people are a result of the way in which companies introduce and use robots. The common denominator in cases of roboticization going wrong (where workers are dehumanized and seen as another input or cost in the production process) is lack of empathy: the ability to put oneself in someone else’s shoes.

*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.

Technological progress is crucial to the fulfillment of the SDGs. However, to be true to the purpose of the SDGs, the use of technology needs to be underpinned by an understanding of how the loss of jobs due to automation can affect people’s basic dignity and rights.

The introduction of robots with empathy and with support for workers to re-train or upskill can help companies fulfill the following SDGs:

While the scale of automation’s impacts on people is undeniable, the nature and gravity of those impacts will depend on the way in which companies apply technology. This includes the due diligence companies carry out to identify and address negative impacts on people. Important questions to consider are:

• Does the company have a culture of empathy that looks not just at the benefits but also the human impacts of automation?
  • Do we seek to understand what workers expect from their jobs in terms of progression and development?
  • Do we ask how workers feel about the technology that surrounds them at work?
  • Do workers have alternative employment options? (Are we the only significant employer in the local area?)
  • How robust is the social safety net for workers who are displaced from their jobs?
  • Does the business have in place processes to minimize the harm to workers of introducing and using robots?
  • Do we have a process to assess impacts on people of new technology or automation in our operations?
  • Do we look for unintended negative consequences from technology meant to make work “faster and easier”?
  • Do we provide workers with opportunities for continuous learning? Do we recognize and reward that learning?
  • Are our governance and internal processes and controls able to manage the additional complexity that comes with automation and technology?
• How do we engage with other stakeholders – including governments and trade unions – to identify ways to prepare workers for a changing landscape of work?

*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.

Alternative models are examples of companies that retain workers instead of replacing them with robots. This does not mean the companies are not automating. It means they are integrating robots with their existing workforce in ways that benefit both workers and the business.

• One emerging trend is to have robots and workers collaborating side-by-side. Research in the automotive sector shows that assembly lines where workers and robots (“co-bots”) worked together were more efficient than lines where workers or robots worked alone.
• Another trend is using automation as an opportunity to provide workers with new skills, particularly to workers who are generally disempowered such as women or ethnic minorities.

General:

• OECD (2019) OECD Employment Outlook 2019: The Future of Work.
• International Labour Office (2019) Work for a brighter future: Global Commission on the Future of Work.

Sector specific Examples:

• ILO, David Kucera and Fernanda Bárcia de Mattos (2020) Automation, employment and reshoring: Case studies of the apparel and electronics industries: a study of automation in the apparel and electronics industries.

• Some business models support commercial viability by externalizing the risks associated with changing levels of consumer demand on suppliers, rather than absorbing it in the business model.
• Companies may do this by way of:
  • Making last minute demands, changes or cancellation of orders;
  • Using contracts by which the supplier assumes the cost and risk of the product until delivered;
  • Avoiding warehousing goods by utilizing a “just in time” inventory/sourcing model.
• As a result:
  • When demand spikes, and the purchasing company places large volume orders with short lead times, suppliers may see no alternative but to demand excessive overtime. (Right to just and favorable conditions of work; Right to a family life; Right to Health).
    • A joint ETI/ILO survey on purchasing practices in 2017, to which responses were received from over 1,400 suppliers in 87 countries, found that only 17% of suppliers surveyed considered their orders to have enough lead time.
  • When demand drops, the purchasing company may cancel orders on short notice and/or refuse to take responsibility for goods that have already been produced. IndustriALL has noted that such cancellations leave factories holding the goods, unable to sell them to the customer that ordered them, and in many cases unable to pay the wages of the workers who made them.
• Purchasing practices such as this may, without appropriate mitigation measures, place heavy pressure on suppliers working on narrow margins. Risk and its associated costs are pushed up the supply chain and absorbed by the most vulnerable people – such as factory workers, including migrant workers, women workers, producers and small-holder farmers – affecting their livelihoods and those of their families. Suppliers under excessive pressure may not pay wages or overtime, or not provide safe working conditions; they may pregnancy test workers pursuant to a view that pregnant workers are not financially viable. Risks are exacerbated when the purchasing company(ies) provide little or no commitment to long-term sourcing, disincentivizing investment in improving working conditions (Right to just and favorable conditions of work; Right to Health).

• Operational Risks:
  • Purchasing practices that situate inventory risk with suppliers can leave suppliers with cash flow challenges and unpredictability that disincentivizes them from investing in compliance with codes of conduct. Such practices can also cause suppliers to outsource (including illegally) to subcontractors, increasing the complexity of the supply chain and reducing visibility and control on the part of the buying company.
  • Where the company does not keep an inventory of its products and relies on a small number of suppliers, it can be vulnerable to inventory shortages: in 2019, German-based Adidas’s sales growth declined due to “supply chain shortages” when “the company’s suppliers—nearly all of whom are based outside Germany—did not keep up with customer demand.”
  • The Covid-19 situation in 2020 further demonstrated the risks to the company of relying on, inter alia, just in time models and the detrimental impact of this practice on supply chain resilience.
• Reputational and Financial Risks:
  • Companies with purchasing practices that lag behind leading practices may receive poor results in the Better Buying review, a growing online platform that allows suppliers to anonymously rank the buying practices of brands and retailers.
  • During the 2020 Covid-19 pandemic, companies leaving overseas suppliers with excess inventory received negative publicity, including through Workers’ Rights Consortium’s “Brand Tracker” which listed apparel labels and retailers that were and were not paying their suppliers for orders in production or completed. From an investment perspective, research on the link between public sentiment on corporate responses to the pandemic and financial flows found that companies with labor and supply chain practices that were seen as taking action to secure their supply chain experienced higher institutional money flows and less negative returns.

*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.

Addressing risks to people associated with this red flag indicator can contribute to, inter alia:

• Do we have sufficient budget allocated to warehousing products? If not, how are we ensuring that factories can produce in advance and keep overtime within acceptable limits?
• Do buyers have sufficient knowledge, incentives and support to assess how and when their decisions will place human rights at risk, and to know from whom to seek assistance when they do?
• How do we know whether our buyers follow our processes, rules or guidelines in practice when engaging or contracting with suppliers?
• Do we engage with our suppliers in ways that help us understand how far they can go to meet our demands while still respecting the rights of their workers? Do we work with suppliers in countries of production to increase worker protections?
• Do we take a short term, transactional approach to supply chains or do we develop supply chain partnerships? For example, do we see high turnover among suppliers?

*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.

Spanish fashion company Alohas’ “business model revolve[s] around an on-demand production process.” The company previews upcoming designs to customers early in the season and makes them available at a discount rate. Once it calculates how many units of each new style should be produced it commences manufacturing. Alohas notes that “on-demand reverts the sales cycle by applying a discount for early purchases and offering the product at full price only once stock has been made available. Meaning we don’t adhere to the traditional sales calendar anymore.”

• ACT (Action, Collaboration, Transformation), including the ACT Global Purchasing Practices Commitments.
• ILO (2017) Purchasing practices and working conditions in global supply chains: Global Survey results: provides the results of an ILO/ETI global survey on purchasing practices and working conditions, to which over 1,400 suppliers from 87 countries responded, with the sample covering nearly 1.5 million workers.
• ETI (2017) Guide to Buying Responsibly: The guide includes best practice examples and outlines the five key business practices that influence wages and working conditions.
• Better Buying has created a tool for suppliers to anonymously rate their buyers against 7 purchasing practices, developed through consultation with suppliers. Buttle (2018) Can there be fair rules for the ‘purchasing practices’ game?: a ETI blog post from ETI’s Apparel and Textiles Lead summarizes standards for company purchasing practices and offers recommendations for improvements in practice.

• Workers’ Rights Consortium’s “Brand Tracker” lists apparel labels and retailers that were and were not paying their suppliers for orders in production or completed during the 2020 Covid-19 pandemic.
• A. Triponel and C Bader (2020) Coronavirus is shining the spotlight on unhealthy supply chains: cleaning them up will help both business resilience and worker wellbeing.
• A. Triponel and J. F. Sherman (2020) Moral bankruptcy during times of crisis: H&M just thought twice before triggering force majeure clauses with suppliers, and here’s why you should too.

• Of the estimated 500 million small-holder farmers worldwide, 200 million are producing food within global supply chains. Fifty percent of the world’s undernourished people are smallholders and their families.
• Farmers and smallholders have limited influence in negotiating terms of trade and receive an ever-diminishing share of the fruits of their labor.
• A range of structural barriers underlie this disadvantage, at the levels of the supply chain, commodity sector and public policy. ETI notes that business models intersect with these barriers in many ways, including:
  • Consolidation of the market into a limited number of food retailers with substantial market power, that is often used to drive down prices and leave farmers unable to negotiate higher pricing.
  • The effect of lowest cost or “discounter models” in the food retail sector, driving price competition and increased pressure on prices in the supply chain.
• Price squeezes on suppliers increase the risk of human and labor rights violations in food and farming supply chains, often affecting the most vulnerable in rural communities, including small-holder farmers, particularly women and migrant workers. The inability of a farmer to provide for his or her family leads to a considerable loss of dignity in some rural communities, increasing marginalization and compounding the risk of human rights impacts.
• With respect to some commodities, farmers and their families find themselves in a poverty trap: without funds or investment to grow high-quality produce or plan ahead, they face low prices and/or harvest early, reinforcing the poverty cycle. Farmers also face theft and are increasingly vulnerable to extreme weather events.
• Where lowest cost is the largest business driver, e.g. in the commodities market, farmers, fishermen and smallholders have limited influence in negotiating terms of trade and receive an ever-diminishing share of the fruits of their labor. [See also Red Flag 14]
• Poverty erodes or nullifies economic and social rights such as Right to health, adequate housing, food and safe water, and the Right to education (OHCHR).

Business Continuity Risks:

• Extreme price pressure on farmers can undermine availability of product and stability of supply in the near term and lead to an exodus from farming over time.

Reputational Risks:

• Undue price pressure on supply chains in certain geographies can lead to civil society exposés, resulting in damage and damage to reputation, brand and customer loyalty.

Business Opportunity:

• Focusing on improved livelihoods for people within the supply chain helps to bring them into the consumer base; failure to do so foregoes this opportunity.

*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.

Addressing impacts on people associated with this red flag indicator can contribute to, inter alia:

• Are our purchasing practices designed to drive down pricing, or do they have the effect of doing so? How do we know?
• Are the length of our supply chain commitments/ contracts helping or hindering our ability to use our leverage to secure better prices for farmers?
• Have we explored increasing dialogue with, or forming partnerships with, farmers in our supply chain? Have we sought to understand the real costs associated with production of the commodity, based on their experience?
• Are we engaging in multi-stakeholder initiatives (MSIs) aimed at addressing human rights impacts with respect to the commodity on which we rely? Where a relevant MSI doesn’t exist, can we learn from analogous efforts and explore opportunities to create one?
• Have we explored how to engage and educate our customers if they must absorb some price increase to protect farmer living standards?
• Are we prepared to experiment – and learn from failures or missteps – in tackling the difficult challenge of livelihoods in supply chains? Can we explore opportunities to promote and facilitate the growth of new forms of business in our supply chain that can channel more resources to farmers (e.g. cooperatives, women- owned enterprises, social enterprises)?

*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness

• Oxfam has highlighted several examples of alternative models, including:
  • UK company Sainsbury’s Dairy Development Group: farmers have full membership within the group and equal votes in decision making on milk price. In 2012, Sainsbury’s “removed itself from this volatile milk market and introduced a Cost of Production (COP) model which was voted in by the farmers themselves.”
  • Private company Apicultura Lilian, in Honduras: the company has a sourcing strategy focused on establishing a direct link with honey producers; it distributes 10% of its profits to supplier network and provides technical support and inputs to increase yields.
• Some initiatives appear to aim at “de-commoditization”: An impact investing fund created by Danone, Firmenich, Mars and Veolia with respect to vanilla, offers a 10-year commitment, cooperative and a minimum price, through an “innovative model where formers and industry players share both the benefits and risks.” The project estimates that 60% of cured vanilla’s value will go back to farmers (compared to initially observed shares of 5% to 20%).
• Research in Progress: The Farmer Income Lab is conducting research and stakeholder dialogue to identify, inter alia, “models that unlock opportunities for women and lead to increased business value, as well as how to integrate these models into business strategies and measure progress in doing so.”

• Oxfam (2018) A Living Income for Small-Scale Farmers: Tackling unequal risks and market power discusses the barriers to raising small- scale former incomes and entry points for change.
• Oxfam (2018) Fair value: Case studies of business structures for a more equitable distribution of value in food supply chains explores 12 case studies to demonstrate that equitable business structures, such as farmer-owned cooperatives, and business arrangements including long-term and transparent contracts, profit sharing and producer participation in pricing committees, can result in farmers receiving a greater share of the value of the food they produce.
• FAO (2015) Inclusive Business Models Guidelines for improving linkages between producer groups and buyers of agricultural produce. FAO has developed guidelines that contain, inter alia, useful methodologies for buyers seeking to organize farmers into suppliers, which includes contract farming or outgrower schemes.
• OECD-FAO Guidance for Responsible Agricultural Supply Chains provides guidance for enterprises across the agricultural supply chain, from the farm to the consumer, anchored by a “framework on risk-based due diligence.”
• On cocoa specifically, Peter Stanbury and Toby Webb’s How to deliver real sustainability in the cocoa sector? Collaborative development governance puts the case for cross-cutting, long-term action.