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How to make business fix supply chain flaws



Meatpacking plants in Wisconsin; fruit picking farms in Huelva; sweatshop clothing factories in Leicester — across the globe, coronavirus outbreaks have repeatedly been linked to companies with the worst working conditions, shining an unflattering light on to the supply chains of developed nations.

“Covid has laid bare the vulnerability of workers at the bottom of the supply chain,” says Laura Safer Espinoza, former New York State judge and director of the Fair Foods Standards Council.

“We call these individuals essential workers and yet the protections that they are afforded are woefully inadequate.”

Of the 24.9m people trapped in forced labour, 16m people are exploited in the private sector, according to figures from the International Labour Office in 2017.

And according to research by Hult International Business School in 2016, 77 per cent of companies thought it was likely that modern slavery existed in their supply chains. “In reality, we think it is closer to 100 per cent,” says Peter Hugh Smith, chief executive of CCLA investment fund and chair of an investor initiative to pressure businesses to rid slavery from their supply chains.

So how can investors influence companies to improve standards? And how likely are they to succeed?

David Schilling, senior programme director at the US-based Interfaith Center on Corporate Responsibility, says the first step is for institutional investors such as pension funds to put policies in place to screen their investments to check that standards are being upheld in the supply chains of investee companies.

“What’s the criteria of their investments and are they doing their due diligence to make sure companies aren’t abusing human rights?” he says.

In the UK, socially responsible investment screening is growing and £34.3bn was invested in responsible investment funds as of July 2020, up from £24.1bn the previous year. This represents 2.7 per cent of the industry’s funds under management, up from 1.9 per cent in July 2019, according to the Investment Association.

But the environmental, social and governance metrics that dictate such investments have their critics. While many funds have dropped companies due to environmental concerns, for instance, labour abuses in supply chains often fall under the radar because of a lack of visibility in subcontracting by those companies. The Australian Strategic Policy Institute recently estimated that the supply chains of at least 82 multinational companies such as Apple and Huawei were linked to factories using forced labour from China’s Uighur minority.

Boohoo, which in July was accused of poor working conditions and paying staff less than the minimum wage, was, just weeks before, rated by MSCI among the top 15 per cent of its peers based on ESG metrics. The online fashion retailer featured in multiple “sustainable” funds, including products from Standard Life Aberdeen, Legal and General Investment Management and Man Group.

Attributing such inconsistencies to the current way ESG is defined, George Serafeim, chair of the Impact-Weighted Accounts Project at Harvard Business School, says: “We call all these things that are very, very different, ‘ESG’ — everything from negative screening, to some engagement practices, to deep integration of ESG issues in companies’ strategies.” Investors, he adds, “need to identify organisations that by the nature of their strategy can deliver social impact, not [just] because they’ve adopted a few policies.”

Sarah Kaplan, professor at Rotman School of Management, says investors should put pressure on boards to create reporting requirements for social responsibility, as well as give small shareholders more opportunity to put issues before the board.

“Just like you have a financial audit committee, you should have an audit committee for your social statistics and be looking at those as closely as you look at your financial numbers,” she says. “If the board says ‘I want to see a full audit of our factories’, and if there isn’t improvement, asks why, you can guarantee the chief executive is going to push those questions all the way down through management.”

Ms Safer Espinoza is less optimistic that good intentions at board level will translate into action lower down. “My experience from what [is almost] a 40-year career in enforcement has led me to conclude that self-policing and self-monitoring simply does not work,” she says.

In her Fair Food Program, participating buyers such as Walmart agree to suspend purchases from tomato growers who fail to comply with the programme’s code of conduct, which now includes a Covid-19 protection protocol. The agreement is legally binding and is the only way, she says, investors can ensure companies put their money where their mouth is.

“Investors need to urge the major corporations at the top of these supply chains to enter into legally binding agreements with worker organisations, and [investors] can commit to putting their market-enforcing power behind the standards,” she says.

Mr Hugh Smith says investors also need to show management that poor working conditions are a false economy.

“There’s a huge economic profit that comes out of slavery, but most of that actually gets siphoned out by the middlemen — recruitment agencies, gang masters, etc,” he says. “In the great majority of cases, the impact [forgoing this kind of cheap labour] would have on cost is so infinitesimally small.”

Additionally, Mr Serafeim argues, ultra-lean supply chains raise a red flag and companies should be valued accordingly. “While it increases companies’ operating efficiency it actually decreases their resilience…This is not only a social issue but is becoming a business issue, so it is also an investor issue.”

And it is only becoming more urgent, says Mr Hugh Smith. “We’re in a recession, there’s global warming. These factors are going to drive economic migration, which risks modern slavery and means we have to do more to even put a lid on it.”


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Iranian TV action thriller delivers warning to Zarif




It is hardly surprising that Mohammad Javad Zarif, Iran’s foreign minister and nuclear negotiator, is not a fan of Gando, a popular television drama that depicts an incompetent minister who scuppers nuclear talks with world powers by hiring dual nationals who turn out to be spies for MI6.

The series — made by an institute believed to be affiliated to the elite and hardline Revolutionary Guards — “is a lie from the beginning to the end” that “damages foreign policy more than me” by fuelling public mistrust, Zarif said.

By focusing on the nuclear talks, the Guards’ motive goes beyond creating compelling drama, reformist analysts say. Iran is in discussion with western powers about reviving the nuclear deal, a key reformist achievement, and hardliners want to deter the popular foreign minister from declaring his interest in the presidency in what is a crucial election year.

“I’ll be grateful to Gando-makers to let us continue our current job,” Zarif said this month, and commented that he would not run for the presidency.

The possibility of nuclear talks with the US and other powers has complicated an already fraught Iranian political scene ahead of the June election. Many reformists are pinning their hopes on Iran’s top diplomat to reinvigorate the nuclear deal and boost support at the ballot box. Hardliners might prefer to negotiate the deal themselves after the election. The polls are also seen as particularly crucial in case supreme leader Ayatollah Ali Khamenei, 81, dies during the next president’s term.

Pendar Akbari, left, and Ashkan Delavari, right, in a scene from ‘Gando’
Pendar Akbari, left, and Ashkan Delavari, right, in a scene from an episode of ‘Gando’. The series title refers to an Iranian crocodile able to distinguish its friends from its enemies © Bahar Asgari/Shahid Avini Cultural and Artistic Institute via AP

The purpose of Gando, which refers to an Iranian crocodile able to distinguish its friends from its enemies, “is to tell Zarif that should he dare to announce his candidacy, he will be destroyed immediately,” said one reformist analyst. “When the intelligence service of the Guards truly believes in the Gando plot lines, it means even if Zarif decides to defy such warnings, he will not be allowed to run.”

Centrist president Hassan Rouhani is due to step down this year after two terms and it is not yet clear who the presidential candidates will be. Politicians register as late as May and then have to be vetted by the Guardian Council, the hardline constitutional watchdog, which can disqualify nominees. Potential hardline candidates include Mohammad Bagher Ghalibaf, the parliament speaker and a former guards commander; Ebrahim Raisi, the judiciary chief; and Ali Larijani, a former speaker of parliament. On the reformist side, speculation has centred on Es’haq Jahangiri, first vice-president, Hassan Khomeini, a grandson of the founder of the Islamic republic, and Zarif.

A US-educated career diplomat widely respected in the west for his pragmatism, Zarif was instrumental in the historic deal in 2015, under which Iran curbed its nuclear activity in exchange for the lifting of sanctions. But Donald Trump abandoned the accord in 2018, imposed sanctions, including on Zarif, and said he would pursue a new accord to contain Iran’s regional and military policies. The US move emboldened hardliners, confirming to them the untrustworthiness of the US.

Zarif’s background in the US both as a university student and as Iran’s head of mission at the UN — during which he met US politicians including then senator Joe Biden — has long made him a source of suspicion for hardliners.

This wariness of both Zarif and the west is evident to viewers of Gando, as is the heroism of the Revolutionary Guards. Mohammad, the action hero protagonist, warns that western negotiators may sabotage refineries as part of nuclear talks. Mohammad works out of elaborate facilities akin to those in a James Bond film. The fictional foreign minister is advised by a media adviser, the main culprit, “to enter into direct talks with the US and accept the conditions of the leader of the global village”.

Vahid Rahbani in a scene from an episode of ‘Gando’
Vahid Rahbani in a scene from an episode of ‘Gando’. State TV abruptly stopped broadcasting the series that was less than halfway through its 30-episode run © Hassan Hendi/Shahid Avini Cultural and Artistic Institute via AP

The dramatic scenes reflect, in part, the worldview of some of Zarif’s critics. “Reformists, Mr Zarif and his lobby group in Washington [Iranian dual nationals] should be wiped out from Iran’s politics,” said an aide to a senior hardline politician who is a potential presidential candidate. “We have to get rid of this cancerous tumour once for good.”

Gholamali Jafarzadeh, a former conservative member of parliament, said Zarif “is not a good statesman and should not run for president” while “reformists should know that their choices have no chance to be allowed to run”. 

This month, state TV abruptly stopped broadcasting the series that was less than halfway through its 30-episode run. Local media said broadcasts would resume when the presidential race was over. Iran’s centrist president Hassan Rouhani, whose signature achievement is the nuclear deal — alluded to the show on Wednesday and said “people’s money” should not be spent on “fabrication of the truth” and “distortion of facts”.

After three years of sanctions, many voters are disillusioned by the infighting and the prospect of real change, whatever the outcome of the election. “Whether Zarif or a figure more senior than him runs or not, I’m not going to vote,” said Hamid, a 40-year-old engineer. “Let the Guards win the election as they are the ones who are running the country anyway. Why shall I make a fool of myself?” 

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Rising inflation complicates Brazil’s Covid-19 crisis




After seven months in lockdown, Michele Marques received some unwelcome news when she returned to work: while she was away the prices of almost all the products she uses as a hairdresser had soared.

“A box of gloves rose 200 per cent. Colouring products increased at least 100 per cent,” said the 37-year-old from São Paulo, underlining how costs were rising while her revenue had collapsed. “I had to raise the price of my services, too.”

It is a dynamic that is playing out across Brazil, adding an extra layer of complexity to the country’s coronavirus crisis, which has already claimed the lives of almost 350,000 individuals and pushed hospital services to the brink.

With much of Latin America’s largest economy being shuttered, inflation is surging to its highest level in years, fuelling a silent scourge of hunger among poorer citizens that has run in parallel to the Covid-19 pandemic.

“The high price of staple foods — rice and beans, for example — has led to the disappearance of these items from the table of millions of Brazilians,” said Ana Maria Segall, a researcher at the Brazilian Research Network on Food and Nutritional Sovereignty and Security. In the 12 months to the end of March, the price of rice increased 64 per cent and black beans 51 per cent.

“In Brazil currently food inflation has penalised the very poorest, preventing them from having adequate access to food and in many situations leading to hunger,” she said, adding that rising unemployment and the curtailment of social programmes were also contributing factors.

Volunteers hand out food in São Paulo © Alexandre Schneider/Getty Images

Less than half of Brazil’s population of 212m now has access to adequate food all the time, with 19m people, or 9 per cent of its inhabitants, facing hunger, according to a recent report by Segall’s group.

“I’m doing some odd jobs, but it’s not enough to keep us going,” said Jonathan, a 28-year-old who lost his job in the kitchen of a Chinese restaurant in São Paulo when the pandemic began. He said he now struggles to provide enough food for his three young children and pregnant wife.

On a 12-month basis, inflation in June is expected to surpass 8 per cent, far above earlier estimates. In the 12 months to March, food prices jumped 18.5 per cent, while the price of agricultural commodities in local currency surged 55 per cent and the cost of fuel increased almost 92 per cent.

Line chart of Percentage increase over past 12 months showing The price of rice in Brazil is soaring

The developments pose a fresh challenge to President Jair Bolsonaro, who is already under fire for his handling of the Covid-19 pandemic. Across Brazil’s biggest cities, graffiti has sprung up labelling the populist leader “Bolsocaro” — a portmanteau of his name and the Portuguese word for expensive.

The rising prices are also likely to provide useful ammunition to leftist former president Luiz Inácio Lula da Silva, who returned to the political fray last month and may challenge Bolsonaro in elections next year.

“Bolsonaro is to blame for the increase in food prices, he is to blame for everything. They have to remove this guy,” said Maria Izabel de Jesus, a retiree from São Paulo.

Armando Castelar, a researcher at the Brazilian Institute of Economics, said the government had underestimated inflation both in terms of the numbers and also “how much a concern it should be”.

He attributed the rising prices to the devaluation of the Brazilian currency, triggered in part by the stimulus packages passed by the US government — which helped to bolster the dollar and led to higher Treasury yields — and the brighter economic outlook outside Latin America.

“You have a situation where commodity prices are going up because the global economy is going to grow a lot this year. With the growth in the US, interest rates are going up and the dollar is strengthening. This puts a lot of pressure on the exchange rate in Brazil and emerging markets in general,” he said.

As the spectre of inflation loomed last month, the Brazilian central bank raised its key interest rate by 75 basis points, higher than the half-percentage point many economists had expected. A further rate rise is expected next month.

“The central bank acted correctly, but it cannot stop there. It is important not to be too lenient in dealing with this,” said Castelar.

Silvia Matos, a co-ordinator at the Brazilian Economy Institute, also pointed to Brazil’s weakening currency as a contributing factor to inflation. But she said the slide in the real was triggered by investor concerns over Brazil’s deteriorating public finances.

Following the creation of two separate stimulus packages to mitigate the impact of Covid-19, government debt has risen to about 90 per cent of gross domestic product, a high level for an emerging market economy.

The rollout of the second of these packages began this month, with 45m Brazilians set to receive $50 a month for four months.

Critics said, however, these stipends were not nearly enough to keep people both fed and at home in lockdown.

“It is essential that the emergency aid is of a greater value, so that people do not leave the house but no one also stays at home starving,” said Marcelo Freixo, a federal lawmaker with the leftwing PSOL party.

“We need to reduce the circulation of the disease. Brazil is already experiencing 4,000 deaths per day. We will reach 500,000 total deaths by the middle of the year.”

Matos says that inflation had hit poorer citizens much harder than middle-class and rich Brazilians because a larger portion of their income was dedicated to food, the price of which has increased substantially.

“The only thing that could help right now is to get out of this pandemic,” she said.

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Can CVC pull off a $20bn ‘deal of the century’ at Toshiba?




Proposed management buyout looks like an improbable win for the Japanese conglomerate’s embattled CEO

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