Boohoo’s share price halved and retailers- including Amazon, ASOS and Zalando, suspended sales of the brand -in the space of nine days. The reason? Reports by NGO Labour Behind the Label and the Sunday Times of multiple instances of labour abuse in Boohoo’s supply chains, including potential modern slavery.

Contrast this with the share price of H&M following the Financial Times’ revelation that H&M branded packaging were being made, under duress, by political prisoners in China. Investors didn’t blink and H&M’s share price remained steady.

Why has a modern slavery scandal hit Boohoo so much harder than H&M? The primary reason is the difference in the two company’s Human Rights Due Diligence (HRDD) systems. Dull though it may sound, H&M’s embrace of HRDD enabled the company to address the incident quickly and lent it credibility at a difficult moment. By comparison, Boohoo’s approach to human rights has long been criticised by NGOs.

HRDD, a process defined in the UN Guiding Principles on Business & Human Rights, is endorsed by governments around the world. Unfortunately, its achieved little awareness among investors-distracted as they are by less substantive ESG fluff.

H&M is widely recognised as a leader in HRDD. It was one of the earliest endorsers of the UN Guiding Principles and has ranked among the top five apparel brands in all three of the Corporate Human Rights Benchmark’s annual reviews of performance. The Fashion Transparency Index has also placed H&M in its top tier of brands three years in a row.

Boohoo is not included in the Corporate Human Rights Benchmark but did make it into the 2019 and 2020 Fashion Transparency Indexes. In both years it was ranked in the second lowest tier.

HRDD does not guarantee abuse free supply chains, but when properly implemented it allows companies to identify risks and work with suppliers to improve conditions. Critically, companies that properly implement HRDD have more resilient supply chains and are better positioned to tackle abuses that do occur.

To avoid losses, investors should pay attention to a company’s HRDD. It’s notable that several ‘sustainable’ funds were heavily exposed to Boohoo, implying an inadequate understanding of human rights risk.

Investors can draw upon multiple sources to evaluate HRDD implementation. The above-mentioned indexes are a useful starting point but include only a small number of companies.  

All companies doing business in the UK with over £36m of global turnover -an estimated 18,000 companies- have to publish a modern slavery statement every year. Any company that meets these criteria but does not have a statement on its website should be treated with great caution. Investors should assess and understand modern slavery statements and human rights policies published by companies. Strong statements acknowledge the company’s duty to respect human rights, define their due diligence processes, explain risks identified and set out objectives for the coming year. Weak statements make assertions about risk without evidencing the due diligence used to arrive at the conclusion. H&M’s statement endorses the United Nations Guiding Principles on Business & Human Rights whereas Boohoo’s does not, for instance.

Companies’ past communications may be used to gauge the importance they attach to human rights. Companies that are open about the risks they face and show concern for the people making the goods they sell are likely to take HRDD seriously.

Investors wishing to build ethical portfolios may be inclined to avoid sectors with a high risk of human rights abuse. This approach does not help end abuse, rather investors should seek out companies that implement strong HRDD and push laggards to improve.

The Covid-19 crisis is driving exploitation of workers at a time when companies are increasingly being held accountable for their supply chains. We are likely to see other company’s share price take a hit due to inadequate HRDD.

Oliver Cushing is the CEO of modern slavery due diligence technology company RightsDD. He holds no direct interests in Boohoo or H&M.