Modern Slavery Act - What to expect for issuers?

September 19, 2023

Summary
On May 11, 2023, Canada enacted the “Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff ," also known as Canada’s Modern Slavery Act (the “Act”). This legislation is scheduled to take effect on January 1, 2024. Subject entities will be required to file their first reports by May 31, 2024. Failure to comply with the reporting obligations under the Act may result in fines, reputational damage, and liability for directors and officers.

Who are impacted?
Any government institution that produces, purchases or distributes goods anywhere in the world, and any Canadian-linked entity that produces, sells or distributes goods anywhere in the world, imports goods into Canada, or controls an entity engaged in any of these activities will be subject to the reporting obligations under the Act.

Specifically, an entity is defined as a corporation, trust, partnership or other unincorporated organization that:

• is listed on a Canadian stock exchange;
• has a place of business in Canada, does business in Canada, or has assets in Canada, and that meets at least two of the following conditions for at least one of its two most recent financial years: (1) has $20 million or more in assets, (2) generated $40 million or more in revenue, or (3) employs 250 or more employees, or
• is prescribed by regulations.

What to report?
To be compliant, reporting entities must submit, to the Minister of Public Safety, the following:

• Steps the entity has taken during its previous financial year to prevent and reduce the risk of forced labour or child labour used at any step of the production of goods in Canada or elsewhere by the entity or of goods imported into Canada by the entity.
• Its structure, activities and supply chains.
• Its policies and due diligence processes in relation to forced labour and child labour.
• The parts of its business and supply chains that carry a risk of forced labour or child labour being used and the steps it has taken to assess and manage that risk.
• Any measures taken to remediate any forced labour or child labour.
• Any measures taken to remediate the loss of income to the most vulnerable families that results from any measure taken to eliminate the use of forced labour or child labour in its activities and supply chains.
• The training provided to employees on forced labour and child labour.
• How the entity assesses its effectiveness in ensuring that forced labour and child labour are not being used in its business and supply chains.

As mentioned above, the report must be submitted on or before May 31st of each year. In addition to submitting the report to the Minister, the entity must make the report available to the public, including publishing it in a prominent place on its website. In the case of entities incorporated under the Canada Business Corporations Act or under any other Act of Parliament, the report must also be distributed to each shareholder, along with its annual financial statements. In the case of a report submitted for a single entity, the report must be approved by its governing body. In the case of a joint report, the report must be approved by either the governing body of each entity included in the report, or by the governing body of the entity, if any, that controls each entity included in the report.

Conclusion and takeaways
The Act represents a significant milestone in Canada's commitment to combatting child labour and forced labour with the aim to increase industry awareness and transparency and force businesses to improve their practices. To comply with the Act, businesses must integrate ESG considerations, and in this particular case, “S”, into their core operations. This involves conducting comprehensive risk assessments, implementing due diligence procedures, and establishing transparent reporting mechanisms. Its implications on ESG practices are profound, emphasizing the need for businesses to prioritize ethical conduct, human rights, and responsible governance. By adhering to the provisions of this Act, companies contribute to a more sustainable and socially responsible global business landscape.

Entities failing to comply with the new reporting requirements may be subject to fines up to $250,000. Additionally, it might be interesting to see whether proxy advisors, particularly ISS, will incorporate this development into their quality score assessment on Canadian issuers.