Firms and their senior managers face increasing ethical, compliance, financial and reputational challenges over the working conditions of people employed across the value chain.
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Key insights

  • The issue of human rights abuses in the supply chain is front of mind for C-suite executives as pressure grows from regulators, investors, consumers and non-government organizations (NGOs).
  • The European Union (EU) Corporate Sustainability Due Diligence Directive (CSDDD) expects larger firms to show they're abiding by human rights and environmental protections for both their own and their suppliers' operations.
  • The threat landscape is shifting in a way that makes the exploitation of vulnerable groups more likely and harder to uncover.
  • Interstate conflict and climate change are supercharging migration, leaving more people vulnerable to human trafficking, forced labor and modern slavery.
  • Unintended consequences are an issue as we move away from fossil fuels. As industries accelerate towards net zero, they shouldn't lose sight of workers' conditions.
  • Prioritizing supply chain due diligence is an important way of protecting your business financially and reputationally while doing the right thing.

Human rights issues: an increasing concern

The issue of human rights abuses in the supply chain remains front of mind for CEOs, boardrooms, investors and consumers. Although significant progress has been made in the decade since the Rana Plaza factory collapse, research suggests that more action is needed.1 Currently, just one in ten companies say they work with their suppliers on key human rights risk areas,2 suggesting that most firms either don't realize the issues exist or don't see them as being their responsibility.

"For as long as sustainability has been a hot topic from a D&O [Directors and Officers] perspective, my opinion has been we should be more focused than we are on the social versus the environmental aspects," says Steve Bear, executive director, Financial and Professional Risks at Gallagher.

"Environmental issues quite rightly tend to make headlines, especially given global concerns around climate change and carbon reduction. However, from a D&O perspective, and based on what we're witnessing, our clients are increasingly troubled by social issues."

Growing oversight: Regulators expect more transparency around human rights

The United Nations Sustainable Development Goals (SDGs) provide a comprehensive framework for addressing social, economic, and environmental challenges. Companies can align their sustainability efforts with relevant SDGs to ensure a holistic approach, and monitoring progress against specific SDG targets can help track the impact of sustainability initiatives. Moreover, over 90% of SDG goals and targets correspond to better human rights standards.

The Organization for Economic Cooperation and Development (OECD) Due Diligence Guidance for Responsible Business Conduct provides guidelines for responsible business conduct, including due diligence in global supply chains. The guidance assists companies in identifying and addressing risks, including human rights abuses and environmental impacts, throughout their value chains.

The Global Reporting Initiative (GRI) Standards provide a widely recognized framework for sustainability reporting. By following these standards, organizations can improve transparency and accountability in reporting their environmental, social and governance performance.

The European Union's strong Corporate Sustainability Due Diligence Directive was finalized in March 2024 and is a component of the Green New Deal. Affected companies will need to show that they are abiding by human rights and environmental protections for both their own and their suppliers' operations, as well as demonstrate that they are taking remedial action should any problems arise. Other EU legislation is increasing scrutiny of human rights standards in specific industry sectors. This includes the EU Battery Regulation (EUBR), which requires manufacturers to evaluate the environmental and social impacts of battery production. Similarly, the EU Deforestation Regulation requires companies to ensure their supply chains are devoid of deforestation-related risks.

The Sustainable Finance Disclosures Regulation (SFDR) established human rights disclosure requirements in the EU. These rules require investors to publish data about portfolio firms' compliance with the UN Guiding Principles on Business and Human Rights and OECD Guidelines. Additionally, under the Corporate Sustainability Reporting Directive, financial and non-financial corporations operating in the EU must report on their Human Rights Due Diligence.

Canada's Fighting Against Forced Labour and Child Labour in Supply Chains Act came into force on January 1, 2024, and imposes public reporting obligations on a broad range of entities across the private and public sectors. In-scope institutions must file annual public reports on measures taken to identify, address, and prevent both forced labor and child labor across in their supply chains.

Supply chain anxieties

According to the Proxima Supply Chain Barometer, over two-thirds of European CEOs are anxious about the potential for human rights abuses within their supply chains, a slight increase year over year.3 Almost 100% of CEOs expect to spend more time on supply chain-related issues in the future.

At the same time, businesses face an increasingly demanding set of supply chain regulations and industry standards, which set a firm floor on oversight expectations. Around the world, mandatory reporting and disclosure requirements have come into operation in recent years, including across the EU, UK, US, Canada and Australia.

"When poor practices come to light, companies face backlash, not just from customers and stakeholders, but also from activist groups concerned with environmental and social issues," says Bear. "The reputational damage can impact share prices and lead to shareholder class actions. It's evident that many D&O claims could emerge due to problematic practices in the supply chain."

Demonstrable action needed

It's no longer adequate for firms to demonstrate they have checks and balances in place for just their own operations. Now, they must also show that steps have been taken to monitor and uphold human rights standards throughout the supply chain, all the way from where raw materials are originally sourced and extracted through to manufacturing and assembly.

"A lack of control and oversight can lead to significant problems," says Bear. "This concern multiplies when it involves third-party suppliers you don't control directly."

He continues, "It's important to be consistent and diligent when dealing with suppliers, especially if you're considering awarding a multi-million-dollar contract. While choosing a supplier based solely on cost might be tempting, it's essential to conduct thorough onsite evaluations. You may even want to consider appointing someone to their board of directors to maintain oversight."

More widespread risks, better hidden

The risk landscape is shifting in a way that makes the exploitation of vulnerable groups both more likely and more difficult to uncover. One of the biggest challenges for businesses is a lack of visibility, according to a 2025 study from LRQA.4 The study also warns that, due to the complexity of global supply chains and data challenges, critical issues such as forced labor, child labor, and poor health and safety conditions for workers often go undetected.

Human rights violations aren't just an issue in developing countries. Australia, South Africa and the US all rose from medium-risk to high-risk standings for overall supply chain risk, according to the study. At a time when many companies are nearshoring to reduce risks, the findings also suggest that relocating operations domestically doesn't necessarily equate to lower risk, pointing to the US and its growing supplier base in Mexico.

Year over year, the study indicates a rising number of flashpoints: for example, child labor is showing increasingly problematic trends, while analysis of over 500 commodities shows that cocoa production is at critical levels in terms of both human rights and environmental impacts in the supply chain.

In some industries, end users are putting more pressure on suppliers to ensure transparency in sourcing materials. According to Alec Russell, executive director, Marine Cargo at Gallagher, newer industries with a strong sustainability focus tend to have more control over their supply chains, which allows them to enforce their own standards.

The mining of precious metals and textile manufacturing are considered highly vulnerable to unethical labor practices, according to Russell. "From an insurance perspective, the risks associated with the mining industry are becoming more prominent," he says. "Mining poses distinct challenges for risk management. However, it's possible to analyze the chemical makeup of a particular component to determine quite accurately which mine it came from."

In 2020, a forced and child labor clause was introduced in marine cargo contracts, making it a condition for the insured to comply with legal and regulatory standards relating to the cargo insured. "Underwriters may emphasize concerns about forced labor in mining, asserting that if any aspects of forced labor are identified, they will blacklist those companies," says Russell.

Case study: Investigating human rights abuses in the hospitality industry

AnotherDay, a Gallagher company, was engaged to carry out an investigation into the alleged exploitation of workers within the supply chain of a hospitality company. Investigations like this — which NGOs often fund — are becoming more common, although they're not always made public.

"These hub investigations happen all the time, and they often go under the radar," says Marlon Pinto, AnotherDay's director of investigations. "Being mentioned in any of an NGO's reports can have a detrimental effect on a business's reputation."

In its inquiry of the hospitality organization, the crime team discovered that workers were typically recruited from economically unstable regions in Asia to work in the Middle East. Led by Pinto, the investigation uncovered patterns of corruption and exploitation, including misleading job offers, contract substitution and financial coercion.

Pinto says these issues highlight the need for companies to invest in due diligence throughout the recruitment process to mitigate risks and defend against future allegations. "I would describe the situation [we uncovered] as modern-day slavery, characterized by exploitation occurring both on the ground and at the origin of recruitment."

Companies employing overseas workers can reduce the risk by thoroughly vetting recruiters and examining internal practices to prevent unethical behavior. "Local recruiters may falsely promise jobs and encourage villagers to apply, but instead of offering genuine opportunities, they exploit the desperation of applicants," says Pinto.

He notes that while some companies claim to address these issues, significant gaps remain, and many firms are just ticking boxes for compliance. "Unless these companies actively work to mitigate these problems rather than merely filling out questionnaires, the situation is unlikely to improve."

Three macro trends driving exposure to human rights abuses

The main hurdles facing firms as they attempt to maintain a clear view of supply chain compliance can be broken down into three key themes — or "the three Cs" — Complexity, Climate and Conflict.

Complexity

The first key issue involves the recent shift in supply chains themselves and the shift towards onshoring, which has served to complicate the picture. For much of this century, China has been the obvious offshoring destination for international firms looking to reduce production costs. However, concerns about rising labor costs and potential political instability have prompted the transfer of some manufacturing and production activities to other countries, a practice known as the "China Plus One" strategy.

Countries in the Association of Southeast Asian Nations (ASEAN) bloc are a popular destination for such investment. In 2020, US and EU brands used China for 58% of their supplier portfolios and Southeast Asia for 15%. By 2023, China's share had slipped to 47%, while Southeast Asia's had risen to 23%.5

Although onshoring and friendshoring potentially increase supply chain resilience, they also introduce firms to a complex web of new suppliers, which must be assessed for labor standards. Businesses may find themselves exchanging one location where human rights and environmental impacts are hard to assess — such as China — for another where the same conditions apply.

Vietnam, for instance, has a growing garments manufacturing sector — the world's third largest behind China and Bangladesh, accounting for 15% of the country's total exports. In recent years, it has ratified several International Labor Organization (ILO) Conventions. However, workers in this industry, the vast majority of whom are women, still face severe restrictions on the right to collective bargaining and endemic issues around low pay and long working hours.

"When considering raw materials, clients must ask themselves why some providers offer much lower prices. Is it due to poor working conditions?" says Bear. "Firms must ask themselves, what are our legal and regulatory responsibilities in ensuring we source materials ethically?"

Conflict

A second key challenge stems from the rising number of conflict zones across the world, and from how the people displaced by conflict are likely to become vulnerable to exploitation. Inter-state conflict is currently at its highest level since the end of the Second World War, according to the United Nations (UN). At the end of 2023, 68.3 million people in 66 countries and territories were internally displaced by conflict and violence, an almost 50% increase in just five years.

This conflict dynamic has supercharged migration, with refugees in particular proving vulnerable to forced trafficking. According to the UN International Organization for Migration, any situation where the authority of the state and society can't protect people leaves people at greater risk, including when people are:

  • Fleeing situations of violence and conflict
  • Dislocated from community and family support structures without access to legitimate forms of employment, legal status and social protection
  • Moving or working through irregular channels
  • Working in sectors that are either literally out of sight, such as work at sea, or in informal sectors6

Climate

Climate change, the third of the "three Cs," is further displacing communities, in turn adding to the risk of modern slavery. As global temperatures rise, the increased frequency of natural disasters has forced more people from their homes and made subsistence in some regions more challenging. It's estimated that storms, floods and droughts displaced 26.4 million people in 2023, the third-highest figure in the past decade.7

The potential risks of the transition

The shift in energy generation provides an example of supply chain risks in terms of human rights.
Almost 450 gigawatts (GW) of solar capacity were installed in 2023, compared to 239 GW the year before.8 The output price of solar power has fallen by 90% in the last 10 years and is now competitive with the cost of all fossil fuels. This increase is solar capacity is a key success story for the net zero transition.
However, much of the solar industry is based in China, where there are allegations that forced labor from the marginalized Uyghur community is making critical solar panel components. Researchers at Sheffield Hallam University found at least 90 Chinese and international businesses whose supply chains were affected by this issue.

Meanwhile, climate considerations are forcing firms to make tough choices for their own operations. These choices can create unintended consequences as industries compete for the rare earth minerals needed to support the technologies required for the transition to net zero. In their rush to secure raw materials, firms could lose sight of the conditions for workers who extract, process and assemble the vast array of minerals and metals the transition requires. Demand for rare earth oxides is expected to reach 153,000 metric tons by 2040, a 65% increase from 2023 — in addition to increased requirements for more common materials such as copper, nickel and manganese.

Extraction is dirty, physically demanding work, with the associated risk of worker exploitation where safety and wellbeing aren't a priority. Businesses must grapple with these fast-growing, complex supply chains, which often involve countries where oversight is challenging. A study by Amnesty International published last year warned that, "Human rights abuses tied to the extraction of energy transition minerals are alarming and pervasive, and the [electric vehicle] industry's response is sorely lacking."

The need to balance social and environmental responsibilities will continue to be a feature of the transition going forward. "I have a client here in the US with large, non-air-conditioned warehouses," says Lisanne Sison, managing director, Employee Risk Management at Gallagher. "While this was never a problem before, it has now become an issue against a backdrop of growing heat stress.

"Companies are faced with the dilemma of whether to invest in air conditioning for their warehouses, which would conflict with their net-zero goals and ambitions," she continues. "There is a tension between providing a safe working environment for employees and the potential negative impact on the company's climate stance due to the associated energy consumption."

What does supply chain due diligence look like?

Although most firms take human rights challenges seriously, experts say there's still quite a broad spectrum of oversight capability in most sectors. "Some of our clients have the operations and risk management structures to deal with this," says Laura Hawkes, head of Intelligence at AnotherDay, a Gallagher company. "Others are waking up to the need to get more involved. Covering these risks can be incredibly time and resource intensive."

Around the world, new laws are coming into place which spell out business responsibilities for upholding human rights standards across the value chain. For example, the EU passed a supply-chain oversight law in 2024 for businesses with more than 1,000 employees and more than €450 million in annual turnover.

Several countries have introduced public registries to track and monitor firms that are known to use forced labor, while increasing fines and penalties for non-compliance. The level of scrutiny from regulators and other stakeholders will only continue to grow.

“
The cost of doing a proper due diligence risk assessment is absolutely minute compared to losing a whole market, or people boycotting your brands because they don't want to be working with you or funding you.
Laura Hawkes, head of Intelligence at AnotherDay, a Gallagher company

 

AnotherDay's clients typically carry out a "desktop" assessment of key suppliers every year, using publicly available data, and then carry out a deeper dive every two to three years. This analysis can involve bringing in "on the ground" expertise a process made more challenging in markets where media and civil society freedom is restricted.

Key criteria to consider

Once a company believes it has mapped its potential human rights concerns, further investigation may be needed. Care must be taken to ensure that steps taken to remedy a human rights issue in one area don't inadvertently worsen conditions elsewhere.
Firms can turn to the UN Guiding Principles on Business and Human Rights, which offer four criteria to guide decisions on how to proceed:
  • Scope — the number of people affected
  • Scale — the significance of any effect
  • Irremediability — the ease of making good on harm caused
  • Likelihood — the chances of impacts occurring
Risk and supply chain managers can then grade specific issues and determine a plan of action. "Most companies want to be absolutely sure that they are on the right side of the law and go above and beyond to mitigate the concerns of other key stakeholders," says AnotherDay's Hawkes. "But it's still a bit of a maze, and navigating it is becoming more challenging."

Insurance considerations — what directors need to know

Directors and Officers insurance provision

D&O underwriters will only provide cover where there is evidence of robust supply chain due diligence, involving documentation, photography and safe storage of relevant materials.
"Having thorough records will provide you with a strong defense in case something goes wrong in your supply chain," says Steve Bear. "If regulators come knocking, or you face class action lawsuits from shareholders, you can present this documentation to show you maintained a high standard of internal governance."

Beyond compliance considerations, firms have wide-ranging stakeholder, brand and liability concerns linked to their ethical and corporate responsibility track records. Companies failing to carry out the appropriate levels of due diligence across their supply chain can cause lasting damage to their business and its stakeholders, as well as leave senior managers exposed to litigation.

"When I first started in this field, around 90% of D&O claims arose from financial losses," says Bear. "Today, the landscape has shifted. The balance of claims is now approximately 50-50, with many losses arising from the increased expectations of corporations. Societal standards for accountability have improved, which is beneficial for everyone.

"However," he adds, "from a D&O insurance perspective, the costs associated with claims have escalated. You may run a profitable business, but if you're accused of having modern slavery in the supply chain, it could lead to substantial legal fees and settlements. This financial burden will only increase if you fail to meet the governance standards that you or your board have established."

Key human rights issues

Child labor remains a prevalent concern across industries and regions worldwide. The United Nations Children's Fund (UNICEF) estimates that in the world's poorest countries, just over one in five children are involved in paid or unpaid work that may harm their physical or mental health.
Modern slavery, including forced labor and human trafficking, is a deeply entrenched issue within many industries, affecting an estimated 50 million people worldwide. The consumer products and construction industries are often deemed to have the highest risk of using trafficked labor, which is most prevalent in developing economies but also present in many more advanced nations. Every year, G20 countries import nearly US$500 billion worth of goods that are at risk of being produced in the context of modern slavery.9
Conflict minerals sourced from regions plagued by armed conflicts and human rights abuses pose significant ethical challenges. The electronics industry has faced criticism for its use of conflict minerals, including tantalum, tin, tungsten and gold. In response, the global tech giants have implemented stringent supplier requirements and due-diligence procedures to ensure responsible sourcing.
Climate change and resource extraction are disproportionately affecting indigenous communities and marginalized groups. According to Global Witness, at least 196 people were killed defending communities affected by natural resource extraction in 2023. The Institute of Human Rights and Business has highlighted areas where governments, businesses and industries should focus to ensure a "responsible exit" for communities currently dependent upon fossil fuel extraction.
Sources

1"The Rana Plaza Disaster Ten Years on: What Has Changed?" InfoStories, Apr 2023.

2"2023 Corporate Human Rights Benchmark," World Benchmarking Alliance, 17 Nov 2023.

3"Supply Chain Barometer 2024," Proxima, 9 Sep 2024.

4"2025 Supply Chain ESG Risk Outlook," EiQ, accessed 17 Jan 2025.

5"The Shift of Supply Chains From China to Southeast Asia," Asean Exchanges, 9 Feb 2024.

6David, Fiona, et al. "Migrants and Their Vulnerability," International Organization for Migration, accessed 17 Jan 2025. PDF file.

7"2024 Global Report on Internal Displacement (GRID)," IDMC, 14 May 2024. PDF download.

8"New Report: Global Solar Installations Almost Double in 2023 but Leaves Emerging Economies in the Dark," SolarPower Europe, 18 Jun 2024.

9"2024 G20 Summit in Brazil Unites World Leaders to Tackle Modern Slavery and High-Risk Imports," Walk Free, 13 Nov 2024.