INVESTING IN DIGNITY
Labour abuse is a persistent problem in Malaysia and one that giant investment funds can no longer ignore. By Anuradha Raghu and Yantoultra Ngui
in Kuala Lumpur
Concerns over labour abuse in Malaysia, a longstanding problem in the country, have escalated in the past three months and are spreading beyond the palm oil industry to other parts of the economy.
The implications are numerous, first and foremost for the workers themselves, many of whom live in squalid conditions. The issue also has the potential to threaten the country’s output by stifling direct investment and killing supply contracts.
But a third fallout is in the world of investing, where more and more of the biggest money managers say it is giving them second thoughts. As labour abuse claims emerged at a supplier to the appliance giant Dyson and the glove maker Supermax Corp, the issue is also weighing on the country’s stock market and hurting the pension investments of its citizens.
“Within Malaysia, forced labour is an issue we view as material,” said Daniel Ng, an investment manager at abrdn Plc (formerly Standard Life Aberdeen), which oversees US$632 billion in assets. “Companies that are not up to standard will likely see reduced capital flows, and trade at relative discounts to companies that do the right thing.”
Malaysia has more than 2 million documented migrant workers — and at least as many undocumented ones — mostly from countries such as Indonesia, Bangladesh and Nepal, according to the International Organization for Migration (IOM), a United Nations agency. Migrants make up more than 14% of the country’s population, it says.
But the vast majority of documented migrant workers live in accommodation that doesn’t meet Malaysia’s minimum housing standards, according to the Ministry of Human Resources. Companies have been accused of demanding excessive overtime, not paying wages, retaining workers’ identity documents and keeping them in debt bondage.
“It is modern slavery,” Malaysian Human Resources Minister M Saravanan said at the launch of the country’s National Action Plan on Forced Labour in November.
He was referring to workers’ living conditions that were discovered during a raid on a glove-making factory near Kuala Lumpur. Indian labourers brought in to work on rubber plantations 250 years ago were given better conditions than today, he said.
In November, Dyson said it was cutting its ties with ATA IMS Bhd after six months’ contractual notice. The supplier makes parts for the British company’s vacuum cleaners and air purifiers. The move came after Dyson commissioned an independent audit of ATA’s labour practices following allegations by a whistleblower.
“We hope this gives ATA the impetus to improve,” a Dyson spokesperson said at the time.
ATA said it was working to improve labour practices, including a ban on Sunday overtime. It said it would ensure that it has valid work permits for all workers and would set up external whistleblowing channels.
The events triggered a plunge in the value of ATA shares, sending them down 74% last year.
Not long before, the country’s $24-billion palm oil industry faced similar scrutiny. In October 2020, the US halted imports of products from FGV Holdings Bhd, one of the world’s largest crude palm oil producers, citing the presence in its operations of all 11 indicators of forced labour set out by the International Labour Organization (ILO). It did the same for Sime Darby Plantation Bhd, also citing the presence of all 11 indicators.
FGV said it was fully committed to labour standards and would take all necessary steps to lift the ban. It has commissioned an independent assessment of its labour practices, it said. Sime Darby Plantation said it appointed a consultancy to evaluate its labour practices.
Then there were the makers of rubber gloves, which control more than two-thirds of the global market for a product that became red-hot during the pandemic. Top Glove Corp, the world’s biggest producer, became one of the country’s two largest companies at one point in 2020.
But the soaring demand for gloves created a huge need for workers, and questions emerged about how they were being treated. In July 2020, the US Customs and Border Protection barred imports of disposable gloves made by Top Glove’s Malaysian units. In subsequent statements, it said it has “sufficient information to believe that Top Glove uses forced labour”.
Top Glove said it was continuing to improve labour practices and had resolved ILO indicators of forced labour in April last year. In September, US Customs said forced labour concerns had been addressed and the company’s gloves may be imported.
But the following month, the US Customs also halted imports of gloves made in Malaysia by another producer, Supermax, citing “reasonable indications” of the use of forced labour. In November, Canada did the same.
Supermax said its new foreign worker management policies include improving benefits and living conditions, upgrading dormitories and raising the monthly minimum wage.
The ILO defines forced labour as “any work or service that is exacted from a person under the threat of penalty, for which a person has not offered himself or herself voluntarily”. Its 11 indicators of the practice include abuse of vulnerability, restriction of movement and debt bondage. It estimates that almost 25 million people are subjected to forced labour globally, with the highest prevalence in the Asia-Pacific region.
Forced labour “is present in Southeast Asia, but Malaysia has a higher reliance on foreign workers and so is in the spotlight more”, said Ng of abrdn.
The US Department of State placed Malaysia in the lowest category in its annual Trafficking in Persons Report in June, alongside Myanmar, China and North Korea in Asia. The ranking is based on the extent of government efforts to meet standards for elimination of human trafficking. Malaysia’s government isn’t making “significant efforts” to meet the minimum standards, it said.
In November, Malaysia agreed to ratify ILO Protocol 29, the protocol to the Forced Labour Convention, as part of a commitment to eradicate forced labour. It also launched a five-year plan that aims to significantly reduce incidences of forced labour by 2025 and eliminate all forms of it by 2030.
The plan will focus on areas including awareness, enforcement and workers’ access to remedy and support services, Human Resources Minister Saravanan said at the time.
For Anthony Dass, chief economist and head of research at the local lender AMMB Holdings in Kuala Lumpur, forced labour has an obvious impact on a country’s economy. For one thing, it hurts foreign direct investment and supply contracts, and reduce demand for companies’ goods and services.
For another, it damages investment in human capital, which can cause an economy to stagnate “at the lowest end of the production ladder”, he said.
But the practice also affects the country’s equity market. There’s a tendency for investors to sell first and investigate later, said Gan Eng Peng, a senior director of equities at Affin Hwang Asset Management in Kuala Lumpur.
Malaysia’s benchmark stock index declined 3.7% last year even as a gauge of global equities rose 17%. The country’s equity measure has fallen in six of last eight years. Ng noted that uncertainties about the political situation and Covid-19 were probably bigger reasons for the country’s underperformance.
“Labour risks are important within ESG,” said Nneka Chike-Obi, director of sustainable finance at Fitch Ratings, referring to environmental, social and governance concerns. “Investor surveys show that worker health and safety and human rights are among their top sustainability concerns.”
Norway’s giant sovereign wealth fund, which owns more than 100 Malaysian stocks, declined to talk about specific companies or markets, but its general message was clear.
“Responsible investment is an integral part of our investment decisions,” said a representative for Norges Bank Investment Management, which oversees the Government Pension Fund Global, the largest sovereign wealth fund in the world with investments with a market value of about $1.4 trillion. “We have clear expectations of the companies in our portfolio.”
For Dass, there’s little to be gained by making arguments that forced labour is also happening in other Southeast Asian countries. The only solution to an issue with wide-ranging implications, he says, is to make changes at home.
“Irrespective of whether the focus is more on Malaysia than other countries, there is an urgent need for changes to take place,” he said.
“Companies that are not up to standard will likely see reduced capital flows, and trade at relative discounts to companies that do the right thing”
DANIEL NG Investment manager, abrdn Plc