ESG and modern slavery in Brazil: what should companies know?

Rodrigo Seizo Takano
Machado Meyer, São Paulo
rtakano@mcahdomeyer.com.br

Murilo Caldeira Germiniani
Machado Meyer, São Paulo
mgerminiani@machadomeyer.com.br

Júlia Corrêa Rêgo
Machado Meyer, São Paulo
jcorrea@machadomeyer.com.br

Introduction

Environmental, social and governance, otherwise known as ESG, represents principles for responsible investments, providing guidance to investors that the company has a social conscious and aims to have a positive impact in the long-run on the environment, society and business.

Due to this, investing in the development of robust ESG metrics is an emerging priority for companies. Financial institutions, customers and investors are increasingly demanding to know how their money is spent and the potential impacts of the businesses they invest in. ESG is no longer a ‘nice-to-have’, it is essential to a company’s success.

The ‘S’ in ESG

One of the pillars of ESG, the social aspect (the ‘S’), aims to cover the way companies interact with their employees and the communities in which they operate. For labour and employment purposes, the ‘S’ pillar focuses on practices involving diversity, anti-discrimination, health and safety in the workplace, and the eradication of modern slavey. Among those, the eradication of modern slavery is one of the most important aspects to consider.

According to a survey by the ManpowerGroup[1], 42 per cent of Brazilian companies are prioritising the social pillar, while in the global context this number drops to 37 per cent. The Brazilian states that prioritise the ‘S’ pillar the most are Paraná (with 51 per cent), Minas Gerais (with 45 per cent) and Rio de Janeiro (with 42 per cent). The survey polled more than 40,000 employers in 41 countries.

In fact, the United Nations’ (UN) 2015 Sustainable Development Goals (SDGs) or Global Goals include the aim to eradicate modern slavery by 2030. However, unfortunately, the numbers of people subject to modern slavery do not stop growing. According to the 2022 Global Estimates of Modern Slavery Report by the International Labour Organization (ILO)[2], there was an increase of 2.7 million in the number people subject to forced labour between 2016 and 2021. This increase in the number of people in forced labour was driven entirely by forced labour in the private economy.

Modern slavery is, therefore, a complex issue that requires action by multiple stakeholders to address it, especially from labour authorities worldwide.

The situation in Brazil

In Brazil, the labour authorities, mainly the Public Labor Prosecutors’ Office (MPT) and the Brazilian Labour Ministry are paying great attention to modern slavery in supply chains.

In fact, according to Brazilian laws, although the engagement of outsourced employees in the supply chain is conducted directly by outsourced companies, the contracting company is responsible for guaranteeing the safety, hygiene and health conditions of the outsourced employees, when services are rendered on its premises or in a place appointed by the contracting company. Regardless of the place of work, according to Brazilian law, the contracting company is liable for the labour and employment obligations of the outsourced companies with respect to the outsourced workers providing services for its benefit.

According to the MPT’s 2021 balance sheet[3], the number of workers rescued from working situations analogous to slavery in the city of São Paulo increased by almost 200 per cent between 2020 and 2021. In Brazil, 1,937 workers were rescued from modern slavery in 2021, according to data from the Brazilian Labour Ministry. The MPT was involved – together with other authorities – in the rescue of 1,671 individuals. Agricultural production, extractive activities and industry are examples of sectors involved in slave labour in Brazil.

In Brazil, companies with modern slavery in their supply chain not only face financial risks, but also significant negative media exposure. The MPT and the Brazilian Ministry of Labour currently publicise a list (the so-called ‘dirty list’) of companies that have been subject to administrative convictions for the use of labour in conditions analogous to slavery.

The ‘dirty list’ is one of the main instruments used by the labour authorities in Brazil to combat modern slavery, as it guarantees publicity on cases involving work in situations analogous to slavery, guaranteeing transparency and expanding social control.

The inclusion of companies on the ‘dirty list’ happens after the final administrative decision regarding the notice of infraction drawn up as a result of an inspection by the labour authorities, in which workers subjected to modern slavery were identified. The inclusion on the ‘dirty list’ lasts for two years and after this period the company is removed.

Companies included on the dirty list may face significant consequences, including, for example, the termination of contracts, the early payment default of financing/loans, a restriction on loans and the inability to participate in public tenders, etc. As an example, CMN Resolution No 4,883/2020 prohibits the contracting or renewal of rural credit operations for companies included in the register of employers that kept workers in conditions analogous to slavery.

In addition, the MPT, in cases involving modern slavery, usually negotiates/requires companies to execute terms of adjustment of conduct (TAC).

These terms are also usually negotiated with the contracting company in cases of modern slavery in supply chains and involve, in many cases, payment of compensation for collective moral damages, a guarantee on labour and employment rights and benefits to the individuals who were subject to exploitation, as well as a commitment to perform several obligations to eradicate modern slavery in their supply chain, under penalty of paying additional fines and additional compensation for collective moral damages.

Refusal to execute a TAC may lead to a class action by the MPT against not only the company directly exploiting the workers, but also the contracting companies indirectly benefitting from the work of the individuals being exploited within their supply chain.

However, companies who face modern slavey inspections and investigations should be careful before executing a TAC with the MPT, especially because TACs usually impose obligations beyond those established by law and, sometimes, such obligations may be hard to comply with, to the extent that, as much as the company must have certain ways to oversee its supply chain, the company may not be able to oversee all steps in the chain. Negotiation and execution of a TAC requires attention and specialised legal advice.

Conclusion

In Brazil, the ‘S’ in ESG is not only a trend, it is a very important aspect that must be considered by companies, especially by those benefitting from complex supply chains, as Brazilian labour authorities are particularly attentive to cases of modern slavery.