Investing Titans Can No Longer Ignore Malaysia’s Labor Abuses

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(Bloomberg) — Concerns over labor abuse in Malaysia, long present in the Southeast Asian country, have escalated in the past three months, continuing to spread beyond the palm oil industry to other parts of the economy.

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It’s a problem with many implications, first and foremost for the workers themselves, many of whom live in squalid conditions. It 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’s giving them second thoughts. As labor abuse claims emerged at a supplier to vacuum-cleaner giant Dyson and the glovemaker Supermax Corp., it’s also weighing on the country’s stock market and hurting its people’s pension investments.

“Within Malaysia, forced labor is an issue we view as material,” said Daniel Ng, an investment manager at abrdn Plc, which oversees about $632 billion. “Companies that are not up to standard will likely see less capital flows, and trade at relative discounts to companies that do the right thing.”

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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, a part of the United Nations. 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 Labor in November. He was referring to workers’ living conditions that were discovered during a raid of a glove-making factory near Kuala Lumpur. Indian laborers brought in to work on rubber plantations 250 years ago were given better conditions than today, he said.

In November, Dyson said it’s cutting 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 labor practices following allegations by a whistle-blower. The results of the audit haven’t been disclosed.

“We hope this gives ATA the impetus to improve,” a Dyson spokesperson said at the time.

ATA said it’s working to improve labor practices, including implementing a zero Sunday overtime policy, having valid work permits for all workers and setting up external whistleblowing channels.

The events triggered a plunge in ATA’s stock, sending it down 74% last year.

Not long before, the country’s $24 billion palm oil industry faced similar scrutiny. In October 2020, the U.S. 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 labor set out by the International Labour Organization, the U.N. agency that sets labor standards and promotes rights at work. In June, it did the same for Sime Darby Plantation Bhd., also citing the presence of all 11 indicators.

FGV said it’s fully committed to labor standards and will take all necessary steps to lift the ban. It has commissioned an independent assessment of its labor practices, it said. Sime Darby Plantation said it has appointed a consultancy to evaluate its labor 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 U.S. 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 labor.”

Top Glove said it’s continuing to improve labor practices and resolved all ILO indicators of forced labor in April. In September, the U.S. Customs said forced labor concerns had been addressed and the company’s gloves may be imported.

But the following month, the U.S. Customs also halted imports of gloves made in Malaysia by another producer, Supermax, citing reasonable indications of the use of forced labor. 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 labor 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 labor globally, with the highest prevalence in the Asia-Pacific region.

Forced labor “is present in Southeast Asia, but Malaysia has a higher reliance on foreign workers and so is in the spotlight more,” abrdn’s Ng said.

The U.S. 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 Labor Convention, as part of a commitment to eradicate forced labor. It also launched a five-year plan that aims to significantly reduce incidences of forced labor 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 local lender AMMB Holdings Bhd. in Kuala Lumpur, forced labor 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 nation’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 as a gauge of global equities rose 17%. The Southeast Asian 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.

“Labor risks are important within ESG,” said Nneka Chike-Obi, director of sustainable finance at Fitch Ratings. “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 labor 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.

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