In the Dark: Uncovering the True Cost of Human Trafficking in Portfolios
By Jolyon Smith, Associate Director of Investments and Impact at Brightlight
As investors, we can sometimes focus on financial returns while overlooking the real-world impact of where we allocate capital. But what if our investments could not only generate returns and avoid harm, but also help to tackle one of the most pressing social issues of our time?
I recently discussed this issue with Noel Thomas, an expert in human trafficking from Dark Watch, exploring how investors can play a crucial role in combating trafficking. As Brightlight works with faith-based and values-driven investors, we are eager to explore how we can better align portfolios with beliefs and how we can seek to make a tangible impact.
A Personal Call to Action
Noel's journey into fighting human trafficking began with a harrowing personal experience. As a child, he witnessed his four-year-old sister nearly being abducted at a flea market while on an overseas trip. Thankfully, his father's quick action prevented a tragedy, but the incident left a mark on Noel.
His commitment deepened years later in India, where he witnessed the unthinkable: a 14-year-old girl being trafficked in plain sight, with local police actively facilitating the crime. It was a stark reminder of Edmund Burke's famous words: "All it takes for evil to prevail is for good men to do nothing."
These personal experiences underscore the scale and complexity of the issue and why it demands our attention as investors.
The Shocking Scale of Human Trafficking
The statistics that Noel shared were staggering. With an estimated 50 million people enslaved worldwide and annual profits of over AUD$228 billion, human trafficking is not a niche issue - it's a massive criminal enterprise that is not just prevalent in developing countries, but even in the US and other major economies.
What's even more concerning for investors is how these illicit proceeds flow through legitimate financial systems and businesses. From banks to hotels to social media platforms, companies across dozens of industries are exposed to human trafficking, often unknowingly. This creates serious risks for investors who may be inadvertently profiting from and enabling these criminal networks.
Noel's experience as the state-wide anti-trafficking coordinator in Florida provided him with firsthand insight into the challenges of combating this issue. He witnessed law enforcement manually scouring online content to justify human trafficking raids - a process that was both time-consuming and inefficient. This observation led to the development of Dark Watch's AI-powered solutions, designed to streamline and enhance anti-trafficking efforts.
Why Investors Need to Care
Noel's personal story reinforced why investors have both a moral and financial imperative to address human trafficking risks in their portfolios.
From an ethical standpoint, those of us who seek to live out our values consistently across all aspects of our life should extend that to how we invest. Just as we're mindful of how we treat others and contribute constructively to society in our daily lives, we need to apply that same lens to our investment decisions. Turning a blind eye is not an option.
Even considering this purely from a financial perspective, human trafficking exposure creates major risks that investors can't ignore. We've seen several recent major cases where allegations and lawsuits against companies for enabling trafficking can have material impacts on share valuations. The reputational damage alone from negative headlines, even if they are unsubstantiated, can be devastating.
For instance, companies in the S&P 500, such as Wyndham Hotels & Resorts and Choice Hotels, are facing lawsuits for failing to monitor and address human trafficking in their properties. In December 2023, Red Roof Inn, a large private hotel chain, settled with four women who were trafficked in their hotels, where staff were allegedly enabling and facilitating the abuse.
Noel shared a troubling anecdote about a public company's response when approached by Dark Watch about trafficking data: they nonchalantly suggested that "prostitutes need love too" and that their platform could facilitate that. Such attitudes not only allow harm to continue but also expose companies to significant legal and reputational risks.
As more cases come to light, like the recent AUD$440.8 million settlement by JP Morgan, the AUD$114 million settlement by Deutsche Bank, and Westpac's AUD$1.33 billion penalty, it has become clear that checking the minimum compliance boxes is no longer enough. Companies that are proactively addressing these risks will be better positioned to thrive in the long run.
How Companies Can Take Action
So what exactly can companies do to tackle human trafficking? Noel outlined several practical steps that responsible businesses can take, emphasising a "crawl, walk, run" philosophy. This approach recognises that companies are at different stages in their anti-trafficking journey and need tailored solutions. Some basic steps that can be taken include:
Map the supply chain and conduct supply chain due diligence to promote ethical sourcing and have full visibility of exposures.
Implement robust hiring and visa verification processes, to vet employees and prevent insider threats.
Train staff to recognise and report trafficking red flags.
Make a public pledge to combat trafficking where relevant and possible.
To illustrate how this might work in practice, Noel gave an example of how a hotel chaincould address human trafficking. They could start by examining their supply chain for everyday items like bed sheets, pillows, and furniture, ensuring ethical sourcing. Next, they could implement thorough vetting processes for their cleaning staff, who might be vulnerable to labour trafficking.
Noel shared a personal experience from a government raid where the hotel's front desk staff tipped off traffickers, highlighting the critical need for thorough employee vetting and training.
While it may seem daunting to take on organised crime, Noel emphasised that companies don't have to do it alone. Firms like Dark Watch offer tailored solutions to help businesses assess their risks and develop appropriate action plans based on their industry and current capabilities. Importantly, Dark Watch focuses on integrating their tools into companies' existing workflows rather than adding new software, making implementation easier and more likely to succeed.
The key is to make a start somewhere, even if it's just with basic training and a public commitment. As Noel put it, we need to make it "super simple" for companies to join the fight if we want to see widespread change.
The Investor's Role in Driving Change
As investors, we have significant access and voice to encourage companies to address these issues more seriously. Here are a few key ways that investors can make an impact:
Portfolio Negative Screening
At Brightlight, we've developed screening tools to identify companies with demonstrated failures in addressing trafficking risks. For instance, we would screen out companies like Choice Hotels, who face several lawsuits alleging that they have enabled trafficking in their hotels from their failure to sufficiently address the risk. Divesting is not the best solution, however, as while it may purify a portfolio, it does not lead to real-world change.
Direct Engagement with Companies
Discussing this issue with companies is crucial. By initiating conversations with high-risk companies about their anti-trafficking efforts, we can help to raise awareness and encourage concrete action to be taken. We need to communicate our expectations for companies to have specific policies and procedures in place to combat trafficking. Generic human rights statements are not sufficient - we want to see dedicated resources, staff training programs, and proactive monitoring systems.
In our conversations with companies, we've noticed that many don't even have human trafficking risks specifically identified in their insurance policies or risk assessments. This lack of awareness is a clear indicator that more work needs to be done.
Supporting & Rewarding Industry Leaders
By directing capital toward companies that are taking meaningful action on this issue, we can create incentives for others to follow suit. We've seen some positive examples of action, particularly in the airline industry, where companies are implementing staff training programs and partnering with NGOs to support the rehabilitation of survivors.
However, there's still a significant gap in proactive monitoring and risk investigation across many industries. This is an area where we believe companies need to step up their efforts, and where emerging technologies like AI could play a crucial role.
The Path Forward
While the challenge of human trafficking may seem overwhelming, there is great potential for investors to drive real progress on this critical issue. By raising awareness, asking tough questions, and allocating capital responsibly, we can play a pivotal role in dismantling the business model of human trafficking.
We are at a pivotal moment, with companies such as Dark Watch starting to harness AI to fight trafficking on the frontlines in a more comprehensive way that hasn't been possible in the past. Noel's work has evolved from grassroots awareness campaigns to developing cutting-edge technology solutions, demonstrating how persistence and innovation can lead to tangible progress in the long run.
For those looking to start taking action on this issue, here are a few actionable items to consider:
Review your current portfolio for potential trafficking exposure, particularly in high-risk industries like hospitality, transportation, and financial services.
Engage with companies that you are invested in about their anti-trafficking policies and encourage greater transparency. Ask if their business insurance covers human trafficking lawsuits - often, the answer to this question can reveal how seriously a company takes this risk.
Consider partnering with organisations such as Brightlight to access more sophisticated screening and engagement tools.
Educate yourself and others in your network about human trafficking risks in investment portfolios.
Look for opportunities to support companies and initiatives that are actively working to combat trafficking through your investment and philanthropy choices. This could include businesses such as Dark Watch.
By aligning our portfolios with our values and leveraging our influence as investors, we can work toward a future where human trafficking is no longer a profitable enterprise. It starts with having conversations, asking questions, and taking first steps towards a more conscious investment approach. Together, we can make a real difference in the fight against trafficking and modern slavery, ensuring that stories of these abuses become increasingly rare, and that victims find hope and a path to freedom.