Supply chain risks in India: can multinationals affect change?

On March 24th, 2024, The New York Times along with The Fuller Project¹, reported labor abuses in the sugar industry in Maharashtra, India. Both child labor and unnecessary medical procedures were identified. The report cited sources that said Pepsi and Coca-Cola were aware of the conditions for some time and have been, at best, slow to react.

The article does not directly link any multinational to the labor conditions in India.  In fact, it states that the labor conditions are a “century-old system.” The article makes no claims that Coke, Pepsi, or any other buyer has any direct control over labor conditions in the region. Since layers of middlemen exist between the fields and the end product, which is often comingled with sugar from other sources, tracing sugar to any particular location is difficult.

Primarily, the inference is that companies are complicit because they were aware of the conditions and have been slow to react. While the article briefly mentions child labor, the thrust of the report focuses on conditions which put pressure on women to have hysterectomies to reduce time away from processing the sugar cane. It says that hysterectomies are not done as a form of birth control, and family size confirms this, but rather to minimize time away from the field due to menstruation. There was no single source of pressure identified, but rather it was from multiple sources including family members and doctors.

Coke and Pepsi have both released statements about the situation, with Pepsi quoted in the article as saying:

“The description of the working conditions of sugar-cane cutters in Maharashtra is deeply concerning. We will engage with our franchisee partners to conduct an assessment to understand the sugar-cane cutter working conditions and any actions that may need to be taken.”

Pepsi’s exposure is indirect and primarily through a local franchisee who claims that sugar from Maharashtra is only a small part of the overall sugar it purchases.

Coke published a statement on its website as follows:

“We condemn abuse in any form within our supply chain and take these reports very seriously. We are committed to respecting human rights wherever we do business and have prioritized addressing these issues in our global operations and supply chains. As such, we invest in a range of efforts from the local to global level to address human rights risks and impacts, with a particular focus on due diligence and stakeholder engagement.

We are deeply troubled by The New York Times’ heart-rending reporting of forced hysterectomies in Maharashtra.  We are committed to looking into and understanding the issues reported by The New York Times.”

Most multinationals do not purchase commodity inputs directly from farmers. In the case of sugar, they are purchasing the refined sugar which is comingled from multiple sources. An additional complication in an attempt to trace the supply chain all the way to the farm is that sugar cane may not necessarily be sold to the same mill every year. Farms are typically small holders with one or two acres and there can be over 10,000 individual farms. They will sell their produce to the mill that offers the best deal. Any resolution will need the cooperation of the Maharashtra government, all the processing mills in the region, and other buyers to achieve an effective outcome as any one buyer, even if a very large buyer globally, is only a small buyer in this region.

While we recognize that multinational companies may often have limited influence to affect change due to cultural, religious or government constraints, especially in low-income countries, there is growing pressure from regulations in end-product countries as well as consumers and investors for companies to take more responsibility for ESG issues in their supply chains.

In situations like these, we also have to consider that companies could easily decide that they don’t want to be responsible for a situation they have little control over and simply switch to other sources. Exiting a country due to prevailing labor conditions or weak institutions won’t ultimately fix anything. The situation will continue to exist, and poverty will only increase. Sourcing inputs from developing regions inevitably exposes companies and consumers to abusive labor practices as well as environmental degradation. But it can also eventually contribute to increases in the standard of living. Companies can have a positive impact through their supply chains by setting standards, auditing, and putting pressuring on suppliers to do better.  As we continue to engage with our invested companies on this issue, we will also encourage and support managements to use this as an opportunity to do the same with their supply chain partners to improve working conditions in the field.

Multinational companies with supply chains that source commodity inputs from low-income countries inevitably expose themselves and their brands with conditions in these locations. Often there are multiple layers of wholesalers which obfuscate responsibility or make it a difficult task to get information about the individual farms or working conditions which the input ultimately comes from. Even with the best of intentions, having an impact can be complicated and take time. From the details in the article, doctors in the area are often quick to recommend the procedure, which would suggest that, educating doctors more than any other stakeholder about medical best practices may be the most effective action to improve the situation.

Four best practices to improve supplier work conditions

The world continues to become smaller, and technology is providing new tools and data to shed light into corners of the world previously invisible. The ubiquity of smart phones and access to social media allows people from the bottom of the income pyramid to immediately broadcast their work conditions to the rest of the world. There is no longer the need for or ability of media companies to act as a filter or provide context. Companies, at the very least, need to consider this changing world and evaluate their supplier policies to ensure they are measuring up to the new reality. As we have looked into supply chain risks we are coming to understand the following about best practices:

In short, specificity of detail gives a great deal of insight into how serious a company is addressing any ESG-related issues. The more the company can detail the findings of any investigations and the steps they are taking to address and improve the situation, the more likely it is they are not greenwashing. The other “tell” is how high up the chain of management has the ownership of the issue gone. When we hear a CEO, chairman or major shareholder of a company talk about an issue with a great amount of detail and passion we are more confident that there will be a resolution.

We will continue to monitor and engage on this issue within our portfolio exposure. With the Vontobel Quality Growth investment approach, we are long-term investors with concentrated positions. Coupled with the long tenure of our analysts, where they have long-standing relations with the companies they cover, this allows us to have multi-year, substantive engagements on important sustainability issues. We can provide managements with support and encouragement on an ongoing basis so they can take the necessary steps to exert influence over their supply chain partners and hopefully have a meaningful impact. In time, we expect to see the companies we invest in who have exposure to this issue use their influence to make a difference and improve outcomes.