Engage or Divest? Investor Strategies for Addressing Uyghur Forced Labor in Green Energy Supply Chains

By Monica Thorne, Intern, Investor Alliance for Human Rights

The Investor Alliance for Human Rights’ report, ‘Respecting Rights in Renewable Energy’, co-authored with Anti-Slavery International and Sheffield Hallam University, explores concrete actions investors can take to address forced labor risks in electric vehicle (EV) and solar supply chains. This blog post discusses some of the report’s key concepts, particularly focusing on its recommendation for investors to assess risks and to consider divestment or company engagement as appropriate. The full report can be accessed here.

The Uyghur population in China’s Xinjiang Uyghur Autonomous Region (Uyghur Region) has endured severe human rights abuses, mass surveillance, and systemic persecution by the Chinese government since 2017. These abuses, which include the subjugation of at least one million people to large-scale campaigns of state-imposed forced labor, have been documented in detail by organizations such as Amnesty International and Human Rights Watch and as concluded by the UN Office of the High Commissioner for Human Rights, may constitute crimes against humanity. At least 17 industries, including seafood, automotive, solar, electronics, and apparel have been identified as being exposed to, or at risk of using, state-imposed forced labor (“Uyghur forced labor” or “UFL”) in their supply chains. Following recent increases in green energy production across China, connections within the solar and electric vehicle (EV) sectors to Uyghur forced labor have been highlighted in reports by Sheffield Hallam University and human rights groups.

Investors around the world are in support of a green transition to renewable energy, with the International Energy Agency (IEA) documenting in its 2024 World Energy Report that US$2 trillion will be invested on clean energy technology and infrastructure in 2024, double that of investment in coal, gas, and oil. However, the transition to clean energies cannot be carried out in earnest if these industries’ supply chains are tainted with UFL. During consultations for the Respecting Rights in Renewable Energy report, investors highlighted the lack of guidance available on how best to respond to the presence of UFL in green technology portfolios in accordance with the UN Guiding Principles on Business and Human Rights (UNGPs). As state-imposed UFL is a distinct and separate risk from addressing forced labor in supply chains that arise from actions of private parties, investors’ approach to engaging with investee companies alone is not a viable option. Furthermore, because this form of forced labor is a result of government policy, companies have limited, if any, ability to reverse those policies and, in some cases, avoid involvement.

“...in the face of large-scale, widely documented violations of fundamental human rights that are perpetrated by the state, there is no reasonable justification for delaying divestment, and it is the only responsible course of action for investors under international human rights law.” 

To meet this unique situation of state-imposed UFL, in our report, we developed guidance in the form of a decision tree using the UNGPs that guides investors on how to approach UFL in a number of different circumstances. The relationship a company has with the Uyghur Region and the company’s willingness to engage with investors on issues related to forced labor can strongly inform an investor’s approach to dialogue. Broadly speaking, investors should identify which scenario applies to an investee company, namely, whether a company is (A) operating in the Uyghur Region; (B) operating in China but receiving labor transfers from the Uyghur Region; or (C) directly or indirectly sourcing inputs produced with Uyghur forced labor, to guide their decision.

Scenario (A): Companies operating in the Uyghur Region – Immediate Divestment

At present, it is not feasible for companies or investors seeking to address state-imposed forced labor to engage in dialogue with the Chinese government, conduct on-site audits, or verify the presence or absence of forced labor in specific workplaces within the Region. As such, labor and human rights advocates agree on the need for immediate and full divestment and disengagement from impacted industries and regions in state-imposed forced labor contexts as the only way for corporate actors to comply with the UNGPs. Through a company’s presence in the Region, it is connected to the ongoing imposition of forced labor and other egregious human rights violations. While many investors understand this, divestment is still often seen as a “last resort” after engagement and use of leverage have failed to affect change. However, in the face of large-scale, widely documented violations of fundamental human rights that are perpetrated by the state, there is no reasonable justification for delaying divestment, and it is the only responsible course of action for investors under international human rights law.

A full breakdown of these recommendations with an accompanying decision tree is available on pages 19-24 of the report

Scenario (B): Companies operating in China, but receiving labor transfers from the Uyghur Region

Uyghur populations are also transferred to factories outside of the Uyghur Region and forced to work under the similar conditions as those within the Uyghur Region. In this situation, it is recommended that investors leverage their financial influence to engage with companies and call for an urgent end to their participation in labor transfer schemes, pressing for an expedited timeframe for investee companies to end involvement in such labor schemes. If a company fails to act promptly, it is recommended that investors consider divestment.

Scenario (C): Companies directly or indirectly sourcing inputs produced with Uyghur forced labor

Opaque and indirect sourcing methods pose additional challenges for investors seeking to address connections to UFL in solar and EV supply chains. Engagement with companies is appropriate for investors whose portfolio companies use suppliers that use Uyghur forced labor.

• When engaging with companies whose suppliers operate directly in the Uyghur Region, investors should urge companies to terminate their contracts with these suppliers.
• As explained above, for suppliers operating outside the Uyghur Region in other parts of China but receiving labor transfers from the Region, investors should require companies to promptly terminate their suppliers’ participation in labor transfer programs. Should suppliers decline or be unable to end their connections to these programs, companies should seek out alternative suppliers.

In both cases, set time periods should be established for companies to shift their supply chains and/or end contracts. These time requirements should amount to months, not years, to reflect the situation's urgency. If companies fail to address their connections to forced labor within these timeframes, investors will need to consider escalation options, which would include divestment from such companies. 

UFL in a company’s supply chain exposes a business and its investors to operational, reputational, and legal risks that can exert significant fiscal damage. With the changing regulatory landscape, laws such as the Uyghur Forced Labor Prevention Act (UFLPA) in the United States and the EU’s market ban on goods produced with forced labor demonstrate that urgent and immediate action is required.