The Hidden ESG Risk in Tech Portfolios
Áine Clarke, Head of KnowTheChain and Investor Strategy at the Business & Human Rights Resource Centre, explains how investors can clean up supply chains.
The information and communication technology (ICT) sector fuels modern economic growth, driving advancements in AI, 5G mobile connectivity, electric vehicles and renewable energy. Its innovation potential and perceived sustainability credentials have drawn ESG investors seeking strong returns.
Yet ICT business models also depend on a hidden supply chain built on conflict minerals and millions of workers at heightened risks of exploitation and forced labour.
Findings from this year’s KnowTheChain ICT benchmark show progress in baseline human rights due diligence processes but companies are failing to keep pace with rapidly multiplying risks leaving workers, companies and investors exposed.
The identified rise in forced labour allegations since the last benchmarking cycle makes urgent action essential.
Tech’s supply chain problem
Tech stocks have dominated ESG portfolios due to their low Scope 1 emissions and professional workforce in developed economies where robust labour laws apply. However, these narrow criteria ignore widespread human rights risks in global electronics supply chains and significant gaps in corporate governance to address them.
KnowTheChain’s research shows companies improving on policy and governance, yet most still fail to disclose how they support supply chain workers’ right to organise, ensure effective grievance mechanisms and access to remedy or align their purchasing practices with fair labour standards.
Purchasing practices and public support for worker rights are among the most effective ways to preventing exploitation, yet companies score lowest in these areas.
Just one firm engaged with a union in its supply chain and only one in six disclosed data on how their purchasing practices affect workers. This is despite clear evidence linking unfair pricing structures to forced labour risks.
Despite double-digit profit margins that could absorb due diligence costs, tech firms largely lack the will to act leaving vulnerable supply chain workers at risk.
High-risk regions
Forced labour is prevalent in key ICT manufacturing hubs – notably China, Taiwan and Malaysia.
In Taiwan, which produces 90% of the world’s advanced chips, migrant workers face well-documented abuses including high recruitment fees, contract deception and movement restrictions. These workers form the backbone of global electronic supply chains, yet their labour conditions remain a blind spot for companies and investors.
In Malaysia, electronics factories continue to exploit migrant workers and Chinese supply chains are often linked to allegations of forced labour, including those using Uyghur workers.
These repeated reports highlight ongoing failures in corporate oversight and pose serious legal and reputational risks for investors.
With the EU’s Forced Labour Import Ban and Corporate Sustainability Due Diligence Directive tightening human rights due diligence obligations, companies failing to trace and eliminate forced labour face exposure to fines, product bans and trade restrictions – all of which pose associated risks to investors.
The business case for proactive engagement
Stronger human rights policies and profitability can go hand in hand. Samsung Electronics – the top-performer in the ICT benchmark – has embedded human rights due diligence into its processes.
Similarly, firms like Foxconn, SK Hynix, LG Electronics, and the Taiwan Semiconductor Manufacturing Company are disclosing strengthened supply chain governance, proving that better human rights practices enhance long-term business resilience.
Investors may reap short-term gains from due diligence underperformers such as Nvidia. However, weak supply chain governance leaves companies vulnerable to litigation, reputational harm and operational disruptions – as seen in the forced labour case at Malaysia’s Kawaguchi Manufacturing plant, highlighted by KnowTheChain.
When workers feel secure, with mechanisms to voice concerns, negotiate conditions and seek remedy, they are more engaged and productive. This is evident in enforceable labour rights agreements in Bangladesh and India, which demonstrate the business benefits of stronger worker protections.
Stewardship must catch up
Growing regulatory scrutiny and tighter enforcement means growing material risk for sector laggards and their investors.
As fiduciaries, investors must use their leverage to demand improvements in corporate human rights due diligence and reduce risks for workers and portfolio companies alike.
Engagement with portfolio companies can ensure stronger oversight of risk, more robust policy implementation and enforcement and greater transparency on remediation efforts. Investors can also exert pressure by integrating human rights into financial models, pricing underperformers at a discount due to their heightened legal and reputational exposure. Furthermore, publicly supporting mandatory human rights due diligence regulations can drive sector-wide improvements, levelling the playing field between leaders and laggards and ensuring broad-based ethical business practices.
Investors, particularly those with responsible investment mandates, must hold companies accountable. Supply chains must be ethical, sustainable and legally compliant – or investors risk failing their commitments to beneficiaries and under international standards.
The future of responsible investment in ICT
While industries like apparel and mining have faced significant scrutiny for supply chain human rights abuses, ICT companies have largely escaped similar accountability. Investors play a critical role in ensuring that portfolio companies adopt a risk-based approach to human rights due diligence and prioritise rightsholder engagement in line with international standard and domestic regulations.
Failure to act will expose investors to growing financial, legal and reputational risks – threatening both long-term value creation and their own responsible investment commitments.
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