Investor Engagement Crucial to Fashion Sustainability

New study shows poor performance on human rights across the sector, further compounded by recent crises. 

Stronger scrutiny and engagement from key stakeholders are essential to drive better results on human and labour rights in the fashion sector, an industry expert has told ESG Investor. 

A recent study from the Business & Human Rights Resource Centre (BHRRC) showed that more than 20% of the world’s largest apparel and footwear companies displayed an appalling record on tracking those issues, with allegations of forced labour identified in almost half of their supply chains. 

In addition, a fifth of the 65 analysed entities scored 5/100 on the BHRRC’s new KnowTheChain benchmark, which assesses companies’ efforts to address forced labour in global supply chains across three high-risk sectors – including apparel and footwear.  

“Investors need to be part of the change and engagement from them is crucial,” said Áine Clarke, Head of KnowTheChain and of Investor Strategy at BHRRC. “If the market is not responding to companies’ negative human rights impacts when violations occur and it’s not affecting company valuations, then brands will be less incentivised to change their practices.” 

Corporate accountability for supply chain forced labour issues has only recently become mainstream, according to Clarke. Prior to this – and in some cases, to this day – companies made commercial decisions to source from countries with low wages, weak labour laws, and industry structures typically involving informal, precarious and highly manual labour. 

The fact that companies have been externalising the risks associated with labour exploitation for years means they rarely feel compelled to take them into account when it comes to performance.  

“The lack of material impact of violations of forced labour and labour rights issues has meant that they haven’t had to account for it in the same way as financial profit and loss,” Clarke explained. “As a result, these issues have been deprioritised.” 

This trend has been further compounded by the multiple crises that have impacted markets globally over the past three years, creating challenging conditions for businesses to operate in. 

“The decrease in consumer spending as a result of the cost-of-living crisis would have also created uncertainty and volatility for companies in respect to sales and revenue growth,” said Clarke. “In the drive to create supply chain efficiencies and cut back in the face of reduced consumer demand, labour rights have inadvertently suffered.” 

Changing for good 

The average score across the 65 companies assessed by BHRRC against its KnowTheChain benchmark was 21/100, with 34% scoring less than 10/100. Overall, BHRRC said, companies are ill-prepared for existing and upcoming legislation on supply chain risks, with only 22% of them engaging with unions and workers.  

In addition, companies’ purchasing practices were often misaligned with sustainability goals, with an average score of 12/100 in this area. 

“The companies that scored the lowest on the benchmark don’t seem to have the management and oversight structures in place to mitigate emergent or prevalent risks with regards to human and labour rights,” said Clarke. “The pre-requisite for human rights due diligence is to have a management committee or personnel responsible for the implementation of policies addressing those risks, as well as board-level oversight of those policies.” 

BHRRC’s study showed that only 48% of the surveyed companies currently have this type of structure in place.

Despite generally poor results in most categories, some outliers did lead the pack and have significantly improved their track record on monitoring labour and human rights risks in their supply chains. Those include Lululemon, Puma and Adidas, which all scored above 50/100 on the benchmark. 

“Companies that are doing better on these issues tend to work very closely with unions and liaise with workers to develop and implement policies, and track their effectiveness,” said Clarke. “One of the key ways to do this is by signing up to a global framework agreement or an enforceable labour rights agreement that provides a structure.” 

Another element distinguishing good from bad actors in this area, is the ability to demonstrate the provision of remedies in cases of violations and abuses in the supply chain. 

“We’re seeing very low levels of disclosure on this across the board, but those that are doing better can provide examples where workers were reinstated if they had been wrongfully fired, or other types of remedial actions,” Clarke explained. 

Going forward, broader stakeholder engagement and ramped-up scrutiny will be absolutely essential to driving better results. 

“There is evidence to suggest that increased scrutiny of the sector and creating that reputational risk for companies does lead to change,” Clarke suggested. “That’s essentially what [our] benchmark is trying to tap into. By highlighting leading businesses, and bringing attention to laggard companies and practices, we seek to spur competitive market dynamics to create a race to the top, rather than a race to the bottom.” 

A wave of new regulations aiming to increase corporate accountability and address human rights issues in supply chains should also go some way towards convincing Western companies to do better. Some examples include in the EU include the Corporate Sustainability Reporting Directive, which went live on 1 January, and the Corporate Sustainability Due Diligence Directive (CSDDD), which has just been finalised and will likely come into force next year.
Although enforcement mechanisms and implementation are outstanding for CSDDD, Clarke said it had the potential to be hugely transformative and to act as a deterrent for companies in regard to supply chain liability and responsibility.  

“The legislation is perhaps not as strong as it was once envisaged, but it’s hugely positive for the movement and will enable victims of human rights abuses to seek and get justice,” she added.  “Hopefully this raft of EU legislation will enable more transparency around companies’ sustainability practices and will increase scrutiny on the sector by those who use that data.” 

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