To encourage apparel companies to improve labour practices in the apparel industry, investors can do a number of things.
Encourage companies to publish factory lists
Although some companies argue that publishing factory lists is commercially sensitive, greater transparency of supplier networks and mapping is informative to investors, and helps make the industry less opaque. Companies demonstrating good practice are also beginning to report on their workforce supply chain (e.g. number of workers and percentage of migrant workers). This is supported by the recently launched Workforce Disclosure Initiative, which aims to provide investors with better information on the workforce reporting data from listed companies, covering employees in companies’ global operations and workers in their supply chains.
Ask companies to report on challenges and performance, not just policies and commitments
As social issues tend to be more challenging to quantify, with less mature data to show how they can impact a company’s performance, companies tend to be less granular in reporting. Investors are encouraged to ask for more disclosure on results, not only on policies and commitments, but also for performance information that demonstrates the company has a systematic approach to the issues. Although this might be difficult, investors echoed that companies that acknowledge the difficulties of collecting and reporting on performance data can enhance credibility.
Encourage a unified approach to auditing
There is currently a lack of standardisation of auditing processes, which allows for every brand and retailer to have their own audit and modular approach. This is costly for manufacturers and can create audit fatigue for suppliers and factories, as many brands use the same suppliers. Whilst investors recognised the existence of current long-standing standards and initiatives, such as Sedex Members Ethical Trade Audit (SMETA) or the SA 8000 Standard, they recommended a unified and agreed model for auditing and industry standard that has a common frequency and verification process, and opportunity for capacity building would help drive the race to the top. Together with increased pressure from investors, greater collaboration between investors was recommended. A number of companies, and increasingly investors, participate in multistakeholder initiatives such as the Social & Labour Convergence Project to drive common standards to support a collective approach and create resources for capacity building.
Encourage leading companies to use their leverage and collaborate with multi-stakeholder initiatives
For investors, collaborating with companies (both leading and lagging) is important to tackle challenges. Investors highlighted examples of companies who have positioned themselves as leading in supply chain management, but who initially hesitated in joining initiatives such as the Bangladesh Accord,26 as they argued they had little leverage. Relevant collaborative multi-stakeholder initiatives investors can ask companies to join include the Action, Collaboration, Transformation (ACT) initiative which addresses the issue of the living wage in the textile and garment sector, the Fair Labor Association or Social Accountability International (SAI), which is dedicated to improve workplaces and communities by developing socially responsible standards. The Fair Wear Foundation annually assesses and publicly reports on member brands’ human rights due diligence efforts, requiring members to provide a full list of suppliers to Fair Wear Foundation as part of their membership.
Take advantage of new and innovative technologies
Investors highlighted the need to look at some of the areas where labour issues, such as forced labour or use of worker recruitment fees, can be addressed through new technologies which can provide more reliable and accurate workers’ voices (e.g. use of mobile phones to document poor labour conditions, mobile phone applications that can record and act as a grievance mechanism). For example, the apparel brand H&M recently joined the United Nations’ Better Than Cash Alliance27, and announced that it will digitalise the payment of workers across its supply chain, which would benefit stakeholders with greater transparency, reduce the time and costs to factories associated with cash payments, and ultimately improve workers’ access to financial services.
Encourage companies to build relationships with suppliers and become less ’transactional’
Brands and retailers should be able to explain to investors how purchasing decisions are made, describe how they impact wage levels in the supply chain and clarify how unintended consequences of purchasing practices were mitigated. This process requires close cooperation between the purchasing departments and compliance and/or ethical teams in a company, not only to share knowledge and perspectives, but also to establish the threshold in pricing strategies that allows workers to receive living wages.
Buyers often tend to fully defer risk to suppliers, putting pressure on timing, workers’ arrangements and supplier margins. Poor critical path management by brands or retailers such as late changes to product specification or order size may have major production and cost impact on suppliers, increasing waste or making it difficult to manage shift patters and piece work. Often, suppliers accept prices that are lower than total production costs per unit because of a perceived risk of losing contracts.
Investors should ask investee companies to disclose their sustainable garment pricing strategies. For examples, questions could include:
- How have purchasing strategies changed over time and how is the true cost of labour being calculated?
- Is it based on the national minimum wage or is it truly looking at the relevant living wage benchmarks?
- Also, is the company calculating Standard Minute Value (the time it takes for a worker to perform a given task), taking into account living wage levels?
It is essential that garment and textile companies start rewarding suppliers for paying living wages by giving them more business instead of shifting to cheaper sourcing locations.
Take advantage of the ability to influence
It is no good having all the policies and tools in place when a company sources 1% of the volume from a factory and so has little influence. Therefore, investors can encourage companies by rewarding improving suppliers with more business or consolidating their supply chain. For example, investors can encourage companies through engagement to publish supplier lists, consolidate their supply chains and benchmark salaries to provide for living wages.
Ask concrete questions in engagement dialogues
Engagement benefits from a focused scope and approach, with clear objectives. Examples of questions that investors can ask include:
- What is the percentage of production volume from suppliers where a business relationship has existed for at least five years?
- Does the company conduct human rights due diligence at all new suppliers before placing orders?
- Are all new suppliers required to sign and return a code of conduct for suppliers before first orders are placed?
- Is supplier compliance with a code of conduct evaluated in a systemic manner?
- Do the production planning systems support reasonable working hours?
- How are root causes of excessive overtime identified and mitigated?
- How does pricing policy allow for payment of at least the legal minimum wages (and minimum wage) in production countries?
- How are suppliers monitored in payment of wages to workers and managed if legal minimum wages were failed to be paid?
- How do companies assess root causes of wages lower than living wages with suppliers and take steps toward the implementation of living wages?
Process recommendations for engaging with companies
Investor field trips - the 360 view
Investors argued that field trips outweighs many other tools, as they help them see what actually happens in practice on a day-to-day basis.
Style of engagement - from naming and shaming to knowing and showing
As practitioners, investors need to be constructive and focused in their company engagement. A statement outlining investor expectations on particular issues (e.g. working conditions, remedial actions on health and safety following an incident) have been highlighted as a very useful and powerful tool with companies, as it helps provide a clear, succinct and well-thought through scope for discussion.
It was also recommended that investors should use a collaborative and positive tone. They should also consider using diplomatic language and providing solutions to issues instead of just criticisms.
Investors also highlighted the value of talking about performance progress in terms of maturity of reporting, rather than ranking and scoring as companies can feel they are being punished for their honesty, rather than rewarded for it.
Moving the needle on responsible labour practices in the apparel industry
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Eight engagement recommendations