We interviewed a number of investors who have engaged companies on human rights issues.
Below are some of the warning signs they highlighted as potential indicators of negative actual and potential human rights impacts.
Company governance of human rights
No human rights policies in place (e.g. codes of conduct, policies covering internationallyrecognised human rights and labour standards, or referencing the Ethical Trading Initiative’s base code)
Having policies in place reflects senior management buy-in and oversight. Where companies do not have a commitment in place, or where it is limited, investors can help companies understand their responsibility to respect human rights. When engaging an investee company, they can start by asking them to implement the UN Guiding Principles on Business and Human Rights, and to manage supply chain labour risks in alignment with IFC Performance Standards20 and ILO’s fundamental conventions.
Unresponsive to investor requests for dialogue
Company dialogue is key. Whilst it can be difficult for investors to assess and influence corporate culture and commitment externally, the tone and responses given by companies on the topic can help investors grasp the extent to which the companies perceive sustainability as a cost centre or value driver. Companies that are not responsive to requests for dialogue or do not recognise potential human rights issues may not have an adequate understanding of these risks. Where companies are unresponsive, investors can escalate the dialogue – for example, by collaborating with other investors or by seeking to raise the issues at board level.
Unclear governance processes and lack of board oversight
The governance structure and reporting lines to decision makers is important in understanding how labour practices and associated human rights risks are acted upon within the company and throughout its business relationships. Lack of a clear mechanism for board oversight of these issues may indicate a lack of attention. Where this is not integrated into existing governance structures, investors can request companies to assign some level of oversight to senior management with overall accountability for performance.
Ignoring the consequences of a ‘fast fashion’ business model
Investors highlighted the implications of the ‘fast fashion’ apparel industry on labour practices. As fashion trends change rapidly, delivery requirements from buyers are impacted. Shorter lead times have allowed apparel brands to introduce new lines more frequently22 and supply more products in stores. However, these quick turnarounds influence suppliers’ visibility of delivery orders – for example, late orders which can create overtime and long working hours. Companies need to work with suppliers to manage these deadlines and consider the implications and unintended consequences in buying decisions. Investors can ask their portfolio companies about the relationship ‘fast fashion’ companies have with their suppliers – for example, the way purchasing teams within a company are dictated by targets to delivery. This can help investors understand how to urge brand companies to give more visibility of delivery orders to suppliers.
The Fashion Transparency Index ranks 40 of the largest global fashion companies according to their level of transparency based on a questionnaire and publicly available information about supply chain issues. See more.
Overlooked small and mid-cap companies
Investors tend to focus on large brands or the worst performers at risk of being excluded from their investment universe. However, there is a large segment in the middle, comprising small and midcap companies, that do not receive the same level of attention and may not have adopted the good practices implemented by some of their larger peers. This may be because small and mid-cap companies often do not have the capital or leverage over factories that their larger counterparts have, making the implementation of best practices even more difficult. Investors can expand their focus to engage small and mid-cap companies, as they can be more focused on improving sourcing and may see strategic value in building close-knit relationships with garment factories, presenting opportunities for improvement.
Lack of disclosure on sourcing regions and recruitment processes
In certain regions such as Turkey, the recent influx of migrant labour and Syrian refugees carries reputational, operational and compliance risks for investors. Many migrant workers work further down the supply chain as subcontractors of the exporting garment factories23, which makes monitoring very difficult. Undocumented workers lack access to legal employment contracts and social security, putting them at risk of exploitation and sweatshop conditions.
Linked to this is the risk of recruitment fees. Vulnerable and migrant workers are often charged recruitment fees and exploited through corrupt middlemen and employment agencies. Investors should look out for lack of disclosure on sourcing regions and can actively encourage companies to adopt recruitment systems that ensure workers in their immediate and extended supply chains are not paying employment fees.
Company management of potential or actual human rights impacts
Nonexistent supply chain mapping
It can be difficult for investors to assess the actual human rights risks of their portfolio companies. Companies have visibility to a certain degree, typically the first tier of suppliers, which has been the main focus for investors because of the lack of disclosure and transparency at further tiers in the supply chain. For salient human rights risks associated with labour practices, investors can set out clear steps to encourage investee companies to map their supply chains and inform investors of the risks.
Fragmented supplier relationships and dispersed sourcing locations
The nature of a fragmented and dispersed supply chain, along with expansion to sourcing from newer countries such as Ethiopia, can carry risks for companies, and ultimately investors. Building long, stable relationships with suppliers and encouraging consolidated supply chains can help reduce a company’s exposure to labour abuses, may limit the need to change or drop suppliers at short notice following unexpected allegations24, and can build trust between factory owners and retailers. Whilst apparel companies set out their sustainability commitments at corporate level, they depend on the factories and suppliers they work with to implement them. Investors can engage with companies to push for training of procurement professionals to equip them with knowledge and tools to make sourcing decisions that positively affect wages and working conditions. Longer term relationships between retailers and suppliers can enable investment in training and capacity building.
Track record of human rights violations
Due to the limited granularity of reporting, investors stressed the challenge of proactivity and understanding the real picture before it is too late. There also tends to be a disconnect between what is disclosed on paper and practices in reality – for example, some of the labour standards around freedom of association and collective bargaining that are officially in place are aspirational in reality.
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Labour practices in the apparel sectorNovember 2017
Investors can encourage companies to demonstrate good practice by reporting on meaningful metrics and key performance indicators (KPIs), and supporting standardisation of assessment guidelines and reporting of data. This would encourage greater transparency and enhance the quality of data being reported to ensure it is valid and valuable for investors. As disclosure matures and improves, investors can seek ways to encourage companies to look beyond standard metrics to move ahead into greater nuance and complexity.
A checklist approach to auditing
Auditing has become a mainstay within the industry in an attempt to understand what is happening in practice. Whilst investors recognise the value of independent third party audit processes and reports, they also highlighted many of the shortcomings and noted the shift towards more robust measures.
For example, companies that show serious commitment and greater maturity to tackling human rights risks, are increasingly moving away from auditing to establishing a local presence that can work with and monitor progress with worker-led initiatives, local stakeholders such as trade unions, NGOs, and civil society organisations.
Limited engagement with NGOs, worker unions and community organisations
Lack of worker voice across the supply chain is a key industry risk. NGOs, worker unions and community organisations can provide companies with expertise on company practices, as well as access to workers and community representatives. Investors can look out for active company participation in multi-stakeholder initiatives as they can play an invaluable role in exchanging expertise and awareness of issues, bringing worker and community voices to the table, and scaling up good practice by companies, NGOs, investors and government. Investors highlighted that companies that are working with these organisations often show real signs of leadership and commitment to addressing systemic issues facing the sector.
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Labour practices in the apparel sectorNovember 2017
Moving the needle on responsible labour practices in the apparel industry
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Eleven warning signs when engaging with companies