Leading the way to sustainability
April marked the tenth anniversary of the Rana Plaza disaster in Bangladesh’s capital, Dhaka, when 1,134 people died as a clothing factory building collapsed. Subsequent investigations revealed that the facility was creating items for well-known high street clothing brands, Primark, Bonmarché and Canada’s Loblaw – and today, household names including Marks & Spencer, Calvin Klein and Zara retain outsourced manufacturing facilities there.
What has changed in the intervening decade to ensure that working conditions have improved – and how can consumers, importers, financiers and other stakeholders across Asia’s extensive garment supply chains be sure the products on the shelves are ethically produced? The issue is complex: extensive global supply chains comprise numerous linkages across geographies, entities and interrelationships. Online fashion retailer Boohoo discovered just how complex in 2020: a modern slavery investigation found workers in its UK-based manufacturing facility receiving as little as £4.30 per hour.
It seems that few brands are immune: a study published in January of this year by the University of Aberdeen and advocacy body, Transform Trade, found that of the 1,138 brands or retailers it mentions, 37 per cent were associated with unfair labour practices – including the Spanish multinational, Inditex, H&M, Lidl, GAP, New Yorker, Primark and Next.
“The garment industry has particularly extensive supply chains which means it’s difficult to know whether unfair practices are present – it’s a real challenge,” says Matthew Friedman, CEO of Hong Kong-based non-profit The Mekong Club. “The growing requirement for transparency into ESG considerations means companies are increasingly aware of what they have to do, but there’s a long way to go.”
Friedman points out that thanks to the Covid-19 pandemic and subsequent economic disruption, the numbers of people in modern slavery are heading in the wrong direction, increasing from 40 million to 50 million in the past five years – of which 70 per cent are in the private sector.
“If a piece-worker in Dhaka earning three dollars a day is laid off due to lack of demand, they have nothing to fall back on,” Friedman explains. “Then if a family member falls ill, the unemployed worker may borrow the funds for treatment which they can only repay by working for the lender – and then they’re trapped in debt bondage, another driver of forced labour.
By adopting the UN Sustainable Development Goals, the global community has committed to ending modern slavery among children by 2025 and universally by 2030 (Target 8.7). In addition, the International Labour Organisation identifies 11 indicators of modern slavery including the abuse of vulnerability, deception, restriction of movement, isolation, physical and sexual violence, intimidation and threats, emotional abuse, debt bondage, withholding wages, abusive working and living conditions and retention of identity documents. These indicators are used to control and exploit individuals, often in the context of forced labour or human trafficking.
Asia remains the epicentre of the global garment trade: according to the ILO, in 2019, the region accounted for about 55 per cent of textile and clothing exports globally. This activity provides employment for about 60 million people, with millions more indirectly involved. And it’s big business: revenue in the Asian apparel market is projected to reach to US$681.3 billion in 2023 and could grow by 3.43 per cent annually between 2023 and 2027.
In part, the growth of Asia’s garment manufacturing and export sector has been sustained by the ‘fast fashion’ model, initiated by Zara parent Inditex in the early 1990s as a way to design and manufacture a garment and have it in-store within 15 days.
While fast fashion has enabled retailers to provide low-cost, fresh designs for trend-conscious consumers, its impact on both the environment and on labour practices has been less positive. Its compressed timeframes and heavy emphasis on low-cost products inevitably place pressure on production costs, including labour compensation, workplace safety and related considerations. And Asia has long been the place to locate facilities that suit these cost requirements.
As a measure of this ‘offshoring’ of risk, the European Environment Agency estimates that most of the impacts from clothing, footwear and household textiles consumed in Europe happen in other regions of the world, including 85 per cent of primary raw materials use, 92 per cent of water consumption, 93 per cent of land use and 76 per cent of greenhouse gas emissions. Overall, 84.7 per cent of the environmental effects associated with fashion consumed in the EU take place outside the union – mainly in Asia and Southeast Asia.
This situation has been aggravated by the pandemic and the supply chain chaos it caused: apparel brands cancelled orders from supplier factories with little notice as they attempted to minimise losses from late delivery. This in turn drove mass layoffs, leaving workers close to destitution.
The US Department of Labor has found forced labour risks in clothing made in China, India, Malaysia, Thailand and Vietnam. They also identified high risks of forced labour in textiles from North Korea and Nepal. Migrant workers in Malaysia, Taiwan and Thailand are at risk of debt bondage due to fees charged by dishonest recruitment agencies and restrictions on their freedom of movement, such as withholding their passports.
Just how many participants can there be in a typical garment supply chain? While the exact number of participants will vary depending on the complexity and scale of the supply chain, some key participants might include:
- Raw material suppliers: the providers of textile fibres, fabrics, trim, buttons, zips and other materials used in production.
- Manufacturers/suppliers who convert the raw materials into finished garments via factories or production units for cutting, sewing, assembling and finishing processes.
- Subcontractors: some manufacturers outsource specific tasks or processes to subcontractors specialising in particular garment production stages or operations.
- Distributors/wholesalers purchase finished garments from manufacturers and distribute them to retailers or other downstream entities and may also handle warehousing and logistics.
- Retailers: the businesses that sell garments directly to consumers. They operate physical stores, online platforms, or a combination of both.
- Brand owners/labels design and develop garment collections, establish brand identity and often own retail outlets. They may either manufacture garments themselves or outsource production to other manufacturers.
- Designers conceptualise and create garment designs and specifications, working closely with manufacturers or brand owners to bring their creative visions to life.
- Logistics and transport providers handle the movement of raw materials, finished garments and other supplies throughout the supply chain. This includes transportation, freight forwarding and customs clearance.
- Financial institutions: banks and other financial organisations provide financing options and facilitate transactions within the supply chain, such as payment settlements, trade finance and insurance.
- Mapping the risks inherent in relationships at two or more businesses increases in difficulty with every degree of separation.
Companies are increasingly required to quantify and disclose their Scope 3 emissions – the greenhouse gases emitted due to their activities but by entities, both upstream and downstream, not directly owned or controlled by them. The challenges involved in discovering and declaring modern slavery or forced labour within a supply chain are similar. Despite this, the requirement to do so is becoming more onerous. Even before the UN created the SDGs in 2015, the International Covenant on Civil and Political Rights, an international human rights treaty adopted in 1966, set out to enshrine a wide range of human rights, including freedom from torture and other cruel, inhuman or degrading treatment or punishment.
As awareness of abuse has increased, nations have worked to promulgate preventative legislation to deal with the matter from the demand side. Like the sprawling problem itself, applicable rules can be scattered among acts designed to prevent human trafficking, workplace safety, supply chain transparency and ethical materials sourcing.
The UK has the Modern Slavery Act 2015 (Transparency in Supply Chains) Regulations 2015 and the Modern Slavery Bill May 2022 which reforms the Modern Slavery Act 2015; the European Commission issued its Forced Labour Regulations in September 2022 with the objective of prohibiting the import and export of products made with forced labour; and the US has numerous instruments including the influential California Transparency in Supply Chains Act of 2010.
Costs of non-compliance
With increasing scrutiny, the cost of non-compliance can be high. In the UK, the new Modern Slavery Bill could make it a criminal offence for a person responsible for a modern slavery statement – including all directors – found to “knowingly or recklessly supply a false or materially incomplete statement”. The penalty could be up to two years’ imprisonment for individuals, and a fine amounting to four per cent of annual global turnover, capped at £20 million, for the company.
Reputational damage could be even more lasting: UK retailer Primark was featured in a 2008 BBC documentary Primark: On the Rack which exposed the use of child labour in producing some garments sold by the company, particularly in India. This led to widespread public outrage and condemnation of Primark, including calls for boycotts and legal action. The cost is difficult to quantify, but the brand has stated that it has invested millions in improving practices and controls.
One cost could very likely be higher insurance premiums. Friedman cites a 2017 legal Case involving sex trafficking in US hotels and motels. “According to the article, facilities and payments services were used for prostitution and the hotels were deemed to have profited,” he says. “As a result, the hotels’ insurance costs increased and due to this previously invisible risk, [carriers] are now reluctant to insure the hotels. To respond to this issue, many hotel chains have enacted strict policies against human trafficking and are offering comprehensive training to their staff to spot, and report suspected human trafficking cases to the authorities.”
The damage may also include a lack of investment or a higher cost of capital for non-compliant companies. In sustainable finance, the phenomenon of the ‘greenium’ – the ability for ESG-compliant bonds to price at a premium compared with conventional ones – has emerged as investors willing to support sustainable products have competed to buy the associated bonds. This results in advantageous terms for the ESG-conscious borrower – and drives better disclosure standards to boot.
When US Supreme Court Justice Louis Brandeis said: “Sunlight is said to be the best of disinfectants”, he endorsed the power of transparency to eliminate bad actions and shady practices. The garment industry is embracing transparency – and disclosure is key. As with disclosing their Scope 3 emissions, getting a handle on modern slavery risks requires cooperation across numerous supply chain partners. Sharing information is the key to letting sunlight into the far reaches of extended relationship arrangements.
“Companies are already good at auditing the connections in the closest proximity to their own operations, but getting this done further across the chain is more difficult – and more costly,” says The Mekong Club’s Friedman. “Who pays for these auditors? The need to manage this exposure leads competitors to cooperate and share information and therefore the auditing costs.”
Existing environmental, social and governance disclosure requirements are a great place to start. Global accountancy body IFAC says that 95 per cent of large companies reported on ESG matters in 2021, a 91 per cent increase on 2019. While the emphasis is on environmental disclosures, more are conscious of the social and governance aspects – and with the practice of disclosure established, are likely to increase their ability to assess and report ESG risks.
In addition, growing consumer consciousness of the power to support ethical brands will spur brands to clean up their acts. While some indications exist that consumers are willing to pay more for ethically produced products (a retail version of the greenium) the current cost-of-living crisis may mean this trend has slowed.
A 2022 survey by CivicScience noted a three per cent drop since January 2020 in the number of respondents who said sustainability was important to where they shop for clothing, falling from 57 per cent to 54 per cent. But at the higher end of the fashion spectrum, consumers are still willing to pay a premium for eco-friendly products that impact their day-to-day lives, with apparel (30 per cent) one of the most likely categories.
The direction of travel towards the elimination of modern slavery may have slowed in the wake of the global pandemic, but a combination of pressures – including growing consumer awareness, better disclosure standards, and mounting costs of non-compliance – mean that the entire spectrum of garment supply chain participants will soon need to get their houses in order.
This article was published in the Q2 2023 issue of CIR Magazine.
