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Consumers increasingly regard sustainability as one of the factors that determines in which shop they will purchase their clothing.
They use social media and the information that is shared by consumers and other stakeholders such as NGO's to determine their opinion regarding a clothing brand. Preventing health and safety risks in the clothing sector is therefore important for companies in the clothing industry. Their reputation is at risk and brand loyalty can be lost quickly due to the impact of social media, leading consumers to choose a competitor. Preventing health and safety risks in the clothing sector is important for investors. When the reputation of companies is in danger due to incidents such as the Rana Plaza disaster in Bangladesh in 2013, brand loyalty can be lost quickly and sales will decrease subsequently, which results directly in a negative impact on shareholder value. Therefore preventing health and safety risks contributes to a better risk-return profile for investments in this sector.
In 2015, M&S informed us about their new initiative to publish an annual list of active clothing manufacturers. As promised, in the first quarter of 2016, the company completed the listing of all its suppliers on its website. At present, it includes number of factories, address of each factory and number of male and female employees for each of its clothing and footwear suppliers. In the coming years, the company plans to enrich the website with other ESG indicators of each of its suppliers. M&S plans to expand the suppliers transparency initiative in the future it to its other businesses like food and retail. With this initiative we rank M&S as an advanced clothing retailer in terms of transparency.
To ensure that all the suppliers’ buildings are in compliance with Primark’s H&S standards, the company has incorporated structural building surveys. It has hired an engineer who conducts these surveys on its behalf. The survey by the expert is completed in all the suppliers’ buildings in Bangladesh and Pakistan. In 2016, the company plans to expand the survey to its suppliers in India and Sri Lanka. Another key finding from this dialogue with Primark was that the company confirmed that none of their suppliers globally are in a shared building which was the cause of Rana Plaza disaster. We consider this approach to be very important as risk mitigation to create better oversight.
Companies under engagement recognize the inherent risks while sub-contracting. It is indeed a challenge to ensure the companies’ values and standards are maintained at the sub-contractors’ factories. To manage sub-contracting risks, M&S confirmed that they have a list of pre-approved sub-contractors. They never source from any sub-contractor who is not known to them. The company is confident about its suppliers that they would not engage in any sub-contracting without M&S approval. The company noted the suppliers’ audit processes are very robust. They involve accounting of production capacity, high penalties and even cancellation of contract in case of a breach, which prohibits its suppliers to engage into any un-approved sub-contracting.
We completed our last round of dialogues with companies within this theme in the first quarter of 2016. In last three years we have had multiple dialogues with our eight companies under engagement and we believe that most of these companies are aware of H&S risks in their supply chain. The companies have refined their H&S management strategies at their suppliers in many ways. For example, most of the companies are focussing on one of the following risk management strategies such as reducing their supply base, working with long-term suppliers, ensuring independent suppliers building than shared ones, using advanced IT systems to track and manage suppliers ESG commitment, stricter audits, and high control on sub-contracting. Increasing local representatives in the high risk countries, improving traceability and transparency are also adopted by the companies to mitigate supply chain risks. As an investor, we applaud the companies on their ongoing efforts around improving sustainability in their clothing business.