SI Opener: Covid-19 puts spotlight on labor issues in the apparel industry

• Several manufacturers weren’t paid for orders in production or finalized
• Engagement seeks to highlight labor standards in supply chain management
• Challenges include data availability and building long-term supplier relationships

In our investment research, we focus on addressing the most material issues for each industry. For apparel, we find that labor practices and supply chain management are two of the six most material issues.

Companies in the apparel and textiles sector may operate and control their manufacturing plants themselves, though they often partly outsource this responsibility to their supplier network. Those operating their own plants have a direct responsibility to provide a safe place to work and commit to respecting labor and human rights.

When manufacturing is outsourced, companies will typically find suppliers in countries with the lowest direct cost, which also have limited regulation and enforced worker protection. Suppliers are often dependent on the contracting apparel company and have to adapt to price pressure – both are factors that increase the risk of a deterioration in labor conditions. Wages paid to supply chain workers are often well below living wage estimates and far too often put them on the poverty line.

In order to create resilient and competitive supply chains, manufacturers of apparel, accessories, luxury goods, footwear and textiles need to balance commercial imperatives such as quality, costs and delivery time with broader issues (like the environmental impact, social considerations and business practices). Companies that implement policies effectively can significantly reduce their reputational and operational risks and potential regulatory scrutiny.

Companies with transparent supply chains will strengthen their social license to operate and boost their brand image. Carrying out effective due diligence across the supply chain is crucial to identifying high risk areas where labor-related issues might arise. This assessment should be followed by concrete actions to prevent and mitigate these issues, including a consistent measurement of the effectiveness of these actions.

Several apparel brands and retailers cancelled or postponed orders as the pandemic forced store closures globally and revenue streams shrunk drastically. Factories in producing countries face major challenges to keep their businesses running whilst experiencing a decline in the volume of orders. In Bangladesh, the second-largest exporter of garments in the world, manufacturers lost more than EUR 2.7 billion in payments for orders that had already been produced or sourced.

Workers in low-cost manufacturing countries have been hit the hardest, given the lack of robust social protection systems in these markets. They are more exposed to sudden job termination, lack of severance pay, and inadequate social security and health insurance.

Our engagement work in the garment industry is conducted in collaboration with other financial institutions through the Platform Living Wage Financials (PLWF).² The platform is an alliance of 15 mostly Dutch financial institutions with EUR 2.6 trillion in assets under management that aims to improve conditions in the clothing manufacturing sector, which is heavily reliant on low-paid workers. This platform has been in existence for a few years now, and has proved its worth in the pandemic.

For example, in the first half of the year, we sent a letter to our investee companies requesting that they manage the Covid-19 crisis responsibly across their supply chains. Our key asks focused on seeking financial prudence, securing appropriate health and safety for all employees, and protecting workers’ rights across the supply chain. We encouraged our investee companies to get involved in industry-wide multi-stakeholder initiatives to find solutions to these challenges.

Furthermore, the International Labor Organization has put forward a ‘Call to Action in the Garment Sector’.³ Global brands, manufacturers, labor unions and other stakeholders can publicly endorse this statement, which aims to catalyse action to enable manufacturers to survive the economic disruption caused by the pandemic, and to protect garment workers’ income, health and employment. The PLWF has publicly endorsed this initiative, together with more than 100 stakeholders.

One of the key components of our engagement work through the PLWF consists in the annual assessment of how our investee companies accelerate the payment of living wages across their supply chains. The members of the Garment and Footwear working group, which is chaired by Robeco, have concluded the assessment of 29 companies and publicly reported the results on this webpage.

Our results show that there is overall progress in embedding the relevance of living wages within the industry. The principal challenge is how to close the gap between commitments that are being put forward by brands, and the actual actions taking place on the ground. Despite widespread acceptance of the need to raise living wages, none of the companies assessed had sufficient processes in place to guarantee the full payment of living wages across its own operations and supply chain.

The research and the information gleaned from engagement on labor and supply chain issues are integrated into our in investment decision-making process for the apparel and retail sectors, as these are considered material issues.

One example is the case of a large DIY retailer. Our discussion about labor practices across the company’s operations was important for the portfolio manager of the RobecoSAM gender equality fund. Covid-19 had a positive impact on the company’s sales, which increased significantly due to people spending more time doing improvement work on their houses. However, the company has a very large base of employees working in its stores, including many migrant workers and female employees, with high turnover rates. We discussed with the company how it manages its workforce so as to ensure equal opportunities for employees across different job levels – an important component of the RobecoSAM gender equality score.

Another example is our engagement with two apparel companies which are important holdings for our consumer trends funds. Both companies embody best practices in their business segments (sportswear/luxury), so this led to positive comments in the ESG integration component of the investment case, positively adding to the rationale for holding these companies in the portfolio.

Although we are seeing an increasing commitment from the sector to solve these issues, there is still work to be done in implementation. Several challenges need to be addressed when it comes to apparel supply chains and paying a living wage. First of all, there is a need to improve data availability so that companies are better able to understand what are the wage levels being paid by suppliers, and how that compares to living wage benchmarks.

Furthermore, it is important that brands commit to more sustainable practices by building long-term supplier relationships, which will enable them to better account for the labor cost in their procurement work. There should also be a social dialogue to ensure freedom of association and collective bargaining agreements as tools to really drive wage improvements. This goes back to the importance of industry-wide collaborations with not only brands, manufacturers and workers, but also with governments and other stakeholders who can collectively contribute to accelerate the systemic change that is needed in the industry.

Lastly, there is a need to bring the rest of the garments industry on board. Legislative changes on mandatory human rights due diligence can really contribute to building a more resilient supply chain at the end of the day. We see some promising signs with lawmakers in the Netherlands who are preparing to bring such a proposal before the Dutch parliament, and hope that other countries will follow suit.

¹ McKinsey: The state of fashion 2020: Coronavirus update
² For more about the Platform Living Wage Financials, go to https://www.livingwage.nl/
³https://www.ilo.org/global/topics/coronavirus/sectoral/WCMS_742343/lang--en/index.htm