AsiaLaborEnviroRisk2013forSRIinvestorsKateLarsen8april2013

Asia CSR Supply Chain labour and environmentalconditions and risks, summer 2013. Consumer goods factory production

Presentation April 2013 by Katie Larsen [email protected] CSR-Supply Chain labour/environmental standards consultant.

Copyright or please acknowledge to use. Thank you to CSR industry & NGO respondents to survey.

mailto:[email protected]

Agenda (15mins)

•Scope: Consumer goods, upstream (more factory conditions focused review)

1.Some Top 10 risks and Who Cares? (How are they material?)

2.Review Top 10 examples

•Touching on throughout:

•What does a survey of industry practitioners think will happen summer 2013?

•What can investors encourage brands to do? Opportunities to align what's better for workers, environment, factories, brands and investors.

Presentation April 2013 by Katie Larsen [email protected]. Independant CSR-Supply Chain labour/environmental standards consultant.Copyright or please acknowledge to use. Thank you to CSR industry & NGO respondents to survey.


The Region:hot-spots



The survey• Asia reps from:

• 18 brands

• 5 consultant/NGO/think tank

• Roles: • CSR, labour standards, social compliance,

sustainability, sustainable manufacturing, etc

• Manager, Director, Senior Manager, Officer, etc

• Industries:• 5 working with tech/IT (some crossover)

• About 20 working with fashion/garment/shoes/homewear

• Nationalities:• American, Chinese, HKese, Swedish,

Japanese

• Companies: • American, British, Swiss, Swedish, German

• Sent April 4

12. Do you, or did you in recent years work in an international brand CSR team?



Top10 issues Review.

Survey (responses throughout) asked :

“Thinking about labour (primarily, and some environmental) issues in the Asia supply chains for apparel and lifestyle goods companies and brands,and what you might like investors who own shares in publicly listed international brands to know (so that they might influence companies to improve how they support workers in the supply chain):”



Top 10 risks in the region impacting supply chains in recent years. Factory:

1. Faintings

2. Fires

3. Water pollution

4. Child labour

5. Prison labour

6. Workers Strikes

7. Worker Suicides

8. Worker Shortages

9. Natural disasters: floods, tsunami

10.Bankruptcy/boss runs off cases



Who Cares? Top 10 examples

1. US university customers: Badidas case

2. Western brands: Paying after Badidas case

3. Western customers: H&M media over Kingsland

4. Western customers: Greenpeace “Detox”

5. Western customers: Apple Foxconn

6. US workers: Walmart strikes, solidarity

7. Brands: Shipping challenges after Thai floods

8. Chinese customers: IPE GCA list

9. Chinese customers: China worker treatment

10.Asian communities: Bangladesh/Pakistan fires



What do you see as key risks in the Asia supply chain summer 2013 which be in the press and/or cause delayed shipment? Total votes 24Presentation April 2013 by Katie Larsen [email protected]. Independant CSR-Supply Chain labour/environmental standards consultant.



1. Mass faintings of 100s of workers in Cambodia garment factories:


Ken Loo, Secretary GeneralGarment Manufacturers Association Cambodia, Sept 2012

Excessive Overtime cause?Massive increase in exports 2005-2012, without corresponding doubling of workforce


1. Mass faintings of 100s of workers in Cambodia garment factories:

Why?1.Some indications “mass” faintings psychosomatic2.Nevertheless, first few faintings in each factory realBecause:3.Out in the heat to buy lunch in the middle of the day to buy lunch, plus4.Not eating enough, plus5.Not sleeping enough•crowded housing in heat•excessive work hoursBecause6.Not earning living wage, plus7.Traveling an hour to work standing in heat in a truck

•Material impacts? Production disruption, cost, causing strikes, protests in the west against key buying brands, unproductive when workers unwell.

•What can investors ask brands to do? Ask factories to provide morning snack and canteens (some now do), and free seated transport to work.



Do you think faintings will continue to be in the press?



2. Deaths of 100s of workers in Fires in Bangladesh and Pakistan garment factories:

Why?

1.Local government not monitoring safety

2.Pakistan factory cheated on SA8000 certificate social audit:

•cheating on audits rife in “CSR” industry

•SA8000 certificate often cheated in Asia

•factories cheat for pass/fail customers who don’t use continuous improvement approach

1.Bangladesh factory was unmonitored subcontractor:

•brands not manage risk in lower “tiers”?

•brands not checking production where declared

•Material impacts? Production disruption, lost product, caused strikes, reputational, brands had to pay compensation in some cases

•What can investors ask brands to do? Improve auditing to include offsite worker interviewing (recommended by NGOs) and checking production status, increase safety training, capacity building approach



Are there approaches that could improve the quality (ROI/value) of audits?



• Quick audit

• Pass or Fail (drives cheating)

• Excessive auditing by different customers

• Change often

• Next factory

• Rely on agents

• Don’t really know where your product is made

• No incentive to factory for social/environmental compliance as buyers move to cheaper competitor if raise price to pay legal wage

• High risk

• Deep audit

• Understand baseline (reduce cheating)

• Brand collaboration whenever possible

• Support capacity building overtime (productivity, HR, communications improvement) & monitor improvement

• Internal ownership (improving buying practises: order timing, critical path, prevent last minute changes, reward improvement through balanced scorecards)

• Longterm partnership and factory skills grow with brands (e.g. Nike-PoChuen/Yuyuen, Apple-Foxconn, Italian suppliers)

• Risk known, managed, reduced

Old Model:

**Highlight:Brands social compliance with factories/supply-chain:

New Model:



Do you believe brands should increase investment in capacity building in factories? If so, in what ways?


What ROI have you seen from factory capacity building programs?


3. Brands accused of water pollution from China supply chain factories:

Two NGOs ongoing campaigns pushing brands on China supply chain water pollution prevention, management, disclosure:

a)Institute of Public and Environmental Affairs (IPE)’s Green Choice Alliance (GCA) coordinating 40+ grassroots NGOs across China wrote to brands requiring they check supply chain in IPE-GCA database and report:

•2008 ranked top 35 IT brands by who reported, campaign “Apple rotten to the core” (FT, NY Times, etc) until eventually responded

•2012 ranked 50 top fashion brands, e.g. Marks&Spencer did not respond gained poor press Vs Levis, H&M, Nike positive. Chinese press misinterpreted rank and criticized all brands.

•Greenpeace “Detox” and “Dirty Laundry” campaign asked brands to commit to “Zero Discharge Roadmap”:

•targeted brands starting with Nike, Puma, Adidas, H&M,

•more recently Italian luxury brandsPresentation April 2013 by Katie Larsen [email protected]. Independant CSR-Supply Chain labour/environmental standards consultant.


•Material impacts?

•Initially, reputational.

•Rapidly cost of investing in industry collaboration (Sustainable Apparel Coalition US$20,000 per year plus need internal experts, projects, travel, etc) to work out how to “Detox” supply chain

•Greater cost will be in coming years when verify suppliers complying, as environmental auditing expensive.

•May drive some sourcing out of low-cost countries if e.g. dyehouses can’t detox as other customers demand use of “toxic” dyes, etc

•But......driving innovation e.g. “Levis water-less jeans”, Nike new “waterless dyeing”

•driving efficiencies e.g. NRDC “Clean by Design”, REEEP

•What can investors ask brands to do?

•If not already targeted, garment and IT selling brands with China sourcing (most) can get ahead of competitors by:

•following Greenpeace & IPE guidance before targeted.

•Work to educate designers, suppliers and brand collaborate to reduce water use before prices rise, communities target sites, etc.

•Innovate.

NGO water pollution accusations:

4. Child LabourStill a risk?

•China: labour shortage driven “holiday internship” situations but with extremely long hours, pay not to youth workers

•Cambodia: labour shortage driven summer holiday influx

•Bangladesh: only 500/2600ish factories registered to export so 2000+ unmonitored subcontractors

•India: pockets of areas where schooling access still poor

Material impacts?

•Obvious reputational.

•Quality issues.

•Supply chain disruption. Remediation expensive.

•Risks with new legislation? “California Transparency in Supply Chains Act” 2010, “Transparency in UK Company Supply Chains (Eradication of Slavery)” private members bill?


•Invest in deeper auditing, unannounced, with offsite worker interviewing, more training for audit teams (not solo auditors).

•Join industry collaborations to create solutions for remediation.

•Stay with factories and monitor that youth supported into education so supplier incentive to hide reduced-this keeps supply chain stability also.


Are there specific industry initiatives you believe more brands should be a part of to generate more stability long term in Asia working conditions for all?:

**AFBCF: Hong Kong based brand CSR Manager run

Apparel & Footwear Brand Collaboration Forum (topped at 20 brands

members)


5. Prison/Forced Labour

Still a risk?

•China: as means to deal with labour shortage, “fast fashion” urgent order shipments, rising wage rate

•Vietnam: Columbia Sportswear supplier subcontracted to forced labour site

•North Koreans?

•Burma?

Material impacts?

•Obvious reputational.

•Inability to monitor production

•Risks with new legislation? “California Transparency in Supply Chains Act” 2010, “Transparency in UK Company Supply Chains (Eradication of Slavery)” private members bill?


•Invest in deeper auditing, unannounced with offsite worker interviewing (allows auditors to monitor), more training for audit teams (not solo auditors).

•Monitor production in factories


What do you think are the key things brands should be asked by investors to do to reduce risk for investors (where reducing risk and helping workers can align):

Rank (1-5). Track record on:

Factory/Supplier 1

Factory/Supplier 2

Factory/Supplier 3

Price competitiveness 4 3 4

Quality reliability 3 4 2

Ontime shipping 3 4 5

Labour standards 3 4 2

Innovation/ Product

development3 4 4

Total Score: 16 19 17

Wins the order this season

Balanced Scorecard (still rare):


6. Worker Strikes

Still a risk?

•China, Vietnam: “new generation” “80s generation” want better wages

•Cambodia, Bangladesh: Demand for Living Wage

•Indonesia: Wages and use of short-term contracts

Material impacts?

•Honda production halted after key supplier in China had strike

•Reputational for Foxconn

•Indonesia strikes 2012 halted production


•Invest in balanced scorecard establishment so are rewarding factories who balance decent wage with price, quality, shipping time

•Needs investment in stronger audit programmes so data is robust

•And supporting capacity building in factories of improved worker-management communication

•e.g. through ILO Better Work in Cambodia, Vietnam, Indonesia.

•If Bangladesh buyer, support H&M CEO request to Prime Minister for regular review of minimum wage rate and increase so level playing field.


Do you think factory worker strikes will continue in summer 2013?

Total votes 18


7-8. Worker Suicides/ShortagesStill a risk?

•China: “new generation” “80s generation” want to be treated like human beings

•sparked a national debate with academics, even politicans commenting

•improved Apple CSR programme and IT industry efforts.Material impacts?

•Largely reputational

•unless causes large strikes, or damages morale, productivity, and worker hiring, retention, productivity and quality

•Some increase in cost of CSR programme, although balanced with benefit of preventing future fires (Foxconn factory they blew up), etc.


•Promote worker hotlines in China

•Promote worker-management communication improvement programmes

•Ensure have “critical path” for final order changes and stick to timing (no last minute changes: Apple woke 1000s of workers midnight to make changes to iPhone.


8. Natural Disasters

Seen in recent years

•China: Sichuan Earthquake

•China: south China snow then floods

•Thailand: Tsunami

•Thailand: Floods

•Japan: Earthquake-Tsunami

Material impacts?

•Sometimes brands couldn’t ship (for 3-8 weeks) with Thai floods

•Brands reliant on some Japanese components impacted after earthquake

•South China factories couldn’t do business when flooded


•Ensure balanced portfolio across countries

•Ask Risk Management team to work with CSR to map supply chain risk

•Join industry initiatives on water: SAC, Business for Social Responsibility (BSR) water groups, National Resources Defense Council (NRDC),

•Set up cooperation to protect wider Watersheds


10. Bankruptcy/boss runs offSeen in recent years:

•Cambodia: Kingsland case

•Indonesia: PT Kizone compensation paid by Nike, Dallas Cowboys, “Badidas’ campaign to make adidas pay

•Pakistan: Factory owner disappeared after fire, German brands paid workers compensation

•China: Frequent past cases of Korean owners locked in factories when workers suspected they might run away

Material impacts?

•Compensation payments: Nike paid US$521,000 in PT Kizone case (even though already paid supplier for goods)

•Reputational

•Possible supply chain or store disruption


What can investors ask brands to do?

•Improve policy so sourcing add wording to ensure suppliers will pay workers what legally due in event of factory close down

•Use leverage of full brand voice (COO, CEO, etc) with vendors or manufacturing associations when possible to cause factory owners to pay workers

•Hire more CSR staff with more experience to engage stakeholders and keep solutions private

New Issue:Do you see Myanmar/Burma sourcing beginning for listed famous garment brands? If so, how do you rank the risk to brands reputations compared to e.g. China?

Higher Risks due to lack of:1.factory knowledge of labour standards2.agreement with international human rights standards increasingly followed in the region?3.experienced labour standards monitoring and capacity building expertise (third party and brand) on the ground, and solutions.


Summary: Top “Hot” issues:

1.Worker shortages2.Workers strikes3.Fire risk4.Faintings (Cambodia)5.Factory shutdown compensation protests

What can be done? Ensure brand/supplier holdings invest in:1.Industry Collaboration solutions (SAC, BetterWork,

FLA, ETI)

2.Capacity building promotion or sponsorship to improve factory management

3.Better auditing: offsite, unannounced, better training, FLA, etc.


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