Over the last decade, the apparel retail landscape has changed rapidly and Governments and NGOs are imposing new regulations, legislation and taxes on product sourcing, production and transportation. As a result, the landscape has become increasingly difficult to navigate and comply with. Environmental, social, and governance (ESG) issues are becoming increasingly critical for all companies across all industries and consumers are giving priority to products that have little to no social or environmental impact.
Supply chains today are global, dispersed and come with a host of complex challenges to businesses around the world. In order to move towards a sustainable approach, retailers and brands need to work towards legislative compliance, and this is not only limited to their own business practices but also must filter through their vast supply chains.
According to Laurent Lambrette, at Linkwear: “The apparel industry is on its way to changing into a CSR-driven industry, in which flexibility and transparency are the keys to success.”
McKinsey’s 2022 State of Fashion report notes consumers want to know where materials come from, how products are made, and whether the people involved are treated fairly. They want to buy and connect with brands who care about the products and services they offer; who value the importance of an ethical supply chain and will incorporate social and human rights and environmental considerations into how they do business across the world. In response, more and more companies are expanding their sustainable assortments and working to boost the sustainability and transparency of their supply chains.
It states: “The bottom line going into 2022 is that the fashion industry faces a complex mix of challenges and opportunities, in which there is little room for missteps. Decision makers have their work cut out to manage the demands of digital, sustainability, and the supply chain.”
According to Trent Duvall at KPMG Australia: “Many ESG issues are complex, especially when considering the need to include both upstream and downstream supply chain partners. For many organisations, these issues are outside of their direct control. For some ESG issues, the solution pathways don’t yet exist and therefore there is a great need to undertake ongoing research and innovation.”
In 2019, the Global Sustainable Development Report explored how companies were starting to embed sustainability in their supply chains by managing risks and adopting corporate commitments to human rights, ethics, the environment and the communities from which they source goods and services. Capturing feedback from 100 sustainability, supply chain and procurement specialists from 70 companies globally.
In a report from Ernst & Young (EY) titled: Why net-zero supply chains are the next big opportunity for business, increasing pressure from consumers, employees, investors, governments and regulators is pushing COOs to consider the future of their operations in the dual context of what’s best for the business, society and the planet.
EU’s Corporate Sustainability Reporting Directive (CSRD)
Supply chain transparency, social compliance and the circular economy are top priorities for both the EU and national governments. For instance, the EU’s new Corporate Sustainability Reporting Directive (CSRD) will require all large European companies from 2023 onward to disclose how they manage social and environmental challenges.
When it comes to the circular economy, the EU is set to introduce new legal measures to increase circularity in textiles, including new directives concerning durability of textile products and a ‘right to repair’. To reduce global carbon emissions, the EU is currently considering a Carbon Border Adjustment Mechanism, also called a ‘carbon border tax’. This is effectively an import duty based on the amount of carbon that was emitted during production.
Environmental, social and corporate governance (ESG) is not a new topic on C-suite agendas, and the business case for action is well-established. Supply chain sourcing and manufacturing has long focused on human rights aspects — such as child labour and working conditions. Some large companies have closely monitored their suppliers for their carbon footprint and sustainability key performance indicators. Forward-thinking retailers have targeted energy savings tied to operating their physical stores to reduce their overall environmental impact, and they have improved transportation routes and leveraged hybrid vehicles for last-mile delivery. Consumer packaged goods companies have focused on reducing their packaging and their water usage.
More recently, the increase in regulatory action is adding greater urgency. The need to consider ESG more broadly within supply chains, with more change on the horizon in what companies will need to provide, not just in their operations but in their supply chains.
What’s more textile and apparel companies could be missing out on billions of dollars in net profit enhancements from a lack of supply chain traceability, according to a new report from financial think tank Planet Tracker’s titled Lifting the Rug. Planet Tracker has found that companies without traceability systems are missing out on a net profit enhancement of 3% to 7% – the equivalent of approximately US$3bn to US$6bn per year for a company earning US$80bn per annum.
How can apparel retailers navigate the new laws and regulations?
With regulations and legislation growing, apparel retailers must navigate what is required to fulfil each piece of legislation and efficiently report on all of the information required for compliance.
New European rules will come into effect sometime in 2022, offering consumers protection for making online purchases. These rules consider that when shopping online, consumers increasingly make purchases outside of their own countries, and that more and more products and services have digital elements. The ‘legal guarantee’ will thus also apply to products with a digital element, such as services and content.
Mandatory human rights, environmental, and good governance due diligence
Last March the EU paved the way with its directive for due diligence and corporate accountability. Penalties will be served if fashion brands are found to cause harm by insuffient due diligence in their supply chains, for example, ensuring no child labour, fair wages are paid and the environment is protected.
End of greenwashing
In October the UK’s Competition and Markets Authority (CMA) developed the Green Claims Code, which sets out six key points to check if environmental claims are genuinely green. Green claims (sometimes called ‘environmental claims’ or ‘eco-friendly claims’) are claims that show how a product, service, brand or business provides a benefit or is less harmful to the environment.
Many businesses use green claims to help market their products or services, but sometimes ‘greenwashing’ comes to the fore. In the US, the Garment Worker Protection Act (GWPA) was strengthened in October, ensuring that retailers cannot use layers of contracting to avoid liability. It also prohibits the use of paying garment workers by the “piece,” thereby eliminating a significant obstacle to workers being paid minimum wage and also protecting their health and safety.
“No industry is rifer with employment violations than the apparel industry,” says the GWPA on its website. “Los Angeles has the highest concentration of garment industry workers in the country. Largely located south and east of downtown, some 2,000 manufacturers employ more than 40,000 people — mostly immigrant women — who spend 10 to 12 hours a day cutting, sewing and dyeing clothing — from designer jeans to “fast fashion” runway knockoffs.”
ESG and legislative compliance are directly aligned to a business’s finances. Apparel retailers need a cost-effective, efficient and flexible way of reporting into their own business operations, but also into their complex supply chains.
In order to report effectively, information required for ESG and legislation needs to be combined and consolidated to reduce duplication and fatigue. Retailers require a full view of their suppliers, their practices and locations. Big data and the solutions used to capture, communicate and consolidate will be critical to success. Without this, retailers will be forced to manually check and consolidate their data across their supply chain and own business. This will likely increase duplication and be subject to human error.
For a full copy of the report summarising each piece of current or upcoming legislation by country, as of June 2022, click here.
About the author: Peter Needle is president at supply chain management software specialist Segura.