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Why Adidas, Lulu Earned Strong Marks for Mitigating Worker Abuse

When Rana Plaza collapsed near Bangladesh’s capital of Dhaka in April 2013, resulting in the deaths of more than a thousand garment workers, labor activists resorted to scouring the wreckage of the multi-factory complex for labels, customs records and other signs of the brands and retailers that had manufactured clothing there.

Transparency was still a nascent concept, and the publication of supplier lists only a pipe dream. Many of the companies that turned up in the rubble, including The Children’s Place, United Colors of Benetton and Walmart, denied any relationship with the factories in the building. If presented with proof, some accused their suppliers of subcontracting their jobs without their knowledge. Others blamed the lack of visibility endemic to a supply chain that often spanned continents.

As mandatory human-rights due-diligence laws gain momentum across the globe, however, a company’s ignorance of labor abuses within its operations may no longer be an excuse. For the investors who pour money into these outwardly glamorous enterprises, the risk of a bad gamble grows painfully more acute.

Part of this is a response to the worsening situation in China’s northwestern Xinjiang Uyghur Autonomous Region, where hundreds of thousands of Uyghurs, Kazakhs and other Turkic Muslim minorities are suspected of working under conditions of forced labor following their internment in the ruling Chinese Communist Party’s so-called “re-education camps.”

Just last month, the German Parliament approved a bill requiring large and medium-sized firms that conduct business in the country to demonstrate how they’re combating human-rights abuses in both their direct and indirect supply chains. The law, which goes into effect on Jan. 1, 2023, requires companies to establish complaint mechanisms, report on their due-diligence activities and take action to prevent and mitigate labor violations. Those that fail to do so could face fines of up to 2 percent of their total worldwide annual group turnover, though they will not be subject to any civil liabilities.

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The broader European Union, too, is poised to introduce a new law that would require companies, both established inside the bloc and with access to its market, to “identify, address and remedy” aspects of the value chain that might infringe on human rights, the environment and good governance. Additional measures covered by the legislation could include a ban on importing products linked to severe human-rights violations such as forced or child labor.

“This new law on corporate due diligence will set the standard for responsible business conduct in Europe and beyond,” Lara Wolters, a Dutch Member of the European Parliament, said after lawmakers overwhelmingly voted in support of the legislation in March. “We refuse to accept that deforestation or forced labor are part of global supply chains. Companies will have to avoid and address [the] harm done to people and [the] planet in their supply chains. The new rules will give victims a legal right to access support and to seek reparations, and will ensure fairness, a level playing field and legal clarity for all businesses, workers and consumers.”

Protest In Solidarity With Uyghurs In London
Protesters demonstrate in front of the Chinese Embassy in support of the repressed Uyghur Muslim community who live in Xinjiang in northwest China on the 100th anniversary of the founding of the Chinese Communist Party on July 1, 2021 in London, England. WIktor Szymanowicz/NurPhoto via AP

The Netherlands, with its proposed bill on “responsible and sustainable international business conduct,” could soon follow suit, as could Australia, which has been facing growing calls to toughen up its anti-slavery laws, since the country’s reliance on imported goods leaves its companies especially vulnerable to modern-slavery risks.

In June, the British parliament introduced an amendment bill that would strengthen the country’s modern slavery act by making it a criminal offense to supply false modern slavery and human trafficking statements, among other things. And this week, Japan’s ministry of trade announced that it has asked the nation’s textile industry to establish a framework for unearthing potential human-rights abuses that might expose Japanese companies to boycotts from the West and abandonment by overseas investors.

The United States has been even more pointed in its response, with the Biden administration warning on Tuesday that businesses with supply-chain and investment ties to Xinjiang could run the risk of violating U.S. law as a result of “ongoing genocide and crimes against humanity” in the region. Already, the United States has cracked down on imports suspected of being produced with forced labor in Xinjiang. One of the most notable was a shipment of men’s shirts from Uniqlo that customs officials detained earlier this year for supposedly violating a ban on cotton and cotton items produced by the Xinjiang Production and Construction Corps. Cotton and cotton-containing products from Xinjiang are similarly verboten.

In new business guidance published by the European Commission and the European External Action Service, also on Tuesday, the organizations recommended that European companies stipulate a “zero-tolerance” policy for forced labor that might arise in relation to recruitment and retention practices, subcontracting, use of recruitment agencies and state-sponsored forced labor. They recommended that businesses learn how to spot “red flags,” such as countries that have labor and vocational programs targeting minorities or regimes that have outlawed peaceful strike actions.

“There is no room in the world for forced labor,” said Valdis Dombrovskis, the European Commission’s executive vice-president and commissioner for trade. “The Commission is committed to wiping this blight out as part of our broader work to defend human rights. This is why we put strengthening the resilience and sustainability of EU supply chains at the core of our recent trade strategy.”

A policy-practice gap

Rooting out forced labor may be easier said than done. Companies—apparel brands, in particular—have notoriously little visibility beyond the first tier of direct suppliers. In the latest forced-labor benchmark by KnowTheChain, an initiative organized by Humanity United, the Business & Human Rights Resource Centre, Sustainalytics and Verite, allegations of worker exploitation were identified in more than half of the world’s top 37 clothing purveyors, including reports of forced labor. On average, benchmarked firms scored 41 out of 100 possible points, with luxury nameplates such as Hermès, Louis Vuitton and Prada performing “particularly poorly.”

“We’re seeing a significant policy-practice gap,” Felicitas Weber, project director for KnowTheChain, said at a recent webinar. “For example, a lot of companies say that they have a human-rights risk assessment in place but as soon as we ask what are the risks that [they] identify, there’s not many that could give us a substantial answer.”

The same is true of the grievance mechanisms for workers most brands tout.

Bundestag
11 June 2021, Berlin: Gerd M’ller (CSU), Federal Minister for Economic Cooperation and Development, speaks in the Bundestag in Berlin during the debate on due diligence in supply chains. Michael Kappeler/picture-alliance/dpa/AP Images

“As soon as we ask how many workers have used these mechanisms, what are the types of grievances they raised and what are some of the remedy outcomes, there’s very little information that really backs up that these processes are actually working,” she said. “We’ve seen a very high level of forced labor allegations from partner organizations, [yet] half the companies, including Amazon and Zalando, scored zero on remedy outcomes.”

More robust practices are possible—and profitable—however, Weber said. Sportswear companies Adidas and Lululemon, which scored 86 and 89 points out of a possible 100 respectively, topped the benchmark for another year—and handily outperformed athletic giant Nike‘s score of 62—for disclosing efforts such as how they’re protecting the rights of migrant workers across different sourcing contexts. But the fact scores varied so vastly demonstrates the current lack of a level playing field, she added. The Covid-19 pandemic has only weakened what few recourses workers have, leaving them more vulnerable to conditions of forced labor than ever.

Legislation could change that by making human-rights due diligence a legal requirement, forcing brands to dive deeper into their supply chains and fix what appears to be broken—or pay the price.

With increasing appetite from consumers for more ethical goods, the failure to address supply chain forced labor risks could become costly in other ways as well. Boohoo, for instance, infamously lost more than $1.3 billion in market value overnight after the ultra-fast-fashion retailer made headlines last summer over alleged exploitative working conditions in the English city of Leicester. After PricewaterhouseCoopers resigned as its auditor over fears of reputational damage by proxy, Boohoo’s board of directors had to purchase shares to stabilize the company’s market price. Despite bumper profits following the scandal, Boohoo’s share price has never fully recovered.

If Elena Espinoza, acting head of social issues at Principles for Responsible Investment, had her druthers, investors would prioritize human rights the same way they do climate change. But if all else fails, the potential financial damage should prove an incentive. Investors, she says, should wield their leverage to ensure that workers in supply chains receive the remedy they need, whether in the form of reimbursement of worker-paid recruitment fees and wage theft or reinstatement for unfair dismissals. Investors should also support human rights due-diligence resolutions, even voting against corporate leadership that consistently fails to address labor violations.

Engaging with workers and their representatives to understand—and champion—their perspectives, needs and demands is equally critical.

“Investors need to understand that they have a responsibility to respect human rights independent of the state’s duty to protect human rights,” she said at the same webinar. “We want to get them to think about the risks to people, and not just necessarily the risks of the business, even though these things, in many cases, overlap.”