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Kowtowing to China’s Threats Could Tank Fashion’s ESG Ratings

As tensions escalate over forced labor in the Xinjiang Uyghur Autonomous Region in northwestern China, environmental, social and governance (ESG) experts warn that capitulating to Beijing could have moral as well as financial implications for brands.

Businesses that appear to exacerbate rather than improve the world‘s problems risk not only the disapprobation of their consumers and employees but also investors who have a responsibility to “not contribute to severe violations of human rights through our investments,” said Jan Erik Saugestad, CEO of Storebrand Asset Management, a financial services company in Norway. The imperative has become more apparent, he added, now that several governments are considering or implementing laws requiring companies to carry out human-rights due diligence.

“This is why it is important that we ask companies to map and disclose information about their supply chains, as well as disengage in activities that may contribute to human-rights violations,” Saugestad said. “We expect companies to take these issues seriously and thus we will escalate our dialogue accordingly where needed.”

Pandemic “wakeup call”

Storebrand Asset Management is a member of the Investor Alliance for Human Rights, a group of 160 institutional investors that announced Thursday that it will be “stepping up” its engagement with dozens of companies, including H&M, Zara owner Inditex and Nike, to “focus attention” on how business connections to Xinjiang could make them complicit in suspected genocidal abuses there. Not to mention, forced labor is illegal and prohibited by international and national laws, it added, which makes it as much a compliance issue as it is an ethical one.

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Brands, increasingly dragged into geopolitical conflicts, are feeling growing pressure to choose between their business interests—in this case, access to China’s 1.4-billion-people-strong market, a fact Beijing has weaponized—and their corporate and customer values.

The rise of conscious or “green” investing, fueled, in part, by the “wakeup call” of the pandemic, has only made the decision-making process more difficult to navigate. Demand for ESG data, driven by surging shareholder interest and an uptick in government policies, has skyrocketed in recent years. By 2025, ESG assets are on track to exceed $53 trillion, or more than one-third of the projected $140.5 trillion global total, according to Bloomberg Intelligence.

Indeed, investors are ramping up their use of ESG criteria to evaluate holdings. In March, money management giant BlackRock said it will ask companies to identify and show how they plan to prevent human-rights abuses.

“It is our conviction that our clients, as long-term shareholders, benefit when companies operate their businesses responsibly,” it wrote in an investment stewardship statement. “Unmanaged potential or actual adverse human-rights issues can not only harm the people directly affected, but also expose companies to significant legal, regulatory, operational and reputational risks.”

Cautionary tale

With rating agencies placing growing weight on a brand’s social impacts, even a whiff of scandal could trigger “significant downgrades” in scores that measure and benchmark a company’s ESG performance and, by extension, its reputational implications, Joachim Klement, an investment strategist at London banking firm Liberum, told Sourcing Journal.

Dismal ratings that devalue a company‘s investment attractiveness could have a knock-on effect on bottom lines, Klement said, pointing to the cautionary tale of food-delivery startup Deliveroo, whose debut on the London Stock Exchange this week was so disastrous that one banker called it the “worst IPO in London’s history.”

The signs were there for anyone who was paying attention, Klement noted: Before Deliveroo went public, six top British investment firms declared they would shun the company’s shares because of its alleged mistreatment of its deliverers, who are not entitled to a minimum wage or holiday and sick pay. ”Potential poor management,” Legal & General Investment Management warned, could “lead to value destruction and avoidable investor loss.”

Suggestions that fast-fashion e-tailer Boohoo might harbor modern slavery in its supply chains, too, have “spooked” investors, Klement said, especially since it comes on the heels of last summer’s imbroglio about unsafe and exploitative conditions at its English supplier factories. Certainly the amplifying presence of social media makes it easier for bad news to spread and stick around. “You just can’t get away with labor exploitation anymore,” he said.

As tensions escalate over forced labor in Xinjiang, ESG experts warn that capitulating to Beijing can have moral as well as financial costs.
A pedestrian walks past a Nike store in Hong Kong. Budrul Chukrut / SOPA Images/Sipa USA via AP Images

Xinjiang: a flurry of fury

Xinjiang became the flashpoint of China’s nationalist rage late last month after Chinese netizens resurrected months-old statements from Adidas, H&M, Nike and others expressing concerns about forced labor in the region. The vociferous backlash saw a slew of celebrity endorsers—including Huang Xuan and Victoria Song for H&M; Wang Yibo and Tan Songyun for Nike; and Eason Chan and Liu Yifei for Adidas, to name a few—rip up their lucrative contracts in public fits of pique. Former fans of the brands posted photos and videos of themselves throwing away sneakers and clothing or setting them on fire.

H&M appeared to draw most of the rancor, vanishing from China’s biggest e-commerce platforms, such as Alibaba’s Tmall, JD.com and Pinduoduo, and location apps like Apple Maps and Baidu Maps. In some parts of China, mall operators shut down the retailer‘s outlets because of the “disrespect” H&M purportedly showed China.

As the furor mounted, other brands, fearful of becoming the next target, scrambled to protect themselves. In quick succession, Asics, Muji, Fila China and Hugo Boss posted their support of Xinjiang cotton on Weibo, China‘s equivalent of Twitter, while Zara owner Inditex, PVH Corp. and VF Corp. deleted online public statements where they had repudiated forced labor in Xinjiang and cut ties with suppliers there. All of this led to equally swift reprisals from human-rights and labor groups that criticized the brands for buckling under Beijing’s bullying tactics.

“Placing profits over human rights carries a major price,” the Coalition to End Forced Labour in the Uyghur Region, a consortium of more than 180 human-rights and labor organizations across 36 countries, including the Clean Clothes Campaign and the Uyghur Human Rights Project, said at the time.

“Millions of consumers worldwide who do not want to be made complicit in Uyghur forced labor are going to be watching to see how companies react to this bullying,” the group added. “Will they reaffirm their opposition to forced labor and crimes against humanity or will they cave to pressure? This is a moral test for the world’s apparel brands. We will see who passes and who fails.”

Similarly, the nonprofit Human Rights Watch urged companies to resist Beijing’s threats and “stand firm in their opposition to forced labor.”

“The Chinese government is showing its true colors by pressuring companies to be complicit in abuses rather than working together to end violations against Turkic Muslims,” Sophie Richardson, the organization’s China director, said last month. “This is a litmus test of companies’ upholding their human-rights commitments.”

Backpedaling brands

Facing reproach from Chinese nationalists who deny claims of Uyghur abuse on one side and conscious consumers who reject goods made with forced labor on the other, brands have struggled to provide clarity.

In the days that followed the fracas, PVH Corp. reinstated its statement without explanation, while VF Corp. floated a briefer, more muted “XUAR Global Compliance Statement” that made no reference to forced labor. Asics and Hugo Boss claimed that the messages on Weibo were unauthorized and didn’t represent their official corporate positions. H&M issued a mea culpa of sorts, expressing its desire to “be a responsible buyer, in China and elsewhere” even as it worked to regain the “trust and confidence” of its Chinese customers, colleagues and business partners. It did not mention Xinjiang or forced labor, which some saw as pandering to the ruling Communist Party. (In any case, it didn’t work.)

“As these brands succumb to this audacious intimidation, they should know that they will be held accountable for their responsibility to respect human rights throughout their supply chains by their investors, customers and other stakeholders,” said Anita Dorett, program director of the Investor Alliance for Human Rights.

Manjit Jus, global head of ESG research and data at S&P Global, whose “media and stakeholder analysis” assesses the reputational, operational and financial impacts of corporate controversies, said that recent developments demonstrate the ”complexity of global supply chains paired with business and national interests.”

“We are investigating these allegations and engaging with companies, monitoring their responses and performing a holistic assessment of how these companies are responding to the issues,” Jus told Sourcing Journal.

Still, the effects of China’s belligerent brand of diplomacy are already being felt. Kearney’s recent Foreign Direct Investment Confidence Index, the management consultancy’s annual ranking of countries likely to receive investment from companies with annual revenues of $500 million or more, saw China slip from eighth to 12th place this year.

The downgrade, Kearney wrote, may “reflect escalated U.S.-China trade tensions and other policy conflicts along with the exposure of international supply chains to China, which—consistent with Kearney analysis—has led some companies to restructure their supply chains to avoid geopolitical and tariff fallout, among other factors compelling investors to rethink their global supply chains.”