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Risky Business: Brands Face ‘Perfect Storm’ for Responsible Procurement

Natural disasters. Conflict. Covid-19. As the world’s major sourcing countries continue to battle destabilizing forces from multiple quarters, it’s their workers who are bearing the brunt of the damage, according to a new report.

The pandemic, while only one piece of the problem, has accelerated a downward trend already in place, risk-intelligence firm Verisk Maplecroft said in its 2021 human-rights outlook Thursday. Child labor, decent wages, discrimination, health and safety, forced labor and the exploitation of migrants in the workplace have deteriorated over the past five years, presenting brands with a mounting set of “dilemmas for ethical procurement” that demands due-diligence innovation.

“The pandemic has not only upended traditional human rights due diligence, it has [also] forced companies to rethink the fundamentals of sourcing low-cost labor from countries that have been devastated by the ensuing socioeconomic fallout,” said Sofia Nazalya, human-rights analyst at Verisk Maplecroft. “Add to the mix a political and human rights decline in key sourcing locations and a perfect storm arises for responsible procurement.”

Conditions are especially volatile in Asia, where three-quarters of the world’s garment workers reside. In its most recent modern slavery index, the London-based consultancy downgraded Bangladesh, Cambodia, Myanmar and Vietnam from “high” to “extreme” risk, placing them in the company of countries such as China, the Democratic Republic of Congo and Pakistan. Because of their weakening enforcement of labor rights, Vietnam, the 26th riskiest country on the index, and Cambodia, the 28th, saw the biggest drop in rankings in Southeast Asia by falling 53 and 36 places respectively, Verisk Maplecroft said.

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But pockets of “extreme” modern-slavery risk can also thrive in countries that score a “high” risk on a national level, the company said. One-third of all subregions in the world—1,101 out of 3,338—present an “extreme” risk of modern-slavery violations, with Bangladesh, Cambodia, China, India, Indonesia and Vietnam harboring some of the most dire cases. Overall, roughly 2.2 billion people live in areas that recorded the worst possible scores for human-rights violations, it added.

Xinjiang is a ‘no go’ zone

China’s Xinjiang Uyghur Autonomous Region has notably become a “no go” for responsible sourcing because of suspected genocidal crimes against Uyghurs, Kazakhs and other Turkic Muslim minorities, Verisk Maplecroft said. The international backlash has thrown open a “Pandora’s box” for businesses, which must walk a tight rope between remaining in China’s good graces and staying legally and socially compliant.

Still, brands must come to terms with the fact Beijing could punish them for divesting from Xinjiang, Verisk Maplecroft said. (Exhibit A: H&M.) They must also anticipate potential bans on other products from the region. Explicit bans aside, however, the reputational risks of being linked to Xinjiang are “likely now too great” for companies to bear. As investors increasingly rely on environmental, social and governance strategies, any mention of Xinjiang in a company’s operations could open it up to material risks.

“Widespread reports of human-rights violations against the Uyghur population in Xinjiang have turned the global court of public opinion against Beijing,” Nazaly said. “Pressure on brands sourcing from the region is building, not least from U.S. sanctions targeting raw materials and products produced there, but also from a range of international sanctions on Chinese officials and companies.”

The logjam continues

Despite more jabs getting in arms worldwide, the slow rollout of vaccine programs in many sourcing nations, along with ongoing restrictions, will persist in squeezing manufacturing, Verisk Maplecroft said. The firm anticipates intermittent lockdowns in parts of Asia similar to those imposed in India and Myanmar, which would continue to roil production schedules and place millions of livelihoods at risk with the underpayment or non-payment of wages.

In Bangladesh, where garment factories have been exempted from lockdown restrictions, workers have not been prioritized for shots, leaving them especially vulnerable to conditions where infection can rapidly spread. The situation, Verisk Maplecroft said, is “broadly similar” in Cambodia, Indonesia and Sri Lanka, where outbreaks in garment factories are not uncommon.

Even with a ramp-up in inoculations, Verisk Maplecroft said the prospect of improved occupational health and safety in Asia is fraught, with its data showing a “steep decline” in OHS measures in sourcing countries over the past five years. Countries that fall under the “extreme” risk category, placing workers’ lives at risk, include Bangladesh, India and Myanmar. High-profile disasters such as the 2013 collapse of Rana Plaza in Bangladesh have failed to drive more robust enforcement, the company said, pointing to a fire at a Dhaka food and beverage factory that killed 52 people in July.

Myanmar and Ethiopia ‘hang in the balance’

The military coup in Myanmar and ethnic conflict in Ethiopia’s Tigray region have “dashed hopes” of the two countries becoming major manufacturing hubs “for the foreseeable future” despite their low sourcing costs, Verisk Maplecroft said. Both nations recorded the worst possible score for violations in the firm’s latest security forces and human rights index, and companies that are seen as associating with these “abusive regimes” could trigger investor backlash and consumer boycotts.

At the same time, eschewing the regions is bound to have a trickle-down effect on their workforces. In 2019, Myanmar had 700,000 garment workers and Ethiopia 100,000. If a sourcing exodus to South Asia, which manufacturers in Tigray have begun, gathers steam, many will be unemployed, Verisk Maplecroft said. Tigray has devolved into a war zone, with people grappling with starvation. In Myanmar, at least 200,000 garment workers—predominantly women—have lost their jobs as of April, according to a recent United Nations report. It’s out of a desire to safeguard livelihoods in the latter case that brands such as H&M and Primark say they’re not suspending production in Myanmar, though labor groups have taken issue with their reasoning.

“While these emerging sourcing hubs were once attractive for their low labor costs, companies that choose to remain face heightened risks with continued destabilization,” Nazalya said. “The threat of new or increased economic sanctions on both countries further compounds the situation. Even if some semblance of political stability materializes in either of these two countries and minimizes disruptions, the ability to responsibly source will still hang in the balance.”