esg risks and opportunities in the textile sector

ESG risks and opportunities in the textile sector

ESG risks and opportunities in the textile sector • RobecoSAM • 2

ESG risks and opportunities

in the textile sector

11/2016

RobecoSAM

www.robecosam.com


Table of contents

TABLE OF CONTENTS 3

1 BACKGROUND 5

1.1 Clothing sector value chain 7 1.2 Health and safety risks within textile and clothing manufacturing 8

Case study - Clothing sector in Bangladesh 9

1.3 Other human rights risks in textile and clothing manufacturing 9 Case study – Textile sector in India 10

2 OBJECTIVES AND OVERALL PROGRESS 12

3 COMPANY PROFILES 16

3.1 Associated British Foods (Primark) 17 3.2 Burberry Group 20 3.3 Hennes & Mauritz AB (H&M) 23 3.4 Inditex Group 26 3.5 Kering 29 3.6 LVMH 32 3.7 Marks & Spencer Group plc 34 3.8 VF Corp 36


As an asset manager focused exclusively on Sustainability Investing, RobecoSAM

systematically integrates long-term environmental, social and governance

considerations into traditional financial analysis, enabling us to fully understand a

company’s ability to create value. Firms that embrace sustainability are, in our view,

more likely to be successful over the long term than those that do not. The objective

of our engagement activities is to increase shareholder value while at the same time

promote responsible and sustainable conduct and good corporate governance.

Consumers increasingly view sustainability as one of the determining factors for

deciding where they purchase their clothing. They rely on information shared by

consumers and other stakeholders such as NGOs to shape their opinion of a clothing

brand. Incidents such as the Rana Plaza disaster in Bangladesh in 2013 endanger a

company’s reputation and brand loyalty, leading to decreased sales, directly

resulting in a negative impact on shareholder value. Therefore, reducing health and

safety risks in the textile supply chain contributes to a better risk-return profile for

investments in this sector.

We began our engagement theme ‘Health & Safety (H&S) in the Clothing sector’ in 2013 with a research study

conducted by Maplecroft, a leading risk analytics company. The report helped us understand the clothing industry

landscape and H&S risks associated with the supply chain of large clothing retailers. Many countries currently

experiencing rapid growth in clothing exports have inadequate H&S regulations and weak enforcement

mechanisms. Policies and management systems that go beyond legal compliance are essential to effectively

mitigating health and safety risks. This understanding served as the foundation for our dialogue with the eight

companies we selected for our engagement on this topic.

In the following pages of our report, we offer an introduction to the clothing sector, provide an overview of H&S

risks within the clothing sector and highlight the outcome of our engagement on health and safety risks with the

eight selected companies.

We have split this report into three sections:

• Section 1: we discuss the clothing sector, its growth, the challenges that lie ahead, and the risks

associated within the clothing value chain for investors and companies.

• Section 2: we discuss the engagement objectives against which we evaluated each company, how we

helped them improve their practices in these areas, and the overall progress that the companies made

over the three years of our engagement process.

• Section 3: we profile each company, providing detailed analysis of its policies, risk management

processes, collaborations and oversight of its subcontractors. We also highlight each company’s progress

over the three years and conclude by discussing how our findings impact our investment case for each

company.

We hope that the report provides readers with an overview of the H&S and other social risks in the clothing supply

chain, as well as the initiatives clothing companies have introduced to manage these risks. As an investor, we

applaud the companies for their ongoing efforts to address social risks in order to free fashion from any form of

exploitation.

Peter van der Werf Engagement Specialist

Kanchan Mishra Engagement Specialist

Rachel Whittaker SI Research Analyst

1 Background

The clothing sector is highly globalized, with buyers often sourcing from numerous suppliers worldwide. The

geographical focus of clothing production has shifted over time, moving from North America and Western Europe to

Japan in the 1950’s and early 1960’s. In the 1970’s and 1980’s, production was dominated by Hong Kong, Taiwan,

China, and South Korea. By the late 1980’s and 1990’s, production shifted again to countries such as Indonesia,

Thailand, Malaysia, the Philippines, and Sri Lanka. In the 1990’s, countries within South Asia and Latin America

emerged as clothing exporters. The EU (top three countries being Germany, France, and UK1), US, and Japan were

the leading clothing importers in 2014, and China was a leading supplier of clothing to all three leading importers.

Figure 1: Top five sources of clothing for the EU, US and Japan

EU US Japan

EU China China

China Viet Nam Viet Nam

Turkey Indonesia EU

Bangladesh Bangladesh Thailand

India Mexico Indonesia

Source: World Trade Organization (WTO)

Changes to international trade policy have had a significant impact on the global distribution of the clothing value

chain. The Multi Fibre Arrangement (MFA), implemented in 1974, imposed quotas on the amount of yarn, fabric

and clothing that developing countries could export to developed countries. It had a major influence clothing trade

until 1995, when it was replaced with the World Trade Organization Agreement on Textiles and Clothing (ATC).

Between 1995 and 2005, the ATC provided a framework for removing many of the quotas previously implemented

through the MFA. Since then, labor costs and productivity have had a growing influence over the clothing value

chain. Countries such as China, India, Bangladesh, and Cambodia have all experienced significant increases in

exports following the end of MFA.

While China and the EU (top three countries being Italy, Germany, and Spain) remain leading exporters of

clothing globally, exports from countries such as India, Bangladesh and Cambodia are growing at a faster rate.

According to data from the World Trade Organization (WTO), between 2013 and 2014 the value of global clothing

exports increased by 5%, going up from USD 460 billion to USD 483 billion.2 Over the same time period, the value

of Cambodia’s clothing exports increased by 17%, compared to 7% in the EU, 14% in Vietnam, 14% in India and 10%

in Pakistan. Countries such as Vietnam, India and Cambodia are therefore likely to become increasingly significant

sourcing locations for clothing buyers.

Clothing manufacture is a major source of employment and a significant contributor to the economies of many

countries active in this stage of the value chain. The large number of workers employed in the clothing sector and

the characteristics of these workers means that the sector has significant potential to contribute to economic

development. Many clothing sector workers are young, unskilled, and female. According to Better Work, an

initiative of the International Labour Organization (ILO) and the International Finance Corporation (IFC), women

make up approximately 80% of the workforce in the clothing sector. Additionally, the sector is characterized by the

employment of internal migrants and workers employed on short-term contracts.

The labor-intensive nature of the sector reinforces its role as an important starter industry for countries pursuing

export-orientated industrialization. Data from the WTO indicates that clothing exports accounted for 81% of

Bangladesh’s 2014 merchandise exports, compared to 91% in Haiti, 54% in Cambodia, 43% in Sri Lanka, 20% in

Pakistan, 13% Vietnam, and 8% in China.

1 http://www.statista.com/statistics/422483/european-union-clothing-imports-by-country/ 2 https://www.wto.org/english/tratop_e/texti_e/texti_e.htm


Figure 2: Share of textiles as a % of total merchandise exports per country

Source: World Trade Organization (WTO)

China 8%

Vietnam

13%

Sri Lanka 43%

Cambodia

54%

Pakistan 20%

Bangladesh

81%

Haiti 91%

India 11%


1.1 Clothing sector value chain

Although numerous players are involved in the clothing value chain, a relatively small number of retailers and brand

owners exert significant influence over the entire value chain, which extends from raw material supply through

textile manufacture, clothing design and manufacture, marketing and retail (see Figure 3: Clothing industry value

chain). The value chain is buyer-driven, with activities such as design, marketing and retail being the most

profitable. Buyers are often large multinational companies, which control how and where manufacturing takes

place, production schedules and the price paid for final products. These buyers may only have direct business

relationships with clothing manufacturers in the first-tier of their supply chain. Buyers may therefore have limited

visibility of second and subsequent tier suppliers, including textile manufacturers and raw material suppliers. The

clothing value chain is also influenced by other key players such as trade unions, non-governmental organizations

(NGOs), government agencies and industry associations.

Figure 3: Clothing industry value chain

Raw material supply

Approximately 20 million tons of cotton are produced annually in 90 countries. Leading cotton producers include: China, India, the US, Pakistan, Brazil and Uzbekistan Leading wool producers include: China, Australia, New Zealand, UK and Iran

Growing and primary processing of natural fibers such as cotton, wool and silk Manufacture of synthetic fibers from petrochemicals e.g. polyamide (nylon), polyesters and polyvinyl

Textile manufacture

Textiles are produced at textile mills. Some countries that manufacture clothing may lack a textile manufacturing sector and therefore rely on imported textiles. For example, Cambodia imports textiles from China and other Asian countries.

Manufacture of yarns / threads (e.g. by spinning fibers such as cotton) Weaving and knitting to produce fabrics Dyeing, printing and finishing

Clothing manufacture Types of clothing manufacturers include:

• Cut, make (sew), trim (CMT) manufacturers, which are provided with inputs and assemble clothing products.

• Original equipment manufacturers (OEM), which produce clothing according to a buyer's design specification. The clothing is then branded with the buyer's brand name.

• Original design manufacturers (ODM), which design and manufacture clothing (may subcontract manufacture).

Fabric inspection Cutting, sewing trimming, ironing Manufacture of ready-made garments (RMG) Use of key inputs such as accessories such as buttons and packaging

Export and distribution

Clothes are generally transported in boxes or are hung with a plastic covering to protect from dust, dirt, and moisture. May involve trading companies and overseas buying offices of clothing retail and marketing companies. Transport by ship, truck rail or air


Marketing and retail

Types of clothing buyers include: • Brand-owners, which may manufacture

their own products at company-owned manufacturing operations (Inditex, Burberry, Kering, LVMH and VF Corp.) These companies also source clothing from factories within the supply chain.

• Retailers that sell own-brand clothes but are not engaged in manufacture (H&M, Marks & Spencer, and ABF (Primark)).

Marketing and advertising, Sale to consumers via high street shops, department stores, discount stores and online clothing buyers are often engaged in design, which may involve research into new fabrics

1.2 Health and safety risks in textile and clothing manufacturing

In accordance with the ILO Convention on Occupational Safety and Health occupational ‘health’ is considered to

indicate not only the absence of disease or infirmity but also “physical and mental elements affecting health” that

directly relate to safety and hygiene at work. Examples of physical hazards associated with textile and clothing

manufacture include fire risk, building construction, noise, temperature, humidity, unsafe machinery, dust and

harmful chemicals. Factors affecting hygiene and sanitation include access to clean toilet facilities, the provision of

drinking water and clean and safe accommodation facilities.

Occupational health and safety risks associated with textile and clothing manufacture expose workers to serious

health hazards. In particular, the manufacture of fabrics may involve significant use of chemicals, while practices

such as sandblasting denim are associated with health concerns. Fire presents a major health and safety concern

within the clothing sector, as the factories in the developing countries lack adequate fire escapes, alarms, first aid or

fire-fighting equipment. Musculoskeletal disorders are commonly caused by physical hazards such as repetitive

movements and awkward postures, for example, during spinning and cutting. Furthermore, heat and high

humidity, resulting from the use of steam and hot fluids during processing and finishing operations contribute to

cardiovascular and communicable diseases. Inadequate provision of personal protective equipment (PPE) can result

in exposure to chemical hazards, leading to skin and respiratory disorders.

Workers face greater exposure to health and safety risks in countries with limited capacity to implement and

monitor health and safety standards. Occupational health risks often result from an absence of appropriate

mechanisms to ensure that legislation for protecting workers’ rights and maintaining workplace safety are

effectively implemented and enforced. Poor knowledge of health and safety practices may result in factory

managers violating international and national standards. Examples include storing flammable materials or

chemicals in corridors and doorways, not installing fire extinguishers, blocking essential exits and not

communicating emergency procedures to workers. Additionally, allowing employees to work long hours, limiting

breaks or enforcing overtime can result in tiredness or fatigue, increasing the risk of accidents in the work place,

particularly when operating machinery.

Textile and clothing factories in some countries do not meet minimum building standards prescribed in

legislation. In some countries, textile and clothing manufacturing takes place in buildings that are poorly

maintained and inadequately ventilated, cooled, heated and lit. Violations of minimum standards of design,

construction, quality of materials, user occupancy, location, maintenance and fire exits can result in serious health

and safety risks such as building collapse and fire. For example, the collapse of the Rana Plaza factory in Bangladesh

in April 2013 highlighted health and safety violations in Bangladesh’s clothing sector.


1.3 Other human rights risks in the textile and clothing manufacturing

In addition to health and safety, a number of other ESG issues also imply significant reputational risk for companies

in the textile sector. We also discussed these issues as part of our engagement with companies on H&S risks.

Living wage

A living wage is the wage considered sufficient for employees to maintain a normal standard of living. The minimum

wage in many of the low-cost production countries is often too low to maintain a life above the poverty line, forcing

employees to work excessive overtime to make ends meet. This has been a significant issue in both developing and

developed countries, such as the US and UK, where the minimum wage has recently increased to better reflect the

living wage. For example, even though the minimum wage has increased by 75% in Bangladesh since the fatal Rana

Plaza collapse in 2013, it still has the lowest minimum wage in the world: it currently sits at USD 68 per month,

falling far short of the USD 104 per month proposed by local unions.

Child/Forced labor

Due to decades of international exposure, child and forced labor are less prevalent in export apparel factories today

than they were twenty years ago. Nonetheless, modern slavery and exploitation remain a significant concern in

most apparel-producing regions around the world. Global exporters, including China, India and Bangladesh are

known to use child and/or forced labor in their garment production.

Case study - Clothing sector in Bangladesh

Bangladesh’s clothing sector has attained a high profile in terms of its contribution to the country’s GDP

within a relatively short period. According to the Bangladesh Bureau of Statistics, clothing exports accounted

for 81% of total Bangladesh exports in 2014 as per World Trade Organization (WTO). Low labor costs have

given Bangladesh a unique competitive advantage over regional competitors such as China, India and

Vietnam, as it is one of the lowest wage countries in the world for clothing production. Worker unrest over

wage levels and working conditions is a routine occurrence in Bangladesh.

2013 was marked by one of the greatest disasters in the history of the garment industry: the collapse of Rana

Plaza in Dhaka, Bangladesh. This event prompted a large number of organizations, NGOs, retailers and

garment manufacturers to join forces in order to assure that health, safety and fair working conditions are

provided to garment workers. As a result, the Accord on Fire and Building Safety (the Accord) was signed in

Bangladesh with the number of signatories reaching 180 by the end of June 2014. At the same time, the

number of factories inspected as a result of the Accord program surpassed 800. 14 factories did not meet

minimum standards, and 4 remain closed, 7 are in operation with drastic load removal and 3 factories are

in the process of shifting production to another location.

This high-profile disaster placed intense public and media pressure on international clothing buyers who

were perceived to be focused only on keeping costs low, rather than on the welfare of workers. The

government’s failure to adequately implement and enforce labor regulations places additional burden on

foreign companies to audit and monitor practices of suppliers and subcontractors to mitigate the risk of

being associated with working conditions that endanger workers’ lives and health.

Most retailers have pledged to continue sourcing from Bangladesh given the country’s continued cost

attractiveness and the negative impact that withdrawing from Bangladesh would have on its economy.

However, companies must have better supplier management mechanisms in place in order to avoid the

risk of additional reputational damage.


Source: http://www.ibef.org/industry/textiles.aspx

Case study – Textile sector in India

India’s textile sector continues to thrive, recently becoming the world’s second largest producer of textiles

and garments. In employment terms, the sector provides direct employment to 45 million workers, making

it the second largest provider of employment after agriculture. The sector is one of the largest contributors

to India’s exports with approximately 11% of total exports and earning worth USD 41 billion in 2014-15. The

size of the Indian textiles industry was USD 108 billion in 2014-15, this is expected to reach USD 223 billion

by 2021. However, wages continue to lag behind other developing countries. Taking the lowest relevant rate

applicable to unskilled garment workers as a metric of minimum monthly wages in the sector, India is among

the lowest payers in the world, similar to wages in Bangladesh, behind Pakistan and Cambodia and

significantly behind China, Thailand and the Philippines.

A 2014 report by the Centre for Research on Multinational Corporations (SOMO) and the India Committee

of the Netherlands (ICN) alleged that workers in the South Indian textile industry face appalling working

conditions amounting to forced labor whereby women and girls are forced to work long hours for low pay.

The report specifically focuses on five mills: Best Cotton Mills, Jeyavishnu Spintex, Premier Mills, Sulochana

Cotton Spinning Mills and Super Spinning Mills. The allegations relate to the lack of contracts or pay slips for

workers, who also have no access to unions or complaint mechanisms within the mills. Further, the workers

are housed in basic company-run hostels and are hardly ever allowed to leave the company compound. A

supply relationship was also established between two of the investigated mills and Bangladeshi garment

factories that fall under the Bangladesh Accord, linking those who signed the Accord to labor rights violations

in India. From a supply chain perspective, the main outcome of the report was an accusation that companies

are failing in their duty to supervise second tier suppliers within their supply chains, with only a small number

of leading companies beginning to map and audit these levels of their respective supply chains.

Keeping in mind the huge importance of the textile and clothing sector to the Indian economy and the

importance of large multinational clothing brands in supporting the sector, the ongoing management of

human rights issues is a high priority. Progress in this area will depend on how effectively companies can

monitor their second tier suppliers where no direct business relationships exist. As is the case with Primark

and H&M, these large companies tend to enforce strict regulations and auditing regimes on their first tier

suppliers in order to effectively manage their supply chains. Indeed, both companies’ supplier policies

comply with the ILO core convention areas, communicate these to their suppliers globally, and stipulate

that regular audits should be conducted and non-compliance should be addressed. Both companies have

committed to expanding their audits to their second tier suppliers as part of their continued business

presence in the region. However, as all relationships with second tier suppliers are indirect and run through

their first tier suppliers, conducting audits of second tier suppliers tends to be more challenging for the

companies. We encouraged both companies to expand their audits of second tier suppliers, and increase

transparency and risk management within their respective supply chains.

Source:

http://www.ibef.org/industry/textiles.aspx


Fur sourcing

Throughout history, the fur industry has been associated with concerns about animal welfare. Methods for

obtaining fur from farmed animals involve practices such as gassing, electrocution, and even skinning animals alive.

Fur producing animals are often raised in cramped, confined conditions that do not safeguard animal well-being.

Animals such as foxes and mink clearly demonstrate signs of mental distress when kept in such confined conditions.

According to the International Fur Trade Federation (IFTF), around 85% of all fur sold today comes from fur farms.

Animal rights activists have campaigned against fur production since the late 1980’s and 1990’s, exemplified by the

'I'd rather go naked than wear fur' campaign initiated by the People for the Ethical Treatment of Animals (PETA).

Anti-fur campaigns have achieved significant success in curbing the popularity of fur and making buying and

wearing fur ‘morally unacceptable.’ This was followed by an increase in legislative restrictions on the production and

sale of fur. The luxury fashion industry was seriously affected, as fur has been long used in its products as one of the

most regal and luxurious materials.

Adopting a strategy of responsible fur sourcing and communicating transparently with external stakeholders on

their actual practices helps luxury companies to create awareness of the applied practices. This informs potential fur

consumers and therefore supports long-term value creation through the fur supply chain.


2 Objectives and overall progress

For our engagement, we selected eight companies ranging from brand owners that may have their own clothing

manufacturing operations to retailers that do not engage in manufacturing but source their products from

suppliers.

1. Associated British Foods Plc (ABF Primark)

2. Burberry Group Inc.

3. Hennes & Mauritz AB (H&M)

4. Industria de Diseño Textil, S.A. (Inditex)

5. Kering Company

6. Moët Hennessy Louis Vuitton SE (LVMH)

7. Marks & Spencer Plc (M&S)

8. VF Corp.

2.1 Objectives

Based on our initial research, we defined five objectives that formed the basis of our engagement with the eight

selected companies. We discussed these objectives extensively with each of the eight companies to gauge how

prepared they were to deal with all of the risks associated with the clothing business.

1. Policy and Risk Assessment

We expect companies to evaluate the social risks in their clothing supply chain. This assessment can be used to draft

a policy that clearly mentions a company’s stance on issues such as H&S, child and forced labor, working conditions

and improving living wage.

⇒ During our initial research, we found that most of the companies under engagement were aware of the risks

associated with clothing manufacturing given the Rana Plaza collapse. At the start of our engagement, Inditex,

H&M and Kering were ahead of the others when it came to assessing risks related to suppliers. After three years

of engagement, we are pleased to report that seven of the eight selected companies evaluated their risk

exposure in terms of sourcing from high risk countries and have formulated H&S policies for their own factories

and those of their suppliers.

2. Risk Management

Social risks in the clothing supply chain can be adequately addressed by developing appropriate risk management

systems. These systems may include regular audits of suppliers’ factories, including H&S standards in the contract,

or conducting due-diligence before entering into a contract with a new supplier. It can also include capacity building

such as providing training to suppliers and setting up grievance mechanisms.

⇒ All companies made the most progress on risk management, and we concluded our engagement on this topic

successfully. The companies adopted many innovative approaches to managing social risks related to the

sourcing of garments. Inditex and Kering relied on developing advanced IT supplier management tools,

providing them with a comprehensive overview of their supply chains and enabling them to identify risks and

take corrective actions. H&M and Primark expanded their local teams in countries like Bangladesh and China,

while Burberry increased its presence in Italy to gain better insights into the country risks and oversee its

suppliers’ facilities.

3. Transparency and Disclosure

We encouraged companies to improve their transparency and disclosure on how they assess and manage social

risks related to the clothing sector. This can be achieved through a commitment to external reporting initiatives, or

with increased transparency and structured reporting on their corporate websites.


⇒ Companies showed improvement on transparency by publishing GRI-compliant reports. Inditex and H&M

displayed more sophisticated approaches to transparency by reporting their entire list of suppliers globally.

M&S soon followed and published the list of all its suppliers in April 2016, including key KPIs such as gender

diversity at each site. Another interesting development is that the companies continue to improve traceability

across the entire value chain in order to map the environmental footprint of each of their products. For

example, H&M is developing a tool to measure the sustainability performance of its apparel and footwear

products, brands or suppliers. The tool covers the entire value chain, from raw materials to end-of-life solutions.

This results in advanced consumer labelling that enables customers to compare products, even from different

brands, based on the same standards in an easily accessible way. Inditex also excels in the area of transparency.

It has been publishing a sustainability balance sheet since 2014. Partnerships and Collaboration

4. Partnerships and collaboration

We expect companies to collaborate and build partnerships with stakeholders throughout the clothing sector,

including peers, suppliers, business partners, customers, NGOs, government organizations and community groups.

Collaborations help companies advance H&S and labor practices through the sharing of best practices and

discussions about innovative approaches to overcoming the risks inherent to clothing manufacturing.

⇒ During our three year engagement, we discovered that most of the companies were already actively

participating in collaborative initiatives and partnerships. H&M and M&S are signatories to the Accord on Fire

and Building Safety in Bangladesh. On the living wage topic, VF Corp is engaging with Social Accountability

International (SAI) to better understand this issue in its factories and ABF Primark has partnered with the Action,

Collaboration, Transformation (ACT) initiative. Burberry is actively involved in the Sustainable Apparel Coalition

and recently joined the Zero Discharge Hazardous Chemicals (ZDHC) organization, which is geared towards

environmental issues.

5. Subcontractors and monitoring of second-tier relationships in the supply chain

Because social risks are more evident at the milling and spinning factories, we evaluated how the companies are

able to influence the tier 2 and tier 3 suppliers in the supply chain to ensure product sourcing that is free from

exploitation. Further, subcontracting is a major issue in garment manufacturing as suppliers often outsource some

of the manufacturing capacity to meet peak short-term demand. This in turn leads to companies’ failure to ensure

that their products are free from exploitation as they have no visibility into the subcontractor’s practices.

⇒ This is the most challenging segment of the supply chain when it comes to managing sustainability. We

recognize that the extent to which companies can influence suppliers in tier 2 and beyond is limited. Still,

companies like Primark and H&M are actively trying to increase their visibility through to the upstream sections

of their value chains in order to improve social issues. Inditex has been working on establishing an in-house IT-

based supplier monitoring system, which also extends to its subcontractors and tier 2 suppliers. M&S and

Primark confirmed that they have an approved list of subcontractors and their suppliers will not resort to illegal

subcontracting as they regularly audit their suppliers, track their capacity, and any tier 1 suppliers found to be

illicitly subcontracting are subject to high penalties.


2.2 Progress

Figure 4 shows the progress made by the eight companies during our engagement period between 2013 and 2016.

Figure 4: Progress towards engagement objectives over three-year period

Source: RobecoSAM

The y-axis shows each company’s risk exposure on a scale of one to four, with four being the highest risk exposure.

We placed each of the eight companies in one of four risk categories in terms of their exposure to health and safety

risks in the clothing supply chain and how sustainability issues could have a financial impact on their business.

Figure 5: Company risk exposure at start of engagement (2013)

Risk exposure level Description Companies

4 (high) • Fast fashion companies whose primary business is clothing retail and do not have their own manufacturing facilities

• Huge supplier base located in developing countries such as Bangladesh, India, Cambodia, Pakistan and Vietnam to keep manufacturing costs low

• Limited control over manufacturing process and 2nd tier suppliers and beyond

ABF (Primark),

H&M, M&S

3 (medium high) • Clothing retail companies that have their own manufacturing operations and/or

• Clothing retail companies whose suppliers are mostly located in Europe

VF, Inditex

2 (medium low) • Luxury brands that do not source any products from developing countries (or have very limited exposure to developing countries

• Have diversified product portfolios

Kering, Burberry

1 (low) • Luxury brands with diversified product portfolios including bags, watches, jewelry and wines (i.e. clothing is not their main source of revenue)

LVMH

LVMH

Inditex


The x-axis shows each company’s progress on our five engagement objectives between 2013 and 2016. Each

company was assigned a score of zero at the start of our engagement in 2013, and the green diamonds indicate

where each company stood at the end of our engagement program in the first quarter of 2016.

Figure 6: Company progress at end of engagement (2016)

Company Description of progress Number of engagement objectives

closed successfully

Inditex • Highly ranked on transparency & disclosure, but also performed well on other objectives

• Made the most progress compared to its peers

5

ABF (Primark),

H&M, M&S,

VF, Burberry

• All companies demonstrate commitment to ensuring their products are free from any social exploitation

4 objectives closed successfully

1 objective showed positive

progress

LVMH • Company has a code of conduct in place for its subcontractors, but there is further room for improvement in this area

3 objectives closed successfully

1 objective showed positive

progress

Kering • Most of Kering’s sustainability initiatives focus on its Puma brand, and we encourage the company to expand its practices to its other brands

3

Overall we closed all of our dialogues successfully in this engagement program. We can conclude that all companies

in our engagement peer group have developed or are in the process of developing a structured risk management

process to ensure a better H&S profile of their manufacturing facilities, are taking initiatives to ensure a better living

wage for workers, and are addressing animal welfare for fur sourcing. We believe that this will definitely lead to a

stage where fashion is free from any form of exploitation and the companies will have a better brand value and

reputation to ensure sustained growth, which is also our motivation behind this engagement theme.


3 Company profiles


3.1 Associated British Foods (Primark)

Associated British Foods (ABF) is an international group of 22 businesses grouped into five segments: sugar,

agriculture, retail, groceries and ingredients. Through these businesses, ABF has operations in 48 countries.

Primark (referred to as ‘the company’) is the only business in ABF’s clothing retail segment and is therefore the

focus of this assessment. Primark generated GBP 5.3 billion (USD 7.8 billion) in revenues in 2015, accounting for

42% of ABF’s total revenues of GBP 12.8 billion (USD 18.6 billion).3 Established in 1969, Primark sells a range of

products including womenswear, lingerie, children’s wear, menswear, footwear, accessories, and homeware. The

company employs 61,000 people and operates over 293 retail stores in the UK, Ireland, Spain, Portugal,

Germany, the Netherlands, Belgium and Austria and the northeast of America.

Risk exposure: 4

Unlike other businesses in the group, Primark does not own any manufacturing facilities. Primark has approximately

700 first-tier suppliers and predominantly sources from countries outside the UK. Its key sourcing countries are

India, China, Bangladesh and Turkey. The company provides a full list of sourcing countries but does not disclose

details of its suppliers. Primark has high exposure to social risks stemming from its sourcing of clothing from these

countries.

Progress during the engagement:

Policy and risk assessment

Over the last three years, we had multiple discussions with Primark’s Director of Ethical Trading. The company takes

H&S risks seriously, and cites them in the risk management section of ABF’s annual report. As a result, the company

has integrated an H&S risk assessment into its sourcing strategy. Primark’s approach includes:

1. Identifying mechanisms for improving living wage by fostering an environment that is

conducive to collective bargaining, for instance

2. establishing best practices within the industry

3. Improving manufacturing standards through monitoring, remediation, and capacity building

Risk management

On third party verification, the company noted that the certification schemes OHSAS 18001 and SA 8000 do not fully

provide the assurance of compliance it requires. Therefore, the company has developed its own H&S standards for

each geography and works with a combination of internal and external auditors to monitor and apply workers’

safety at its suppliers’ facilities. In case the audit results are not satisfactory, the company believes in working with

suppliers so that they improve their performance to meet and maintain the company’s ethical standards. Only very

rarely and as a last resort does the company consider terminating a supplier’s contract for failure to comply with the

company’s Code of Conduct. Last year, the company increased the scope of its Tier 1 audits by expanding the

supplier base from cut & sew factories to suppliers that perform tasks such as embroidery. The number of incidents

has not increased significantly as a result of the broadened scope. Apart from the scope, the number of audits has

also increased, with currently around 2,500 audits a year, which is likely to increase further due to the growth in

volume. As a response to the expected growth in volume, Primark has substantially increased the number of people

working in the Ethical Trade department from 50 to 80. We note this as a positive move in the desired direction.

In response to the challenges in India, Primark has set up initiatives in spinning mills and factories. The company has

people on the ground in India to monitor progress, including a project controller from UK.

The company has incorporated structural surveys to evaluate whether buildings are compliant with H&S standards,

and has hired an engineer who conducts the building surveys on its behalf. All of the company’s factories in

Bangladesh and Pakistan have undergone structural surveys. One key observation is that Primark confirmed that in

Bangladesh it does not permit its production to be in multi-tenant buildings. We consider this to be a valuable step

in eliminating potential risk management gaps that arise when buildings are shared.

3 http://www.abf.co.uk/documents/pdfs/2015/abf-annual-report%202015.pdf


Transparency and disclosure

Out of all the brands cited in the SOMO report, Primark has provided the most comprehensive response, and has

also put forward practical solutions. Primark released an updated version of its Ethical Trading website in 2016 to

provide its customers and suppliers with a wealth of information on its sourcing practices. One example is the

overview of countries where Primark sources products. For commercial reasons, the company does not intend to

disclose the names and locations of the factories it purchases from.

Partnerships and collaboration

Primark has signed up to numerous industry partnerships and has been forthcoming in supporting the Rana Plaza

victims financially through several programs. In response to the SOMO report, Primark is implementing Fair Hiring,

Fair Labour tool kits in South India, and has taken a leading role in setting up a consortium of brands and other

experts including NGOs. Primark has also started a new partnership with UK Department for International

Development (DFID) to improve working conditions for garment workers in developing markets including

Bangladesh, Pakistan, Burma, Ethiopia and India. Furthermore, Primark has undertaken efforts to improve living

wage and is a founding member of Action, Collaboration, Transformation (ACT) initiative. While these initiatives are

laudable, neither ABF nor Primark is a signatory to the UN Global Compact, and we encouraged the company to

consider signing up.

Subcontractors and monitoring second-tier relationships in the supply chain

To manage subcontracting risks, Primark’s purchasing teams manage a system for assessing supplier capacity.

Factories are asked to report their capacity and the auditors use this information to cross check what they see in

factories. Where necessary, weekly production management meetings are set up with the suppliers, combined with

unannounced spot checks to check for any illegal night shifts or subcontracting. Unapproved subcontracting

contravenes Primark’s terms and conditions of trade, and Primark investigates all suspected cases. Where proven

instances of subcontracting will be reported to Primark’s senior Directors and may lead to the termination of

business.

http://www.abf.co.uk/documents/pdfs/2015/abf-annual-report%202015.pdf


Engagement conclusion:

Based on Primark’s policy of not sourcing from suppliers in multi-tenant buildings in countries like Bangladesh, and

regularly conducting building structural surveys, we closed the objective ‘Risk management’ successfully. We also

closed our engagement objective ‘Partnerships & collaboration’ successfully as we note the company’s

collaboration with many European agencies to improve overall sustainability in the clothing industry. Based on the

company’s due diligence of its suppliers and subcontractors, we closed our objective ‘Subcontractors and

monitoring of second-tier relationships in the supply chain’ successfully. We appreciate Primark’s timely and

qualified response to the SOMO report and closed our ‘Transparency and disclosure’ objective successfully. We

noted positive progress on ‘Policy and risk assessment.’ Hence, we achieved the success threshold of our

engagement objective with Primark and closed the overall engagement successfully in June 2016.

Annual progress on engagement objectives:

Objectives 2013 2014 2015 2016


Risk management



Subcontractors and monitoring of

second-tier relationships in the supply

chain

Legend

No progress

Positive progress

Successfully closed

Unsuccessfully closed

Impact on investment thesis:

Primark’s business model initially focused on price and volume with a ‘pile it high, sell it cheap’ approach. It

found a consumer niche somewhere between low cost supermarket clothing and mid-market clothing brands

such as Zara, H&M, Marks & Spencer, and grew successfully. More recently it has been diversifying into the

more mainstream market, in more affluent locations, as low cost brands have become more acceptable and

even desirable. From an investor perspective, the diversification is positive, opening up a larger market and

potentially retaining more customers that would previously have ‘grown out’ of shopping at Primark.

Furthermore, as consumers become more conscious of the hidden social cost of cheap goods and the

environmental impact of ‘disposable fashion,’ the former business model seemed unsustainable in the longer

term. However, the risk with targeting consumers with a little more money to spend, is that they can afford to

be selective about where they spend it. The brand reputation becomes more critical, the more ‘mainstream’

Primark becomes, and Primark needs to establish an image as a responsible retailer not simply focused on

cheap clothes regardless of the cost of externalities. Its investment in better managed and monitored supply

chains and the strategic and reputational benefits of collaborating with industry peers will generate returns in

the form of customer loyalty and revenue growth, as well as reducing the risk of future costs associated with

remediating supply chain incidents.


3.2 Burberry Group

The Burberry Group (Burberry) is a luxury goods manufacturer, wholesaler and retailer. The company designs,

sources and markets luxury men’s, women’s and children’s clothing and accessories through a diversified network

of retail (including digital), wholesale and franchise channels worldwide. In 2015/16 total revenues were GBP 2.5

billion (USD 3.7 billion), with retail sales accounting for 73% of revenue, wholesale sales 25%, and licensing

revenue 2%4. Burberry has a global brand presence, notably in the Americas, Europe and Asia-Pacific regions. The

company has identified key growth areas in the Middle East and Latin America, in addition to the luxury Chinese

consumer market.

Risk exposure: 2

The majority of Burberry’s products are manufactured in Europe by third-party suppliers located in countries such as

Scotland, Italy (leather products), Turkey (polo shirts), Poland and Romania (tailored products). Approximately 20%

of its products are sourced from suppliers located in Asia, including China. Burberry does not source from

Bangladesh, Pakistan or Cambodia. Almost 10% of the company’s products are manufactured at two company-

owned and managed facilities in West Yorkshire, UK: the Castleford Factory, which manufactures the company’s

heritage rainwear; and the Burberry Mill, which weaves the company’s gabardine fabric. Therefore, the risks

associated with sourcing of clothes from countries like Bangladesh, India and China are limited for Burberry. We

consider Burberry’s risk exposure related to sourcing of fur and tier-two and tier-three suppliers (milling and

weaving) to be high.



During our engagement with Burberry, we learned that the company has an explicit policy that prohibits sourcing

from Bangladesh, Pakistan, and Cambodia to prevent exposure to high-risk production countries. In the first quarter

of 2014, Burberry published a Corporate Governance investor pack stating that it focuses on labor rights of workers

in its supply chain. Burberry’s Code of Conduct focuses on labor rights across the supply chain. Through this

program, Burberry supports suppliers in areas where labor laws are weak, absent or poorly enforced with additional

measures, for example, by providing hotlines for workers in China.

In the lead up to Burberry’s 2015 AGM, we discussed our vote on the company’s remuneration policy and

recommended that Burberry explore the possibility of linking executive remuneration to its sustainability strategy,

which according to its most recent annual report, has established targets on various ESG metrics. Special attention

should be given to health and safety indicators, which will contribute to a lower risk profile for the company.

Risk management

About 20% of Burberry’s products are produced in China. The company has a CSR team of 11 people based in Hong

Kong and uses in-house auditors. It plans to build in-house audit capacity in order to further strengthen its risk

management. Burberry’s procurement team is not primarily driven by purchase price, but by the suppliers’ product

development skills. To limit excess overtime in the Chinese factories, the CSR team engages with its suppliers,

providing them with knowledge that helps them increase productivity, which in turn reduces the need for overtime.

Burberry communicates regularly with it suppliers, with whom it maintains long relationships – many of which go

back over 30 years – and its supplier management reviews these relationships on a monthly basis. Regular reviews

of its suppliers take into consideration quality, social, and environmental aspects. For H&S certifications, the

company argues that the costs of obtaining certification are not offset by the benefits, as it does not meet its low-

risk production standards. Therefore, Burberry does not require its suppliers to have H&S certification, and instead

relies on its own standards.

Regarding the use of fur, Burberry stated that it uses fur from fox, mink, and Asiatic raccoon from a certified

supplier. It has a Responsible Sourcing policy, which commits to only buying certified fox and Asiatic raccoon.

Burberry states that currently 100% of Finnish fox and Finnish Asiatic raccoon sold at its supplier’s auctions are

certified by the Finnish Fur Breeders Association (FFBA - 'Profur'). Mink certification was at 88% in October 2015. Its

4 http://www.burberryplc.com/investor_relations/annual_reports/annual_report_2015-16


supplier aims to be able to offer 100% certified mink by 2017. Regarding the use of rabbit fur, Burberry is working

towards sourcing fully traceable rabbit fur and is partnering with key supply chain partners to implement this.

Having mapped its rabbit supply chain, Burberry works in-country with peer brands and industry stakeholders to

monitor and improve animal welfare where necessary, and is developing a species-specific protocol for rabbits. We

recommended that Burberry include origin details of the fur used in its products in order to build full traceability of

these sensitive raw materials.


In December 2014, Burberry published a human-rights policy addressing labor conditions in clothing factories in its

chain. Moreover, the company reports annually on its sustainability performance. Both documents are a major step

forward in improving the company’s transparency.


Burberry is a member of the Ethical Trading Initiative, where its Head of Corporate Responsibility sat on the board

for six years between 2007 and 2013. Burberry’s participation provides an opportunity to cooperate and learn from

industry peers, and the tripartite nature of the organization brings NGOs, unions and corporates to the table,

enabling the sharing of a broad set of perspectives on labor rights issues. Furthermore, Burberry is actively involved

in the Sustainable Apparel Coalition and recently joined the Zero Discharge Hazardous Chemicals (ZDHC)

organization, which focuses on the elimination of chemicals of concern used in textile manufacturing processes .


Burberry is aware of the risk of labor standard breaches in Italy. To mitigate this risk and carry out more effective

controls, the company has a team of six people in Florence whose work focuses on both social and environmental

management of the supply chain. Before a subcontractor is hired, an audit is conducted and the subcontractor must

commit to Burberry's code of conduct.

http://www.burberryplc.com/investor_relations/annual_reports/annual_report_2015-16



We closed our objective ‘Policy and risk assessment’ successfully, as Burberry has a sustainable sourcing policy,

which also covers sensitive materials like fur, and a strategy to avoid sourcing from high-risk countries in Southeast

Asia. Burberry also provided sufficient evidence that it has implemented risk management systems such as auditing,

certification and traceability of fur; therefore we successfully closed the 'Risk management' objective. The company

has shown transparency in communicating these strategies and we therefore closed the ‘Transparency and

disclosure’ objective successfully. Based on its many partnership initiatives we also successfully closed the objective

‘Partnerships and collaboration.’ We also noted positive progress on ‘Subcontractors and monitoring of second-tier

relationships in the chain.’ As a result, we successfully closed our engagement with Burberry in October 2015.


Objectives 2013 2014 2015 2016


Risk management





chain


As a luxury brand, corporate reputation is paramount to maintaining the brand strength that drives revenue

growth and profit margins. Avoiding the highest risk sourcing regions gives investors greater confidence that

supply chain issues will not undermine brand strength. Similarly, the improvements on the traceability of fur

help to mitigate a potentially inflammatory topic, though from a purely risk management perspective, we

prefer companies that avoid using fur altogether. The ethical sourcing choices that Burberry has made has an

impact on future earnings in the form of the higher cost of manufacturing in Europe, yet there are risk-

reduction benefits in dealing with countries that are more politically stable and physically closer to the

corporate center with more familiar socioeconomic risks. In the long run, it is in Burberry’s interest to

collaborate with the industry on improving standards, even in countries that it does not currently source from,

with a view to accessing lower cost sourcing options when the risk of doing business in these countries

reduces.


3.3 Hennes & Mauritz AB (H&M)

H&M is a Swedish multinational clothing retail chain that owns six independent brands: H&M, COS, Monki,

Weekday & Other Stories, and Cheap Monday. The H&M group owns approximately 4,000 stores in 61 markets

worldwide and employs 148,000 people. In 2015, its total sales amounted to SEK 210 billion (USD 25.8 billion),

with a profit of SEK 20.9 billion (USD 2.6 billion). The company plans to open 425 new retail stores by the end of

2016, including in three new markets (New Zealand, Cyprus and Puerto Rico)5.

Risk exposure: 4

H&M markets itself as a unique clothing brand, bringing affordable high-fashion to consumers. It achieves this by

maintaining an in-house fashion design team responsible for designing clothing and other products, which are then

manufactured throughout H&M’s supply chain. The company does not own or operate any manufacturing facilities

but sources from third-party suppliers. The majority of H&M’s 615 suppliers are located in South Asia and the Far

East, with only 205 in Europe, the Middle East and Africa.6 Specifically, the company sources from:

• Europe: Bulgaria, Egypt, Greece, Italy, Latvia, Netherlands, Poland, Portugal, Romania, Sweden, Tunisia

and the Ukraine

• Far East: Cambodia, China, Indonesia, South Korea, Thailand and Viet Nam

• South Asia: Bangladesh, India, Pakistan and Sri Lanka.

Of these countries, three (Bangladesh, Cambodia and Viet Nam) are rated as ‘extreme risk’ by Maplecroft’s H&S

Risk Index 2014. China, Egypt, Indonesia, Pakistan, Sri Lanka and Thailand are rated ‘high risk.’ Therefore, social

risks in the clothing supply chain remain highly material for H&M.



H&M described its H&S policy and risk assessment during our first conference call. It has a strong local presence in

Bangladesh with nearly 500 people, of whom 30 are solely responsible for sustainability. This local presence

enables the company to mitigate many high-risk issues, such as limitations of the audit system, short-term supplier

relationships and the risk of unauthorized subcontracting.

Risk management

H&M has developed a three category system for rating its suppliers: Silver, Gold and Platinum. These categories are

assigned annually, and factories that move up to a higher category get a larger share of business, planned over a

longer time period. A supplier’s sustainability performance is one of the important factors used to determine its

category. For example having minimum H&S and child labor prevention standards in place are some of the

components of a supplier’s sustainability performance. H&M uses its supplier code of conduct and capacity building

to promote suppliers to higher rating categories.


H&M believes that transparency is the starting point for all change. The company is working with other brands in

the Sustainable Apparel Coalition on the HiGG Index, a tool that measures apparel and footwear products, brands,

and suppliers on their sustainability performance. It takes the entire value chain into account, from raw materials to

end-of-life solutions. This results in an advanced standardized consumer labelling system that allows customers to

easily compare the sustainability performance of products across different brands.

The company has made significant progress each year with its enhanced sustainability report. The report provides

sufficient details so that stakeholders can closely follow the company’s progress on all the important areas with

respect to its targets in improving supply chain and social risks related to cloth manufacturing. In 2015, H&M

expanded its publicly available first-tier suppliers’ factory list to include second-tier suppliers such as fabric and yarn

mills.

5http://about.hm.com/content/dam/hm/about/documents/en/Presentations/2016/Telephone%20conference%20presentation%20Q4%202015_en.pdf 6http://sustainability.hm.com/content/dam/hm/about/documents/masterlanguage/CSR/2015%20Sustainability%20report/HM_SustainabilityReport_2015_final_FullReport.pdf



H&M was the first major brand to sign the Bangladesh Accord aimed at driving industry-wide progress on H&S and

working conditions for the workers in the garment factories in Bangladesh. In addition, H&M sits on the Accord’s

steering committee and is working closely with other companies in the sector such as Inditex and various NGOs, as

well as the governments of the countries from which it sources its production. H&M frequently takes a leading role

in these relationships. Further, in 2015, H&M entered into an agreement with the global union IndustriALL and IF

Metall, which aims to bring improvements for garment workers, including trade union rights, collective bargaining

and fair living wages. We value H&M’s commitment to addressing this pressing topic of living wage. Furthermore,

H&M collaborates with the ILO and Sida, focusing on decent work. In addition they are members of the brand

collaboration group Action Collaboration Transformation (ACT), which aims towards living wages in the industry.

H&M furthermore participates in multi-stakeholder initiatives focusing on social sustainability, such as ETI.


We also asked how H&M monitors its subcontractors and second-tier suppliers, particularly in India, where abuses

were brought to light in an NGO report published by SOMO (Centre for Research on Multinational Corporations) at

the end of 2014. H&M noted that it has terminated its relationship with the Super Spinning Mill, the supplier of

woven fabrics mentioned in the report, because H&M was only a very small customer accounting for 1% of the

fabrics produced by supplier and therefore did not have sufficient leverage to effect change. More broadly, H&M has

started to extend the scope of its Code of Conduct to the textile manufacture segment of its value chain in China

and Bangladesh, specifically targeting the chemical restrictions and the environmental and safety requirements in

the mills. H&M stated that local parties such as trade unions and NGOs were the company’s eyes and ears alongside

its own procurement teams. We urged the company to extend these relationships further. On the topic of living

wage, H&M is working on a program to enable a fair living wage for employees working for its suppliers. The

company has set a goal that all of its suppliers should have put in place improved pay structures to enable fair living

wages by 2018.


Based on the company’s global and local policies covering supply chain and various initiatives to track and measure

performance, we closed our ‘Policy & Risk Assessment’ and ‘Risk management engagement’ objectives successfully.

H&M is highly ranked on transparency as the company has improved its sustainability reporting over the last three

years. Also, its collaboration for improving traceability is praiseworthy and we closed our ‘Transparency and

disclosure’ objective successfully. We also rank the company highly on ‘Partnerships and collaboration’ based on its

ongoing activities in the area, and closed that objective successfully. We also noted positive progress on

‘Subcontractors and monitoring of second-tier relationships in the supply chain.’ Overall, we concluded our

engagement with H&M successfully in June 2015.



Objectives 2013 2014 2015 2016


Risk management





chain


As a global mid-market retailer, H&M relies on the lower cost countries to achieve its aim of providing

affordable fashion. Yet its scale and its reputation for focusing on sustainability makes it an easy target for

blame whenever any problems are identified, even if it does not have direct management responsibility or

influence. Hence, from a risk perspective it is reassuring to see that H&M leads the peer group in some of the

H&S factors addressed in the engagement, but in reality the investment in H&S programs in the supply chain

is a necessary business cost to manage risk more than a potential area for adding value. The brand is a

household name globally and hence the downside potential of being held responsible for negative social

impacts would impact both customer sentiment and reparation costs.


3.4 Inditex Group

The Inditex Group (Inditex) is a leading global fashion retail group, consisting of over 100 companies active in the

design, manufacture, distribution and retail of clothing, footwear and accessories. The company’s labels – Zara,

Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home, Uterque and Lefties – sell own-brand

clothes through a network of 7,013 stores, located across 88 countries. Approximately 13% of these retail stores

are operated as franchises. Additionally, the company operates online sales channels in 29 countries. Net sales in

2015 were EUR 20,9 billion (USD 23billion).7

Risk exposure level: 3

The company’s business model is based on the ‘fast fashion’ concept, whereby in-house designers respond to

consumer demand with frequent new designs. This means there is a short turn around between the initial design

and the products becoming available on the shop floor. In addition to design and retail, Inditex has its own

manufacturing operations through 11 manufacturing subsidiaries located in Spain. These subsidiaries carry out

capital-intensive, value-added activities such as purchasing raw materials, clothing design, quality control, finishing,

packaging, distribution, and logistics. Meanwhile, activities such as sewing are contracted out to suppliers. The

company also contracts suppliers to manufacture complete products instead of multiple suppliers working on one

product.



Inditex has a strategic plan for a stable and sustainable supply chain by 2018. To manage suppliers’ ESG risks, it has

deliberately chosen to work with a large number of ‘proximity suppliers’ in the Mediterranean countries, rather than

outsourcing all production to South Asia. Approximately 60% of the company’s manufacturing takes place at

factories located close to its Spanish headquarters in Arteixo, A Coruña in northern Spain. More than 50% of its

suppliers are also located in proximity countries. In 2015, the company sourced from 1,725 suppliers, 836 of which

were located in Asia, 500 in the EU, 185 in non-EU Europe, 130 in Africa and 74 in North and South America.

Although Inditex does not disclose a list of suppliers, it identifies supplier clusters in Spain, Portugal, Argentina,

Brazil, Morocco, Turkey, Bangladesh, China, Vietnam, Cambodia and India. Of these countries, Bangladesh is rated

as an ‘extreme risk’ country according to Maplecroft’s H&S Risk Index 2014, while Morocco and China are ‘high

risk’.

Risk management

Inditex has worked with an audit-based methodology for many years, but in 2012 it improved its comprehensive IT-

based system to monitor all its suppliers. The system maps Inditex’s entire supply chain and the flows of materials

that make up the final products. This enables the company to identify where it is exposed to risk in operations along

the supply chain. The monitoring system is integrated into the commercial team’s procurement system to match

supplier capacity. To expand the reach of this technological development, the company has recently hired technical

engineers for both the sustainability team at the head office and the local offices. Since 2013, all suppliers have

been trained to work with this system.


We also asked Inditex about moving towards integrated reporting based on the company’s sustainability balance

sheet in its annual report, where it is integrated with other financial data. Inditex adopted this reporting approach

for the first time in its 2011 Annual Report. Although this is still not fully integrated reporting, it shows strong

evidence of the company’s efforts. The company’s 2015 annual report is presented as an integrated report, in line

with the principles established in the International Integrated Reporting Framework. By adopting the sustainability

balance sheet approach, the company develops the expertise required for integrated reporting. Inditex generally

displays a high level of transparency on sustainability issues for its external stakeholders.


Another topic we discussed with Inditex was living wage. Inditex believes that negotiation between workers, the

labor union, the employer and the government is a suitable approach to tackling this issue. It recognizes that living

wage is a material issue to global supply chains. The manufacturers’ and suppliers’ commitment to paying a living

wage is firmly enshrined in the Global Framework Agreement that Inditex signed with IndustriALL, the global 7 http://static.inditex.com/annual_report_2015/en/


federation of unions providing workers with extensive support to strengthen their bargaining power in negotiations.

Inditex also works closely with other brands and international organizations. One example is the work of brands and

trade unions in ACT (Action, Collaboration, Transformation) to drive increases in worker wages. The company has

programs in production countries supporting the right to freedom of association and collective bargaining. It also

tries to build up broad collaborations with the relevant local parties and works with other brands and trade unions

in the industry to create a socio-economic environment that is conducive to raising wages sustainably.

Subcontractors and monitoring of second-tier relationships in the supply chain

Inditex trains and educates its suppliers extensively to ensure that they are all compliant with the policies and

standards required by Inditex. It also requires suppliers to apply those policies and standards to their own supply

chains. All tiers are monitored and mapped by the supply chain management system discussed earlier. Inditex

claims that it will continue to develop better tools for its suppliers to manage their sustainability management.

Regular audits on suppliers’ compliance are conducted by the company and are followed up with corrective actions.

In 2015, SOMO published a report about one of Inditex’s suppliers stating that employees had to work seven days a

week for a minimum of 15 hours a day. In response to that report, the company stated that when it became aware

of this, it immediately took measures by speaking to the owner of the factory and a solution was found within a

week. The owner has adjusted its production schedule and Inditex has assured the owner that the relationship

would be continued even if a deadline was not met. This kind of long term agreement is crucial to reducing pressure

on factory owners and allowing them to improve working conditions.



During our discussions with Inditex, we gained sufficient confidence that the company is aware of its exposure to

social risks within garment manufacturing. Based on the company’s risk assessment process and its IT tool for

managing such risks, we closed our ‘Policy and risk assessment’ and ‘Risk management’ engagement objectives

successfully. For ‘Partnerships & collaboration,’ we noted that the company partners with relevant stakeholders to

bring about positive changes and we therefore closed this objective successfully. We applaud the company’s

capacity building approach to help its suppliers deal with subcontractors and second-tier suppliers and therefore

closed the ‘Subcontractors and monitoring of second-tier relationships in the supply chain’ objective. We also

consider Inditex to be an example of best practice when it comes to ‘Transparency and disclosure.’ As a result, we

successfully closed all of our five engagement objectives with Inditex in January 2016.


Objectives 2013 2014 2015 2016


Risk management





chain


As one of the original companies for which the term ‘fast-fashion’ was coined, Inditex’s main brand Zara’s

success is founded on the concept of getting catwalk-inspired designs onto the high street as soon as possible.

To achieve this, an efficient and reliable supply chain is absolutely crucial. Managing the risks within the

apparel supply chain is therefore not simply a matter of reputation or cost risk management for Inditex, but is

also at the heart of its corporate strategy, underpinning both its growth and profitability. Disruptions in the

supply of season-specific clothing can result in a significant financial impact. This process of engagement gives

us some additional insight into the steps Inditex is taking to keep its supply chain processes up to date.


3.5 Kering

Founded in 1963, Kering (formerly PPR) built its reputation as a leader in the retail sector. Kering is active in the

design, manufacture and distribution of clothing and accessories. Gucci, Bottega Veneta, Yves Saint Laurent,

Alexander McQueen, Balenciaga, and Stella McCartney are among the company’s 16 luxury brands. Kering also

has sports brands, including Puma, Cobra, and Volcom. The company reported revenues of EUR 11.5 billion in 2015

and employed over 38,000 employees.8 Puma contributed almost 30% of 2015 Group’s revenue.

Risk exposure: 2

At the group-level, Kering does not disclose a list of countries from which it sources its garments. However, at the

subsidiary-level, Puma has disclosed a list of suppliers and indicates that its main sourcing countries are Bangladesh,

Cambodia, China and Indonesia. Of these countries, Bangladesh and Cambodia are rated as ‘extreme risk’ countries

in Maplecroft’s H&S Index 2014, while China and Indonesia are ‘high risk.’ Puma’s list of suppliers also includes

countries such as South Africa, Mauritius, Kenya, and El Salvador, which are assessed as ‘extreme’ or ‘high risk’ in

Maplecroft’s H&S Index 2014. Within Kering’s portfolio of brands, Puma has the largest footprint in high-risk

countries, while most of its luxury brands source their products from factories in Europe.



Kering’s risk management system is built on 3 main components: • an organization that sets out the roles and responsibilities of the various persons involved and sets out

procedures, as well as consistent and clear standards for the system

• • a risk management policy that sets out the objectives of the system in line with the company’s culture,

the shared language used, and the process to identify, analyze and deal with risks

• • an IT system that makes it possible to share information about risks internally

Kering’s risk mapping system has been strengthened in 2013 thanks to a dedicated software, which guarantees a

common methodology across Group divisions and brands. Risk score are calculated based on internal information

complemented with external data providers such as Maplecroft or Fair Labour Association (FLA). Kerings’ risk

management system encompasses financial, strategic, operational, reporting, reputational and compliance risks.

This risk mapping approach is refined and adapted when it comes to social compliance with specific criteria in order

to capture both H&S and Human rights risks at suppliers’ level. This is used to set up the audit programs.

Risk Management

Within the scope of the Group’s risk management policy and in accordance with Kering’s corporate governance,

Kering’s Executive Management created a “Kering Group Risk Committee” in 2011. This Committee comprises the

Group Managing Director, the Chief Financial Officer, the Head of the Legal Department, the Head of the Internal

Audit Department, and the Head of the Security Department. As the Group’s operations and activities expand, and

become more complex and more international, the Risk Committee helps identify and manage strategic,

operational, reporting, reputational and compliance risks that could have an impact on the Group’s business

operations.

The management of suppliers’ social compliance has followed the Group’s growth, and transformation into an

integrated model. Kering accordingly launched an ambitious project in 2015 to harmonize and combine resources

for each stage in the supplier relationship process (contract, invoicing, traceability, audit, etc.). The sustainability

team is involved in this project, which will also helps brands implement and monitor social and environmental

criteria for brand suppliers and subcontractors. More specifically, the project enabled the establishment in 2015 of a

team of internal auditors at Group level, which will ultimately allow the integration of social and safety audits for all

luxury brands, the harmonization of the standards used in these audits and the appropriate response to non-

compliance.


8 http://www.kering.com/en/group/about-kering


Since its acquisition of Puma in 2007, Kering has worked hard to apply insights from Puma's experience to the rest

of the Kering family. One of these instruments is the ‘Environmental Profit & Loss (EP&L) account,’ which Puma was

the first company to publish in 2011. Since 2015, Kering has also been publishing an ‘Environmental Profit & Loss

(EP&L) account’ at the group level. This report makes it possible to identify all the environmental impacts of the

company’s operations and supply chain, and to quantify them in monetary terms, thus enabling a comparison of

these external impacts. Such a report is valuable because it enables investors to observe the effect of improvements

by the company and view the progress made year-on-year. The methodology is shared on an open source basis so

that other companies can benefit from it as well. We consider this to be a best practice example and recommended

the use of this methodology to other companies.


Kering has an extensive policy on fur and special animal skins, which establishes guidelines for the responsible

sourcing of these products. The company is aware of the negative attention and reputational risks associated with

the issue. The challenges Kering faces in dealing with responsible sourcing are extensively discussed in its

sustainability report. Kering also runs specific programs, in intensive cooperation with organizations such as the

Convention on International Trade in Endangered Species of Wild Flora and Fauna (CITES) and the Sustainable

Luxury Working Group of the BSR, in which luxury brands are working together to improve industry standards. We

urged the company to further expand these activities regarding responsible fur sourcing.


Kering also explained how it handled a problem in Gucci‘s supply chain, which was brought to light by an NGO.

Illegal Chinese migrants at one of Gucci’s Italian subcontractors were found to be working in substandard labor

conditions and living in poor housing. The subcontractor had already been identified as high risk by Kering even

before the news was revealed. The relationship with this subcontractor has now been terminated. In addition, the

direct supplier involved has been placed in the high-risk group. In response to the incident, Kering has increased the

frequency and number of audits and has also introduced night time audits in order to prevent overtime incidents

and address the poor labor conditions of migrant workers in Italy. As a next step, Kering is reviewing all of the supply

chains across its various brands with the aim of creating a new framework that would provide stronger group level

oversight over the supply chains. Previously, monitoring of the suppliers was carried out mainly within the individual

business units. We see this as a crucial development for companies in the luxury goods sector, enabling the

optimization of risk assessment and consistency in its risk management approach.



We successfully closed our ‘Policy and risk assessment’ and ‘Risk management’ engagement objectives with Kering

based on its supply chain risk management tool and its efforts to further refine the process at the group level. We

also concluded our ‘Transparency and disclosure’ objective based on the company’s Environmental P&L reporting.

We did not find sufficient evidence of ‘Partnerships and collaboration’ and ‘Subcontractors and monitoring of

second tier relationships in the supply chain,’ and therefore concluded flat progress on these two objectives. Since

we concluded three engagement objectives successfully, which is our minimum target, we concluded our overall

engagement with Kering successfully in October 2015.


Objectives 2013 2014 2015 2016


Risk management





chain


Kering’s major brand assets are independent of the corporate brand and each other. From an investor

perspective, this limits the downside potential for reputation risk that could stem from a negative supply chain

incident. Nevertheless, we consider good supply chain management to be indicative of overall good company

management, and would like to see continuing improvements in the roll out of progressive supply chain

management policies to the rest of the Group to achieve cost synergies between brands and divisions as well

as process efficiencies.


3.6 LVMH

Louis Vuitton Moët Hennessy (LVMH) is a global luxury goods group with companies active across five sectors:

wines and spirits, fashion and leather goods, perfumes and cosmetics, watches and jewelry, and selective

retailing (ranging from luxury travel retail to department stores). LVMH’s revenue varies by sector, with fashion

and leather accounting for 35% of total revenue in 2015, selective retailing 30%, wines and spirits 13%, perfumes

and cosmetics 13%, and watches and jewelry 9%. LVMH has an established presence in Europe, North America,

with strong growth in Asia. In 2015, LVMH reported revenues of EUR 35.7 billion (USD 40.5 billion).9

Risk exposure: 1

The company’s clothing brands such as Louis Vuitton, Donna Karan, Loewe, Thomas Pink, and Kenzo, are included in

the fashion and leather goods sector. The extent to which fashion and leather products are manufactured by

company-owned factories or by suppliers and subcontractors varies by brand. In 2011, approximately 55% of LVMH’s

fashion and leather goods (based on sales) were produced in company-owned factories. The company reports that

its production activities are mostly located in France, Spain and Italy, while many of its fabric suppliers are located in

Italy. Company-wide, in 2015, 64% of LVMH’s suppliers, distributors and subcontractors were from Europe, 18%

were from Asia, 9% from North America, and 9% from other locations globally.10 LVMH indicated in October 2016

that it is looking into ways of providing a regional breakdown of the key sourcing locations by business group. As the

company currently does not disclose a list of countries from which it sources clothing or a regional breakdown of

sourcing locations by business sector, the extent to which LVMH is sourcing from countries associated with

heightened occupational health and safety risks is unknown.



LVMH uses a risk-assessment system that classifies suppliers based on their risk exposure. Each supplier must sign a

Suppliers Code of Conduct (SCOC) before a supplier relationship is registered in the company’s supply chain

management system. The approved subcontractors are also required to sign the SCOC. If they fail to do so and this is

established during an audit, the relationship is terminated. In terms of risk exposure to high-risk countries such as

Bangladesh, LVMH has a low risk. After the Rana Plaza disaster, the company initiated an investigation. As a result

of the investigation, LVMH pays closer attention to labor conditions during the supplier audits for all brands that

source from that region.

Risk management

Most LVMH brands enjoy long-standing supplier relationships. Christian Dior, for instance, has worked with 80% of

its suppliers for over 30 years. This increases LVMH’s visibility into its supply chain. Furthermore, the company

indicated that it is working with more diversified production targets throughout the year so that the inventories of

many products are built gradually, creating a buffer to cover seasonal peaks. This reduces the pressure on suppliers

to meet their contractual agreements under tight deadlines and engage in unauthorized subcontracting. Within the

group, Louis Vuitton, which sells a large volume of leather goods and is responsible for 1/3 of sales in LVMH’s

Fashion and Leather division, uses diversified production targets.

Several of the brands such as Louis Vuitton, TAG Heuer and Loro Piana as well as Thomas Pink, work with the SEDEX

supply chain information system and LVMH has set itself the target of rolling it out throughout the company in 2016.

We have highlighted that this system will improve the company’s oversight of its supply chain and provide greater

opportunities for reducing both social and environmental risks. LVMH indicated in October 2016 that other brands

are testing different organizations such as Ecovadis, but for now the company only monitors these developments

and has not decided how to implement this more broadly throughout the group.


LVMH made good progress on transparency and disclosure, which is clear after reviewing the respective

sustainability reports and the increased disclosure of labor issues in general, and health and safety in particular. We

therefore noted positive progress on this objective.

9 https://www.lvmh.com/investors/profile/key-figures/#groupe 10 https://r.lvmh-static.com/uploads/2016/03/ra2015_complet_gb.pdf



Through its Donna Karan brand, LVMH came into contact with BSR, a global business network dedicated to

sustainability, and has subsequently become active in the BSR working group for Sustainable Luxury. This alliance is

particularly valuable as it facilitates the sharing of information among the various enterprises within the working

group. LVMH is the main driving force behind the group’s work on the sourcing of leather and fur raw materials. We

also encouraged LVMH to also focus on labor conditions within the working group and to specifically put the topic of

a living wage on the agenda. In 2014, the company set up a project regarding living wage in Italy that was initiated

within the sustainability consultation that takes place annually between all the sustainability managers in the group.


LVMH has meetings with suppliers in Italy and China to discuss how to best optimize the supply chain for its fashion

brands. We consider such efforts to reduce peak production as an effective risk mitigation measure to limit health

and safety risks and guarantee labor standards in LVMH’s supply chain. LVMH added in October 2016 that their

China and HK Forums in 2015/6 on Packaging and points of sale merchandising involved both tier one and tier two

suppliers.


We closed the ‘Policy & Risk Assessment’ and ‘Risk management’ objectives successfully as LVMH has an adequate

risk management system and has also conducted a risk assessment of its suppliers. We also see that the company

actively participates in collaborative initiatives and we therefore closed our engagement objective ‘Partnerships and

collaboration’ successfully. We noted positive progress on ‘Transparency and disclosure,’ though we see scope for

improvement. Even though the company expects its subcontractors to sign its SCOC, we noted flat progress on

‘subcontractors and monitoring of second tier relationships’ as we did not find any further evidence of process in

place. Overall, we consider our engagement with LVMH to have been successful as we reached our success

threshold of meeting three engagement objectives successfully in October 2015.


Objectives 2013 2014 2015 2016


Risk management





chain


LVMH is known for its long history and traditional culture, which gives it a unique brand appeal that drives

profitability, while the wider portfolio of strong brands limits the downside potential for reputation risk that

could stem from individual negative supply chain incidents. However, the company can also appear inward-

looking and resistant to change, which can raise red flags with potential investors. This engagement has had a

positive impact on our view of the company as it uncovered a number of ways in which it is collaborating with

others in the industry, and introducing new systems and processes to strengthen supply chain robustness.

Although we evaluated LVMH as having low risk from H&S issues in the supply chain, the lack of visibility into

its regional exposure is a risk factor.


3.7 Marks & Spencer Group plc

Marks & Spencer Group (M&S) is a UK-based multinational retail company that sells clothing, private label food

and homeware products. In the UK, general merchandise (including clothing and footwear) accounts for 42% of

the company’s turnover. M&S markets its clothing under a number of brand names, including Limited Collection,

Per Una, North Coast, Portfolio, Indigo Collection, and Autograph. The company has 914 stores in the UK and 468

in 58 other markets in Europe, the Middle East, North Africa, and Asia. In 2015/16, the company reported group

revenues of GBP 10.4 billion (USD 15 billion)11.

Risk exposure: 4

M&S does not own or operate any factories. The company sells own-brand clothing, which it states gives it greater

control over working conditions throughout its clothing supply chain. M&S has approximately 2,000 suppliers in

more than 70 countries, though the names and locations of these suppliers are not publicly available. The company

has local buying offices in Turkey, India, Bangladesh, Viet Nam, Sri Lanka, Cambodia, and China, all of which are

leading clothing manufacturing countries. The company sources from UK-based manufacturers, especially for its

Best of British Collection, which is marketed as a clothing and footwear range manufactured entirely in Britain.



M&S has already been operating a Health and Safety policy and risk assessment process for decades. It does not

follow one particular Health and Safety standard such as OHSAS 18001 or SA 8000, but has developed its own

standard over the last 130 years that M&S has operated with their own-brand strategy.

Risk management

Integral to its risk management is the fact that M&S has a top-tier sourcing strategy in which it only uses the best 52

factories in Bangladesh that are able to provide the quality M&S requires. For each factory, M&S uses a balanced

scorecard to measure quality, ethics, and H&S. This scorecard is followed up with a continuous improvement plan.

For over a decade, M&S has performed extensive fire and electrical safety audits, but has expanded the scope to

include structural safety audits as a lesson from its involvement in the Bangladesh Accord. One key element of its

on-boarding audit of a new supplier is a comparison of the planning permission with the actual building situation to

ensure that no illegal construction activities, such as the addition of extra floors, have taken place. M&S has a long-

standing strategy of purchasing only from suppliers who have their own building and do not operate in shared

premises, which was one of the principal problems with the Rana Plaza collapse. Moreover, the company confirmed

that the local audit teams spend a considerable amount of time on improvement programs with the suppliers. In

addition, all suppliers are also checked annually by an external auditor. One of the cornerstones of the

improvement programs is to use modern technology to obtain greater insight into employee complaints about

suppliers. M&S works with a company that conducts telephone interviews with employees in Bangladesh who call a

toll-free number to lodge a complaint. In a pilot study, 75% of all employees were reached in this manner. By using

this service, the employees felt less pressure to provide politically correct replies because the survey could be

completed in their own homes rather than at work.


M&S recently published a list of all its suppliers on its website. It currently includes the number of factories, each

factory’s address, and the number of male and female employees for each of its clothing and footwear suppliers. In

the coming years, the company plans to enhance the website with other ESG KPIs for each of its suppliers. Further,

M&S plans to expand its clothing suppliers’ transparency initiative to its other businesses like food and retail. Based

on this initiative, we rank M&S as an advanced clothing retailer in terms of transparency. In our view, it uses a

forward looking approach that most of the companies in the sector will be unable to replicate in the near future.


M&S is a member of several of industry organizations, but has not committed to the UN Global Compact. We asked

the company to consider becoming a signatory, as it would provide external stakeholders with valuable assurance of

its commitment to good labour standards, among other sustainability topics. Nevertheless, the company has

recently committed to the ‘UN Guiding Principles for Business and Human Rights’, which is a significant step in the 11 http://annualreport.marksandspencer.com/M&S_AnnualReport_2016.pdf


right direction. M&S also pays close attention to the concept of a living wage. The company has researched the

correct method of calculating a cost price that allows suppliers to pay a living wage. The company is aware that this

cannot be guaranteed, and collaborates with the International Labour Organization (ILO) to urge the governments

of countries in Southeast Asia to raise the minimum wage. We consider this approach to represent an important

policy instrument in addition to the specific attention given to safe working conditions in the factories. Furthermore,

to balance the costs associated with higher wages, M&S engages with its suppliers to bring efficiency in their

operational processes.


With a local presence of 50 people, M&S is confident that it can monitor the production capacity of all factories to

avoid the risk of subcontracting. The company confirmed that every subcontractor is pre-approved and that it never

sources from any subcontractor that is not known. The company is confident that its processes are robust enough to

prevent its suppliers from engaging in any illegal subcontracting without M&S approval. M&S also shares its H&S

policy and sourcing standards with its tier 2 suppliers.


Based on our extensive discussions on M&S’s policy and risk assessment and management, we successfully closed

our 'Policy and risk assessment' and ‘Risk management’ objectives. We also closed our ‘Transparency and

disclosure’ objective successfully based on the company’s list of suppliers and its commitment to further improve its

disclosure. Based on its robust system for monitoring and tracking subcontracting, we closed our ‘Subcontracting

and monitoring of second tier relationships’ objective. We appreciate the company’s collaboration with different

stakeholders on living wage, for instance, to bring about positive change, and report positive progress on the

‘Partnerships and collaboration’ objective. Overall, we concluded our engagement with M&S successfully in April

2016.


Objectives 2013 2014 2015 2016


Risk management





chain


Although clothing is less than half of M&S‘ business, given that the rest is food, which is also associated with

significant supply chain risks, M&S’ approach to managing the apparel industry risks are a reflection of the

overall quality of its supply chain management. The company has been trying to lead in the sustainable supply

chain space since 2007, and is one of the few companies to try and quantify the net economic benefits to the

business of its sustainability initiatives (GBP 185 million in 2015/16). As a result, we have a high degree of

confidence that initiatives to address H&S issues will be approached with an eye on financial as well as ethical

benefits.


3.8 VF Corp

VF Corporation (VF Corp) is one of the world’s largest apparel and footwear groups, generating USD 12.4 billion in

revenues in 2015. The company’s subsidiaries are active in the design, manufacture, distribution and retail of

footwear, clothing and accessories. Wrangler, Lee, Timberland, The North Face and Eastpak are among over thirty

brands within the group. VF Corp’s brands are sold in more than 150 countries through 47,000 retailers.12

Subsidiaries also sell branded clothing directly to online customers and over 1,520 of its own retail stores.

Risk exposure: 3

In 2015, VF Corp employed 15,000 workers at 28 company-owned manufacturing facilities. Located in the US,

Mexico, Honduras, Nicaragua, Argentina, Chile, Turkey, Poland and Egypt, these manufacturing sites account for

approximately 23% of the 550 million items produced annually for the company. The remaining 77% are produced

by approximately 1,900 supplier facilities located around the world. VF Corp’s suppliers include cutting, sewing,

screen printing, embroidery, laundry, and packaging facilities, as well as raw material producers.

At least 1,000 of the company’s supplier facilities are located in the Asia-Pacific region, including Bangladesh,

Cambodia, China, India, Indonesia, Pakistan, Thailand and Viet Nam. Significantly, Bangladesh, Cambodia and

Vietnam are rated as ‘extreme risk’ countries according to Maplecroft’s H&S Risk Index 2014, while China, Indonesia,

Thailand and Pakistan are rated as ‘high risk.’



VF explained that after 115 years of manufacturing experience in the US, the company now sources all products

outside the US from countries such as Egypt, Mexico, and Honduras. Since then, it has replicated the high H&S

standards – called Ideal Plant Model − it applied to its US suppliers in its current sourcing countries and monitors

their compliance through an experienced team of over 35 auditors. In terms of living wage, the company has a clear

policy for the 60,000 staff in its plants.

We also asked the company about its decision to move production to lower labor cost countries compared to

Bangladesh, such as Ethiopia or other African countries. VF stated that every factory is audited according to Global

Compliance Principles before making any decision. The company is already working closely with some of its Asian

suppliers that are considering the option of moving production to East Africa, and VF itself is designing the factories

based on its H&S requirements. The company stated that it is collaborating with suppliers in Ethiopia, Kenya, and

Tanzania in order to ensure building sustainability.

Risk management

VF’s auditing team also acts as a capacity building unit to work on long-term relationships with its suppliers. VF

indicated that its supply chain comprises 30% own manufacturing, 45% third party VF factories with which it has

long-standing relationships, but that are not owned by VF, and only 25% transactional suppliers. Since December

2013, VF has stopped working with WRAP and SA 8000 certification as it found that factories were certified on 'local

standards' and that its own internal audit team checking these certified suppliers would not have approved them

against company standards. VF rejects a significant number of proposed suppliers based on non-compliance before

a relationship is developed. For example, approximately 20% of Chinese suppliers do not qualify based on the

audits that take place before signing a contract with a new supplier.


VF is one of the largest of the currently 26 North American brands that form the Alliance for Bangladesh Worker

Safety, and VF’s vice president for global procurement is a member of the board. In addition, VF collaborates with

the International Finance Corporation in order to improve H&S in the supply chain. These collaborations spurred the

improvement of H&S requirements for suppliers in Bangladesh and enhanced learning to implement similar

processes throughout its supply chain. Regarding living wage, VF is engaged with Social Accountability International

(SAI) to better understand this issue in its factories. The company expects productive dialogue, greater transparency

12 http://content.stockpr.com/vfc/db/74/17020/annual_report/VF_Annual_Report_2015-Digital.pdf


and engagement with stakeholders on this topic in the future. Finally, we encouraged VF to become a UN Global

Compact Signatory.


In 2015, the company expects a slight fall in its own production to 25% due to a change in the product category mix.

Yet the company's efforts are focused on reducing the number of short-term assignments and outsourcing 50% of

the volume to Third Way suppliers in order to strongly reduce the risks surrounding working conditions.

VF Corp recognizes the importance of enhancing its oversight of tier-two suppliers. Actions taken include:

• Selecting the largest 180 material suppliers for audits of operational H&S and child and forced labor.

• Engaging with nominated tier-two material suppliers to assist them in delivering more sustainable

materials at competitive prices.

• Directly engaging with the largest fabric mills in China and Vietnam, along with the International Finance

Corporation (IFC), to help fund energy efficiency assessments and improvements to reduce environmental

impact.

• Building a traceability capability within the supply chain to develop a framework to enhance clarity of all

VF’s tier-two suppliers.

• Committing to expanding its manufacturing H&S requirements throughout tier-two, as VF has systems

enabling strong engagement at that level. At this time, 100% of its Bangladesh suppliers are covered with

H&S, training and capacity building initiatives, both directly from VF and through the Alliance for

Bangladesh Worker Safety.



Based on VF’s commitment to H&S and replicating its US factories’ standards in its suppliers’ factories in other

countries, we are confident that it has good control over managing these risks. With the monitoring and tracking of

tier-two suppliers and the extension of its H&S standards to tier-two suppliers, VF is set to advance its H&S

commitment up in the value chain and we closed our engagement objective ‘Subcontractors and monitoring of

second tier relationships in the supply chain’ successfully. We also believe that VF actively partners with different

stakeholders such as IFC, Alliance for Bangladesh Workers’ Safety, and SAI to stimulate better sustainable outcomes.

Noting this, we closed our engagement objective ‘Partnerships and collaboration’ successfully with VF. We also noted

positive progress on our objective ‘Transparency’ as the company published its first sustainability report. Overall, we

closed our engagement with VF successfully in March 2016.


Objectives 2013 2014 2015 2016


Risk management





chain


VF Corp’s transparency has improved significantly in recent years, in particular around supply chain issues.

With such a big stable of consumer brands and the vast global network of suppliers, there is naturally a

concern that it is difficult to monitor risks and generate efficiencies consistently. Greater insight into these

management processes leads us to conclude that the company appears to have a high degree of insight into

and control of its supply chain risks, which should support long-term prevention of problems and better cost

management. VF Corp has also been criticized in its home country, the US, for its decision not to sign the

Bangladesh Accord. The engagement discussions provide insight and reassurance that the company is actively

engaged with collaborative initiatives that are relevant to its business and the regions in which it operates.


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