Labor & Employee Welfare

Ensuring Safe Working Conditions in the Supply Chain

Concerns about safe working conditions in the supply chains of major companies have surfaced repeatedly in recent years. One Apple and Amazon contractor in China has faced allegations of worker mistreatment and unhealthy working conditions; so too have factories in South and Southeast Asia used by companies like Nike and Gap and H&M.

These issues aren’t limited to factories abroad. In October 2018, the New York Times reported that six women working at a Tennessee warehouse owned by Verizon contractor XPO Logistics suffered miscarriages amid hazardous working conditions. Supervisors allegedly had pregnant employees lift heavy boxes and work long shifts, ignoring doctors’ notes calling for lighter workloads. As a result, at least one woman filed a complaint with the Equal Employment Opportunity Commission. Congress responded when 97 members signed a letter to the House Committee on Education and the Workforce requesting an investigation of XPO extending even beyond the miscarriages. Nine senators also urged the CEOs of XPO and Verizon to improve worker safety provisions.

Since worker rights violations don’t always receive such wide public attention, though, investors themselves have looked for ways to uncover and address labor concerns in the supply chains of companies they invest in.

Labor Conditions and Supply Chain Transparency

Workplace safety issues can be a matter of life and death for employees in the supply chain. An estimated 317 million nonfatal occupational injuries and 321,000 occupational fatalities occur around the world yearly, according to a World Bank study. Factories are particularly susceptible to cultivating an unsafe environment because of the pressure to deliver products quickly at a low cost, the study says. The result is a “substantial economic burden.” In fact, the World Economic Forum reports that accidents and work-related illnesses cost the world an estimated $3 trillion each year, and a “lack of wellness” at work (in the form of injury, illness, stress, and disengagement) costs the US $2.2 trillion annually.

Consumers care about these issues, too. Beyond the reputational risks associated with poor working conditions, MIT researchers found that consumers are willing to pay a premium for products that come from transparent and responsible supply chains.

Taking a broader view, a Human Rights Watch report on the apparel industry explains: “Publishing supply chain information builds the trust of workers, consumers, labor advocates, and investors . . . It makes a company’s assertion that it is concerned about labor practices in its supplier factories more credible.”

But for companies and their shareholders, gaining visibility into the supply chain and enforcing standards isn’t simple. “Grudgingly or not, multinational brands have taken up the mantle of responsibility, establishing codes of conduct that their suppliers are—theoretically at least—obligated to adhere to,” writes Michael Blanding of Harvard Business School Working Knowledge. One challenge is the sheer number of worksites in large companies’ supply chains: Adidas says that it works with about 800 factories across 55 countries. Blanding notes that companies sometimes use third-party auditors to help monitor conditions in the factories they work with, but that the quality of these audits can be unreliable and the results difficult to act on.

Consumers are willing to pay a premium for products that come from transparent and responsible supply chains.

What Can Investors Do?

Given the obstacles standing in the way of corporate supply chain transparency and safety, where can investors turn for information?

While company disclosures are one place to start, investors may look to third-party reporting on environmental, social, and governance (ESG) data. But only 39% of ESG frameworks studied in a 2017 report by the Center for Business and Human Rights at New York University’s Stern School of Business covered supply chains.

One organization working to fill the gap is KnowTheChain, which tracks how well large companies in several industries perform on workplace safety issues across their supply chains. KnowTheChain ranks 40 information and communications technology companies, 38 food and beverage companies, and 43 apparel and footwear companies on their progress in eradicating forced labor within their supply chains.

Its rankings are based on a variety of themes, including risk assessment, recruitment, worker voice, and remediation. These rankings provide investors with valuable information about the companies they own or are considering buying. Beyond ranking and scoring, KnowTheChain’s 2018 report on information and technology communications companies highlights specific examples of worker rights violations, notable positive steps companies have taken, and recommendations for future actions. The organization encourages investors to incorporate its findings into their portfolio decisions and dialogues with companies.

An example of how investors have pushed for safe working conditions comes from the Interfaith Center on Corporate Responsibility, a group of over 300 investors managing $400 billion in assets. Thanks to pressure from the coalition, in addition to other motivations, more than 200 companies signed a legally binding accord. In the accord, the companies commit to financing and implementing safety programs in Bangladesh, where most clothing retailers in developed countries source their garmets from. The accord followed a garment factory collapse in Bangladesh that killed 1,100 workers in 2013.

Investment manager Actis provides another example of investor efforts in supply chain management. Principles for Responsible Investment (PRI) describes how Actis utilized its $280 million investment in Ostro Energy to improve the Indian renewable energy company’s ESG performance. According to PRI, Actis quickly identified worker safety as a challenge and developed a monitoring site to detect dangerous working conditions. The initiative resulted in the Ostro Labour Accommodation Standards Policy, which details guidelines for worker accommodation and labor conditions.

These examples may provide insight and inspiration, but their success doesn’t mean that investors’ work is done. “I don’t see enough pressure on procurement and supply chain professionals around sustainable procurement, ethical sourcing, and governance issues,” says Andrew Coulcher, Director of the Chartered Institute of Procurement and Supply. “This is a great opportunity for the investment community to hold organizations to account.”

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