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© Copyright 2018 by K&L Gates LLP. All rights reserved.
John Sullivan, Caitlin Blanche, Catherine Adam, Savannah Hardingham
Ethical Supply Chain: Is it More than a Fad?
Luxury & Fashion Webinar Series – Facing the Future September 27, 2018
TODAY‘S PRESENTERS – A WARM WELCOME
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London Catherine Adam, Partner
Houston John Sullivan, Partner
Orange County Caitlin Blanche, Partner
Melbourne VIA RECORDING: Savannah Hardingham,
Special Counsel
OVERVIEW
– Modern Slavery Introduction
– Unique Risks to Fashion and Luxury Goods Industries Significance to Fashion Industry
Luxury Goods and Ethical Sourcing
Cobalt
Conflict Minerals
Diamonds
Regulatory Risk and Litigation
US Laws and Litigation
UK Modern Slavery Act of 2015
France Duty of Vigilance Law
Modern Slavery Act 2018 (NSW)
Australian Federal Modern Slavery Bill 2018
– Conclusion and Questions klgates.com 3
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Source: Walk Free Foundation Global Slavery Index 2018
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40.3 MILLION victims of modern slavery
– 24.9 M in forced labor – 15.4 M in forced marriage
– 28.25 M (71%) are women – 10.1 M (25%) are children
Of the 24.9 MILLION victims in forced labor
– 16 M are exploited in the private sector (i.e. corporate supply chains)
– 4.8 M are in forced sexual exploitation – 4 M are in state imposed labor camps
THE NUMBERS
Source: ILO Global Estimates of Modern Slavery: Forced Labour and Forced Marriage, Geneva, September 2017
Modern-day Slavery is a $150 BILLION per year industry
This is more revenue than Super Bowl, World Cup, World Series, NBA and NHL Championships combined
More than the GNP of most countries
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Source: Walk Free Foundation Global Slavery Index 2018
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UNIQUE RISKS TO FASHION AND LUXURY GOODS INDUSTRIES
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SIGNIFICANCE IN FASHION INDUSTRY 1/3
– Fashion industry comes second, alongside personal technology, sugar cane, cocoa and fish as allegedly benefitting from modern slave labor, which affects an estimated 40 million people across the world
– About 75 million people work directly in the fashion and textiles industry and about 80% of them are women
– Women represent the large majority of those enslaved within the fashion industry
– 1 in 4 enslaved is a child
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– Global nature of the industry – large majority entirely sourced. Very little done in company-owned factories
– Forced labor can occur on so many levels in the production process -- from factories where fabrics are being cut and sewn to the textile-production houses, to gathering of raw materials like cotton and leather
– Certain essential materials present high risk including:
Cotton
Mica in cosmetics
Shea nuts and wax
– The most at risk products come from China, India, Vietnam, Thailand, Malaysia, Brazil and Argentina
SIGNIFICANCE IN FASHION INDUSTRY 2/3
Cotton Mica Shea
Nuts/Wax
Argentina
Malaysia
Vietnam
Thailand
India
Brazil
China
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– Cosmetic supply chains are complex and loosely regulated
– Some products have 50+ ingredients from multiple countries all over the world
– Natural beauty ingredients such as cocoa, vanilla, minerals such as mica have all been commonly linked to child labor
– Key ingredients such as shea nuts and wax used as a base for mascara are produced by small holder farmers where the risk of labor abuse is high
SIGNIFICANCE IN COSMETIC INDUSTRY 3/3
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– The Rana Plaza factory collapse outside Dhaka, Bangladesh in 2013 was a watershed moment for the global garment industry
– Shook Bangladesh’s $28 billion garment industry (second largest behind China)
– Raised questions about worker conditions and transparency in global garment industry
– Some Action was taken: Governments rushed to improve safety measures, human rights and labor advocates called for greater accountability and transparency. Individuals were charged with murder, and saw labor reforms across various countries
DESTRUCTION LEADS TO AWARENESS
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OTHER ETHICAL ISSUES
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– Impacts of overproduction:
Warehouses of luxury materials incinerated
– Choking pollution generated by Chinese factories
– Voraciousness of American Mass market
– Eco friendly fabrics
– Reducing carbon emissions
– Responsible sourcing of extreme luxury materials – i.e. python
– Renewed pressure to ban fur
Coalitions, Indices, Pledges, Oh My … – Know the Chain -
Names and Shames - compares each company to its competitors - top 20
120 global companies reviewed and benchmarked in 3 main sectors: Food and Beverage, Information & Tech, and Apparel and Footwear
Latest Apparel and Footwear benchmarking report out late 2018
– Rank a brand -
NGO, Donation driven
Ranks companies across sectors including a “Luxury” Category (Fashion/Clothing, Telecom, Food, Online, Electronics, Body Care) with grade A-E. Makes conclusions, “it is unclear to us whether X company cares about sustainability or not”
Grade is based on series of questions in various categories, including about Carbon Change, environmental policy, labor conditions/fair trade
HOW DO YOU MEASURE UP?
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NAMED AND SHAMED? 1/2
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– Issue “Report Card”
– Grades or Rankings
– Get picked up and widely publicized, especially if receive bad rating
– Many luxury brands are behind compared to street brands, which have a very long history of addressing some very public scandals
NAMED AND SHAMED? 2/2
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– Have a supplier Code of Conduct that provides for no forced or slave labor, no child labor, no discrimination and a safe and hygienic workplace?
– Include at least two of the following workers’ rights: 1. to have a formally registered employment relationship 2. to have a maximum working week of 48 hours with voluntary and paid overtime of 12 hours maximum 3. to have a sufficient living wage?
– Include the right for workers to form and join trade unions and bargain collectively; or the right to facilitate parallel means of independent and free association and bargaining
– Does the labor conditions policy also apply further down the production chains, at least covering the leather production or the animal farms?
– Have a published list of direct suppliers, that have collectively contributed to more than 90% of the purchase volume?
– Belong to a collective initiative that aims to improve labor conditions, or does the brand (company) purchase its supplies from accredited factories with improved labor conditions?
– Is there a policy for the brand (company) for capacity building at the apparel manufacturers for improved labor practices?
DOES THE BRAND… 1/2
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– Annually report on the results of its labor conditions policy? Is at least 90% of the brand’s production volume from apparel manufacturers monitored for labor conditions?
– Annually report on the results of its labor conditions policy for the leather, yarn and fabric production phases, including a reasonable overview of the number and region of workplaces covered by the policy in relation to the total production volume?
– Implement a policy to establish the payment of living wages at its apparel manufacturers? Are at least first living wage payments realized?
– Is at least 25% of the production volume from apparel manufacturers approved as socially compliant by independent third parties?
– Is at least 50% of the production volume from apparel manufacturers approved as socially compliant by independent third parties?
– Are at least 50% of the brand's leather, yarn and fabric production phases approved as socially compliant by independent third parties, such as FLO-Cert, GOTS or SA8000?
DOES THE BRAND… 2/2
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OTHER GROUPS DRIVING CHANGE
– Peer to peer organizations, NGOs, activism grows
NGOs: Some are alliances of NGOs and trade unions in the industry
– Sustainable Apparel Coalition
– Sustainability Consortium
– Clean Clothes Campaign
– Ethical Trading Initiative
– Fashion Revolution
– Mekong Group
– The Apparel and Footwear Supply Chain Transparency Pledge
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– Prepare/Update/Enforce Supplier Code of Conduct – Require suppliers hire directly – Do not use recruiters – Create and maintain designated hiring procedures and places – Commit to reimbursing workers recruitment fees upon hiring. – Provide avenues and safe environment for employees to voice concerns
– Purchasing practices:
avoid short term contracts prevent against expressive pressure to lower pricing avoid sudden changes of workload size to decrease brand’s risk of
ending up with kind of suppliers that rely on human trafficking - i.e. seasonal items with short turn around.
TOP PRIORITIES FOR CHANGE
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LUXURY GOODS AND ETHICAL SOURCING
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I. Cobalt (Lithium-ion Battery) dependent products
Electric Vehicles (EVs) (i.e. Tesla, BMW, Mercedes)
Electronics (i.e. iPads, laptops, cell phones, watches)
Battery Packs ( i.e. Tesla Powerwalls)
II. Conflict Minerals dependent products
Electronics, jewelry …
III. Diamonds
Jewelry, precision tools…
LUXURY GOODS AND ETHICAL SOURCING
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– Used in lithium-ion batteries – 60% of world supply comes from Democratic
Republic of Congo (DRC) – Human trafficking, child labor and corruption reported – Human rights violations obscured in multiple supply
links – Impossible to say finished products were not made
with child labor or human trafficking – The new “blood diamond” – EV manufacturers criticized for not being transparent
and disclosing plan to ethically source without – Demand will significantly increase with Evs – Manufacturers are trying to engineer battery without
Cobalt – Sources outside of DRC developing
I – COBALT 1/3
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I – COBALT 2/3
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Source: Amnesty International
I – COBALT 3/3
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– Together the Four are often referred to as “3TG” or “Conflict Minerals” Gold, Tin, Tantalum, Tungsten
– U.S. SEC requires disclosure of use of conflict minerals “if they are necessary to the functionality or production of a product” (§1302 of the Dodd Frank Act)
– Countries of origin: Angola, Burundi, Central African Republic,
Democratic Republic of Congo (DRC) , Rwanda, South Sudan, Zimbabwe, Uganda, and Zambia
II – CONFLICT MINERALS 1/2
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RCOI – Companies are required to conduct a “reasonable country of origin inquiry”
(“RCOI”)
– RCOI design considerations:
Must be performed in good faith
Reasonable design to determine: Whether any of its 3TG originated in the covered countries, and/or
Whether any of its 3TG are from scrap or recycled sources
If so, conduct due diligence and file a report
II – CONFLICT MINERALS 2/2
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– Most companies don’t know where the diamonds (and gold) come from
– Responsible Jewelry Council
– “FLUX” ‒ Fair Luxury is group of jewelers in UK with goal of responsible sourcing from human rights respecting mines
Source from Fair Trade or “Fair-minded” certified mines
– 15 years since the world wide effort to ban “conflict” or “blood” diamonds
– Kimberly Process for certifying diamond sales not funding wars by rebel groups
– Industry still criticized for failing to ethically source
III – DIAMONDS 1/2
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III – DIAMONDS 2/2
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REGULATORY AND LITIGATION RISKS
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– United States of America Federal Acquisition Regulation (FAR):Combatting Trafficking in Persons, 48 CFR 52.222-50
California Transparency in Supply Chains Act
Trafficking Victims Protection Act of 2000 (as amended)
Foreign Corrupt Practices Act
Section 1502 of the Dodd-Frank Financial Reform Act Regarding Conflict Minerals in Supply Chains
– United Kingdom UK Modern Slavery Act of 2015
– France Loi de Vigilance (French Corporate Duty of Vigilance Law)
– Australia New South Wales Modern Slavery Act 2018
Commonwealth legislation pending but imminent
REGULATORY RISKS TO COMPANIES
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– Required disclosure on corporate website What, if anything, company is doing
– Applies to: Retail sellers and manufacturers
Doing business in California
Annual gross receipts (worldwide) > USD 100 million
– Cal. AG can enforce via injunction
– Other states: none, so far, re supply chains per se
CALIFORNIA TRANSPARENCY IN SUPPLY CHAINS ACT (SB 657; CAL. CIV. CODE §1714.43)
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LITIGATION RISKS
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– Growing Number of Lawsuits Class actions, MDLs
Undeterred by dismissals – creative claims
– Types of Claims Consumer protection statutes
“I would not have purchased had I known …”
Aiding and abetting HT or HR abuses
“You funded the group that killed my son …”
Shareholder derivative claims
UK – MODERN SLAVERY ACT 2015: A QUICK RECAP
– The Modern Slavery Act 2015 (MSA) is aimed at combating crimes of slavery and human trafficking
– Section 54 of the MSA requires:
commercial organizations
which operate in the UK
that supply goods or services; and
have a global turnover above GBP 36 million
to publish a slavery and human trafficking statement for each financial year that ends on or after 31 March 2016
– The statement can either specify the steps being taken or state no steps are being taken and must be updated on an annual basis
– The MSA is supplemented by guidance published by the Home Office (in 2015 and updated in 2017)
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HOME OFFICE GUIDANCE: TRANSPARENCY IN SUPPLY CHAINS, ETC.
– The 2017 update of the Home Office guidance on modern slavery statements shifted from “may include” to “aim to include” suggesting that including the non-exhaustive list set out at Section 54(5) of the MSA is best practice in preparing a statement
– Section 54(5) lists the following for an organization to include: a) its structure, business and supply chain b) its policies in relation to slavery and human trafficking c) its due diligence process in relation to slavery and human trafficking in its
business and supply chain d) the parts of its business and supply chains where there is a risk of slavery and
human trafficking taking place, and the steps it has taken to assess and manage that risk
e) its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate
f) the training about slavery and human trafficking available to its staff
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WHAT DOES THIS LOOK LIKE IN PRACTICE? 1/3
– There should be a link to the slavery and human trafficking statement in a prominent place on the organization's website
– The organization should ideally paint a detailed picture of all the steps it has taken to address and remedy modern slavery and the effectiveness of such steps
– This can be a useful brand enhancing exercise in addition to achieving compliance
Example I
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WHAT DOES THIS LOOK LIKE IN PRACTICE? 2/3
Example II
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WHAT DOES THIS LOOK LIKE IN PRACTICE? 3/3
Example III
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MSA: DOES IT DO ENOUGH?
– The Modern Slavery Act provides little consequence for non-compliance
– If an organization fails to comply the Secretary of State may seek an injunction. Non-compliance with the injunction would result in contempt of court which is punishable by unlimited fines
– Realistically, the highest risk is reputational
– This lack of teeth has been widely criticized and there have been calls for its review since 2015
– A Westminster Hall debate on tackling modern-day slavery is scheduled for 9 October 2018
– And with Anti-Slavery Day on the 18 of October, it is likely further emphasis will be put on strengthening this legislation
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FRANCE: DUTY OF VIGILANCE LAW
– The loi relative au devoir de vigilance des sociétés mères et des entreprises donneuses d'ordre came into effect on 29 March 2017
– Like the UK’s Modern Slavery Act 2015 it was also in part a reaction to the Rana Plaza disaster of 2013
– The law applies to companies registered in France with, for at least two consecutive years, either:
a) more than 5,000 employees working for the company and its direct or indirect French-registered subsidiaries, or
b) more than 10,000 employees working for the company and in its direct or indirect subsidiaries globally
– The law’s scope goes beyond the UK’s focus on modern slavery and includes human rights, the environment and health and safety conditions
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According to Article 1 of the law, a Vigilance Plan has to include:
– mapping that identifies, analyses and ranks risk
– procedures to regularly assess, in accordance with the risk mapping, the situation of subsidiaries, subcontractors or suppliers with who the company has commercial relationships
– appropriate actions to mitigate risks or prevent serious violations to human rights and the environment
– alert mechanism that collects potential or actual risks (developed in partnership with relevant trade union organizations)
– a monitoring scheme to follow up on the measures implemented and assessment of their efficiency
FRANCE: THE VIGILANCE PLAN
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FRANCE: CONSEQUENCE OF NON-COMPLIANCE
– If a company fails to establish, implement or publish a vigilance plan, any concerned party can file a complaint with the relevant jurisdiction
– A company has 3 months to comply with a formal notice to comply
– If a company remains non-compliant after 3 months a judge can impose a civil fine up to EUR 10 million
– The fine amount is based on seriousness and circumstances of the non-compliance as well as its perpetrator
– A judge will also rule on whether the vigilance plan is complete and appropriately fulfils the obligations described in the law
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WHAT DOES THIS MEAN IN PRACTICE? 1/3
A. Think of your supply chain: – what do you source
– where do you source (goods, services)
– what due diligence do you carry out across your supply chain
– what contractual arrangements are in place with your providers
– what steps are taken if non-compliance is identified
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B. Think of your industry and your corporate culture:
– are you in a high risk industry
– what are your competitors doing
– is an ethical supply chain at the heart of your organization? Should it be?
– do you have an existing supplier code of conduct / ethics? Does this cover legislative requirements?
– what training do you offer your employees
WHAT DOES THIS MEAN IN PRACTICE? 2/3
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WHAT DOES THIS MEAN IN PRACTICE? 3/3
C. Think of your plan / reporting: – ensure you have all measures in place to implement your plan / report
– is it easy to find on your website
– is it written in plain language
– does it comply with local legal requirements
– do you have measures in place to ensure it is updated annually
MODERN SLAVERY ACT 2018 (NSW) 1/2
– Applies to commercial entities With employees in NSW & turnover of AUD 50 million+
– Mandatory reporting – public report Of risks of modern slavery in supply chains
– Anti-Slavery Commissioner (UK model)
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New criminal offences
Victim support
measures
Anti-Slavery Commissioner
Mandatory reporting of risks
& training
MODERN SLAVERY ACT 2018 (NSW) 2/2
– Annual publicly available statement to address: Structure, business and supply chain Due diligence processes in relation to modern slavery in its business
and supply chain Identify where a risk exists and steps taken to assess and manage
that risk Training about modern slavery for employees
– Penalties apply Imprisonment and fines – AUD 1.1 million
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FEDERAL MODERN SLAVERY BILL 2018 – Applies to commercial entities that: Are Australian or carry on business in Australia Have consolidated revenue AUD 100 million+
– Mandatory reporting – public statement Of risks of modern slavery in supply chains
– Parliament is considering: Anti-Slavery Commissioner (UK model) Penalties as per NSW Act
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– Risks
– Conclusion
– Questions
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ETHICAL SUPPLY CHAIN: IS IT MORE THAN A FAD?
RISKS TO COMPANIES THAT DO NOTHING
– Regulatory and Litigation risk – Reputational risk (brand and company)
Naming and shaming
Rankings
– Market risk Difficult to retain or acquire new customers
– Financial risk Higher cost to finance, investors may withdraw capital, legal fees and of
course fines
– Operational risk Investors vote against the directors
Employees may vote with their feet
Competitors may play up those who don’t comply
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PLEASE DO NOT HESITATE TO BE IN TOUCH!
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John Sullivan Houston T +1 (713) 815 7330 [email protected]
Catherine Adam London T +44 (0) 20 7360 821 [email protected]
Caitlin Blanche Orange County T +1 (949) 623 3526 [email protected]
Savannah Hardingham Melbourne T +61 (3) 9205 2043 [email protected]
