Why responsible labour practices matter

There is a global expectation today that all companies need to respect human rights. The investment community increasingly recognise they have a role to play in ensuring that investee companies are meaningfully addressing human rights issues while mitigating any negative impacts.

Investors increasingly appreciate the need to understand the root causes of the systemic issues typically found in the apparel industry and how they affect the rights of people, impact businesses, and ultimately influence investment and financial returns. Whilst governments have the duty to protect these rights, investors recognise the corporate duty to respect human rights, as well as the role companies can provide to create a more sustainable industry.

Risks and opportunities 

As the apparel industry is dominated by multi-tiered supplier relationships, a lack of traceability and rapid market-driven changes, the scope for risks and negative human rights impacts remains large:

Reputation risks

Potential brand damage and consumer backlash, which could lead to potential loss of sales for companies. Triggered by social media, reputational concerns can reach a wider audience faster than before. Consumers are also better empowered to research brands.

Operational risks

Potential cost savings from cheaper labour in countries like Bangladesh need to be balanced against incremental business risks, such as impact on lead times and product quality. The discovery of poor labour practices also leads to supply chain disruption which can cause stock outs, lost sales, reduced market share1, and lack of trust in the company brand. This could ultimately directly impact company revenue.

Legal and regulatory risks

Global regulatory pressure, including potential lawsuits and fines, encourages greater transparency around sourcing of products and services. This is reflected through developments such as the UK Modern Slavery Act, the recent Duty of Care of Parent Companies and Ordering Companies in France, the Dutch Child Labour Due Diligence Law, the Trade Facilitation and Trade Enforcement Act in the US (which bans the import of goods produced by force labour) and the California Transparency in Supply Chains Act.

Responsible supply chain labour practices present opportunities including:

Increase in employee motivation

More motivated employees lead to higher retention, increased productivity and improved product quality. For example, factories with improved labour practices reduce their product rejection rates by 44%.

Supply security 

Building long, stable relationships with suppliers reduces a company fs risk of labour abuses in its supply chain, limiting the need to change or drop suppliers at short notice following unexpected incidents.

Access to supply chain innovations 

Building stable relationships with suppliers can lead to companies benefitting from more innovation within the supply chain. Suppliers with innovative products or processes are most likely to share them with companies with whom they have positive relationships. To understand existing and emerging risks that may impact financial performance, both in the short and long term, investors need greater transparency and an informed understanding of how companies are managing practices on the ground.

The push by ‘soft law’ mechanisms

An additional driver for investor focus on labour practices is the growing number of frameworks, standards and guidance on human rights. These include the UN Guiding Principles on Business and Human Rights, the revised ILO Tripartite Declaration of Principles Concerning Multinational Enterprises (MNE Declaration), the OECD’s Responsible business conduct for institutional investors5 and the UN Sustainable Development Goals. These frameworks have raised expectations for investors to identify human rights impacts within their portfolio, and to use their leverage to address impacts and risks, prioritising based on severity.