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By AMP Capital New Zealand

How ethical investors avoid companies that exploit workers.

 

Have you ever wondered who makes the clothes you are wearing and how those workers are treated in the factories where the clothes are sewn?

 

In the fast fashion industry where cheap production tends to be an important commercial driver, when it comes to choosing manufacturers, brands and retailers may end up sourcing garments from factories that pay workers very little and expect them to work long hours. Working conditions may be unsafe, and in some factories, children may be employed.

 

It’s concerning to know that human rights abuses in the brands and products we buy and interact with every day remains a far-reaching problem. The International Labour Organisation estimates there are 40.3 million people in modern slavery globally[1], including 24.9 million in forced labour. One in four of these are children.

 

Human rights and supply chain

Six years ago, the treatment of workers in clothing factories in Asia was exposed when a factory in Bangladesh collapsed due to structural failure, killing 1,100 garment workers.

 

Encouraging progress has been made on worker rights and safety in the country since then, partly as a result of investor engagement, but there is much more work to be done. Workers are still not paid enough to live above the poverty line and there are many barriers to union representation and collective bargaining.

 

There was hope that conditions for factory workers would improve as the world’s largest companies concentrated their sourcing in China. However, suppliers are constantly being squeezed by their big brand clients, leading to shrinking per-unit pricing and heightened production costs. As a result, they are less likely to put stringent safety measures in place which have large associated costs.

 

While conditions have improved in parts of China, some manufacturers have shifted to lower cost regions, either further inland in China or across the nearby borders of Bangladesh, Vietnam and Cambodia. In Bangladesh, factory workers are paid four times less than a worker in China on the minimum wage.

 

Workers in the garment industry continue to face squeezed wages and a huge amount of pressure to deliver products in shorter time periods. Consumerism and the demand for cheaper, faster fashion has huge ramifications on the factory worker who produces the clothes. It is unlikely the issues above will be resolved unless our attitude to fast fashion changes.

 

Why should we care about the wages and conditions of those who make our clothes?

We believe that any form of child labour and forced labour must be prohibited, and workers should expect to be paid a living wage. Poor working conditions are not only unethical, they also carry significant investment risks over the longer term to brands and business operations. A business model that relies on underpaid workers to deliver on its good and services does not account for its true environmental or social cost, and will not be sustainable in the long-term.

 

Globally, some of the largest retailers and manufacturers have started auditing their lengthy supply chains. This means tracking all of the factories they source from and checking the conditions in those factories. However, auditing is only the first step in the process. While companies need to understand where they are buying from, much more important is understanding the actual conditions in the factories they source from.

 

We expect even more attention on the treatment of the world’s factory workers all over the world with the United Nations Sustainable Development Goals aim to eradicate extreme poverty and modern slavery by 2030. With only 12 years to go until the goals reach maturity, more regulatory activity is likely to be required.

 

So, what can fund managers do?

At AMP Capital we take an ethical stance against companies that exploit their work force so they can make profits. It will not be possible to eradicate poverty unless fair and just conditions of work, including remuneration are established.

 

AMP Capital’s Environmental Social Governance (or ESG) team has been engaging with companies across all sectors of the economy to understand how each is maximising the opportunities and managing the risks in relation to this issue. Our ongoing engagement has focused on encouraging companies to sign up to and implement credible and robust ethical sourcing frameworks. Key engagement activities include:

>        Mapping and understanding the supply chain, even if it is outsourced, including waste.

>        Ensuring that companies publish what factories they use, and encouraging the consolidation of supply chains where possible. The fewer companies a manufacturer uses, the better the voice they will have regarding conditions for factory workers.

>        Encouraging companies to work with their peers to find solutions for wages and poor conditions, and to pay a living wage to their workers (ie an amount which covers the cost of living such as food and rent).

>        Asking for ethical sourcing policies to be aligned across all brands of a listed company.

>        Recommending companies do spot checks and increase their presence on the ground with their manufacturers.

 

Making a difference

Global companies like AMP Capital believe there is a role for business to play and that we have an opportunity to make a real difference. Large corporates can wield an enormous amount of influence over their suppliers, even those much further down the supply chain, to implement systemic reforms that will ensure worker safety and welfare, and to adopt zero tolerance policies on global supply chain abuses.

 

It’s not just about doing the right thing. There’s an economic reason for it as well. The way a company deals with its suppliers or factory workers can provide valuable insights as to how the company operates generally and whether it will flourish longer term. Companies with better governance and practices have a high correlation with stronger financial results. 

 

Business cannot succeed in a world of increasing inequality, poverty and climate change. Investor engagement with companies on supply chain management will ultimately help businesses secure resilient supply chains and sustainable markets for future growth.

[1] Source: Global Estimates of Modern Slavery: Forced Labour and Forced Marriage, Geneva, September 2017.

Global companies like AMP Capital believe there is a role for business to play and that we have an opportunity to make a real difference. Large corporates can wield an enormous amount of influence over their suppliers, even those much further down the supply chain, to implement systemic reforms that will ensure worker safety and welfare, and to adopt zero tolerance policies on global supply chain abuses.

It’s not just about doing the right thing. There’s an economic reason for it as well. The way a company deals with its suppliers or factory workers can provide valuable insights as to how the company operates generally and whether it will flourish longer term. Companies with better governance and practices have a high correlation with stronger financial results. 

Business cannot succeed in a world of increasing inequality, poverty and climate change. Investor engagement with companies on supply chain management will ultimately help businesses secure resilient supply chains and sustainable markets for future growth.

[1] Source: Global Estimates of Modern Slavery: Forced Labour and Forced Marriage, Geneva, September 2017.

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