Forced overtime, low pay, restricted movement, physical and psychological injuries as well as exposure to hazardous conditions – it’s all, allegedly, in a day’s work making vacuum cleaners for Dyson. These are the reported conditions that some workers have endured while working at ATA Industrial in Malaysia, which makes products for the company that gave the world bagless vacuum cleaners.
Dyson denies any claim of “negligence” and is no longer working with ATA but is one of many corporates facing allegations of human rights abuses in its supply chain. They are being held responsible for the actions and working culture of companies they do not own. Suppliers are no longer invisible, no longer just in the background. They are now on the radar of ESG-focused consumers and stakeholders.
This means that companies have to choose who they do business with more carefully. Picking the wrong partner could be expensive and cost more than money. “The risk in supply chains is increasing. If there is an incident, the damage to your brand could be significant,” says Fred Isleib, global head of ESG integration at Manulife Investment Management “These could be related to human trafficking, child labour, unfair wages – there are numerous issues that happen within a supply chain that elevates risk.
“Where it resides inside ESG policies is in the social pillar,” he adds. There have long been cultural practices in some parts of the world that many in the western world do not agree with, so why are institutional investors pushing their portfolio companies for greater transparency now? For one, consumers and other stakeholders have become much more socially aware.
“Then we have social media,” Isleib says. “Once these issues arise, they are quickly disseminated throughout the world. Then your customers mo e somewhere else. That’s what is driving the risk within supply chains.” The main outcomes of these risks are reputational damage and disruption to operations. And they do not only stem from human rights abuses. They could be the result of pollution, mis-using natural resources, damage to local communities and corruption.
Supply chains are not typically front and centre of a corporate’s ESG policy. Yet they account for up to 40% of corporate ESG impacts, according to the ESG Working Group white paper that analysed 1,600 MSCI World Index companies.
Big problem
Dyson is not the only household name to be hit by such allegations. In 2016, retail giant Marks & Spencer was found to have children as young as seven-years-old making clothes in Turkey to be sold in its stores on Britain’s high streets. The manufacturer, which also made products for online retailer ASOS, was also found to have unsafe workplaces.
There have also been allegations of human rights abuses at overseas companies supplying sportswear behemoth Nike, which has been accused of employing suppliers in China that use slave labour, while a facility in Vietnam was deemed unsafe for its workers. Nike faced a small protest at Charlestown University in Washington DC, which refused to renew its sportswear contract unless the company signed a compliance agreement.
These are just two instances of the supply chain issues that have impacted big name brands. Such scandals, true or not, can prove costly. Indeed, it can hit a company financially through loss of productivity, increased legal and public relations spend and the costs of adapting the business to ease any fears of the scandal happening again.
Professor Sabine Benoit from Surrey Business School, who has studied this issue, said in a release: “Customers will blame major firms for supply chain scandals – and this inherited blame will affect whether they buy from the firm in the future. “Our research has found that taking one action – either monitoring and supporting suppliers to do better or moving on from them – will help to build trust and confidence in the major firm but purchasing intention only returns to 75% of what it was before the scandal hit.
“The best option, if a scandal does hit, is for companies to double-down on their response by sacking the supplier who caused the scandal and work to support their remaining suppliers, then consumer trust will start to rebuild, resulting in the best outcome possible – with purchasing intention rising to 85% of what it was before the scandal hit.
“What this means for major companies is that consumers expect their brands to be doing good in the world – and there’s a right way and a wrong way to handle supply chain scandal with a direct impact on the company’s bottom line,” she added.
New thinking
Yet supply chains are changing. When China became the “workshop of the world” every company you passed on the high street seemed to have some connection to a factory in the world’s second largest economy. This was a big economic game-changer which helped keep costs low. However, Covid has changed this.
The world is getting smaller as deglobalisation is becoming the new strategy with supply chains starting to retreat from the developing world. The impact that the lockdowns ordered in response to Covid had on the world is one driver behind such a change in thinking. Indeed, six in 10 chief executives surveyed by KPMG last October said their supply chains are under increased stress. They were working to build a resilient chain to prepare for any further lockdowns or disruptions to global supply lines.
Isleib says the importance of supply chain visibility has grown during the past five years. “It has gone into hyperdrive thanks to Covid,” he adds.
Political tensions between the West and East are also strained, something Isleib is seeing reflected in the corporate world. “Companies are reconstructing their supply chains; they are making them shorter. We are seeing nearshoring and onshoring of suppliers where appropriate,” he says. But investors must not get complacent if companies have suppliers closer to home.
Remember Boohoo? In 2020, the online clothing retailer saw £1bn wiped off its value the day after The Sunday Times alleged that staff at a factory in Leicester, which made garments for the company, were paid £3.50 an hour – less than half of the £8.72 minimum wage for those aged over 25. It was also claimed that there was little evidence of action being taken to stop the possible spread of Covid.
Eyes on the ground
The developing world has a ready and abundant supply of workers, but if there is not the will from the authorities in those countries to enforce higher standards of working practices, then corporates will have to manage such risks themselves. “When you incorporate suppliers within developing countries, it elevates certain risks as regulation in many emerging nations is lacking or not robust enough,” Isleib says.
“In addition, many third-party providers don’t necessarily have insights into companies within emerging markets, making it even more critical that the company holds its own independent audit reviews with feet on the ground. “One of the reasons why we have regulation is to make companies within a country more competitive,” he adds. “Regulation will come through over time, but we should not rely on it. “Some companies will put a representative directly into a supplier. That gives good visibility on what is happening,” Isleib says.
Data dilemma
Another option is using data and reports from companies that specialise in supplying such information. An alternative is for corporates to constantly monitor the operations of the companies in their supply chain themselves. Isleib has heard mixed reviews about third-party ESG data, but this does not put him off.
“It is a good first step to get that initial third-party review,” he says. “I like to understand if companies are conducting audits, do they have teams that are going out to their suppliers to visually understand what’s going on, speaking to the employees on the factory floor, that type of stuff? It’s what I like to see.
“The number of audits that can be completed on an annual basis is somewhat limited, but those who do that have a better visibility into their supply chain.
“Visibility can be difficult, especially if suppliers are small or are not a public company,” Isleib adds. “Companies need to understand that announcing when they are going to turn up is a potential risk. If you feel that’s happening, then perhaps it does not make sense to use that supplier.
For Investors to assess supply chain operations, they need to be aware of a corporate’s value chain. “If you map out the supply chain from the virgin suppliers all the way to the retailer, you can get a good idea of what’s happening by speaking to the companies involved and understanding what their processes are for managing human capital development challenges. What are their practices around quality control? And then if you do that, through each of the steps of the supply chain, you can get a pretty good idea of what is happening. “Now, that is typically tier-one suppliers,” he adds. “When you get to tier two and three suppliers, it is difficult to understand what is happening, and you need to rely on the larger company.”
Bad move
Perhaps investors encouraging corporates to demand higher social and environmental standards is preferable to moving to suppliers closer to home. It could push people in the emerging world into poverty. ESG should not be a guide to move money out of developing nations, it should be a guide to raise environmental and social standards.
To help make this happen, size matters. When it comes to making the world a better place. “As an organisation, the larger you are, the more influence you have over your suppliers,” Isleib says. “The ability to influence suppliers to be more sustainable can be a powerful force.”
Isleib points to an undisclosed large US retailer as an example. “It was the first company that I saw driving changes to make suppliers more sustainable,” he adds. “This large company had made commitments to the public about what they were going to do, the result of which was to push that requirement down
on its suppliers.
“Their suppliers had a choice: they could say that they do not have the resources to do it, and risk losing the business, or find a way to do it and retain that retailer as a customer. “We see this playing out in carbon disclosures and de-carbonisation pathways,” Isleib says. “Companies realise that they cannot achieve their net-zero commitments if their suppliers provide carbon intensive products.
Comments