4 September 2018

Be the strongest link in the chain

A contribution piece by Stephanie Maier, Director, Responsible Investment, HSBC Global Asset Management, first published in the Business Times Singapore on 21 August 2018

As a company owner, the reputational and financial risk from your supply chain will always be present – but do you know the extent of the risk?

Take human rights for example: it could be easy to overlook when it’s not your factory and it’s out of sight. But make no mistake, issues like child and forced labour or unsafe working conditions are an increasing focus for consumers, regulators and investors. Business as usual doesn’t cut it anymore.

View of Singapore’s skyline

Don’t wait for the wake-up call

Five years ago, the devastating garment factory building collapse in Bangladesh cast a haunting spotlight on major apparel brands and retailers’ supply networks. There was swift action on the back of a terrible tragedy. It cemented the need for minimum standards for all kinds of consumer companies and exemplified the critical importance of ensuring due diligence across a network of suppliers and distributors.

As a direct result, two Accords were signed by trade unions, brands and retailers which created a five year, legally binding framework for factory inspections to identify and remediate fire, electrical and structural issues. These initiatives have dramatically improved safety in over 2,000 factories supplying predominantly European and North American brands.

Regulations don’t hold still

Regulations on supply chain disclosures related to lifting corporate sustainability continue at pace, and are a priority issue for business management and investors alike. The call for greater transparency on sourcing of products and services is mandated through regulations such as the Modern Slavery Act in UK, the Duty of Care of Parent Companies and Ordering Companies in France, the Child Labour Due Diligence Law in Netherlands, the Trade Facilitation and Trade Enforcement Act in US (which bans the import of goods produced by forced labour) and the Transparency in Supply Chains Act in California.

While the growing list of legislation is predominantly in Europe and the US, the impact is already starting to be felt in Asia. More than 40% of clothing exports globally originate in China and Hong Kong - this rises to 50% if we include Bangladesh, India and Vietnam.

In the athletic footwear sector 95% is made in Asia. In addition to pricing and production turnaround, companies want to know checks and balances are in place to ensure appropriate labour standards. Worker safety and protection is top of the list.

For example, the UK Modern Slavery Act, implemented in 2015, requires large companies to produce an annual slavery and human trafficking statement outlining the steps they have taken to ensure a robust supply chain. Companies can also issue a public statement that no such steps have been taken, but that’s not very common.

These kinds of disclosure requirements in turn prompt companies to enhance their due diligence processes and have made labour standards a key consideration in their selection of suppliers.

It’s not all focused on avoiding downside risk. Some companies are also identifying opportunities – actively seeking to work with suppliers with good labour practices to reap the benefits of increased employee motivation leading to higher retention rates, increased productivity and improved product quality, as well as better supply chain security.

If companies in Asia want to maintain their dominant position and benefit from a higher value partnership model with their clients, ensuring good labour standards is increasingly a minimum requirement.

Increasing investor scrutiny

Investors are also placing increased importance on these issues as part of their investment processes, closely scrutinising the policies and statements disclosed by companies. Investors recognise the impact that poor management of supply chain labour standards can have on company revenue and valuations.

This can include reputational risks and potential for erosion of trust in company brands, or the risk of higher operational costs, for example as poor labour practices can lead to supply chain disruption and consequent reduction in output, lost sales and reduced market share.

This is leading investors to directly question companies, and the companies in their supply chains, on their labour practices and making public statements in support of better labour practices and disclosure. Investors expect companies to have clear policies and systems to manage these risks, including regular audits and training, and to report on the efficacy of these systems.

For us, labour standards is one of the environmental, social and governance (ESG) factors we integrate into our evaluation of companies and ultimately our investment decisions.

It is also an issue on which we will engage with our investee companies where we consider there are material risks. In June 2018, we joined institutional investors collectively representing $2.1 trillion assets under management in setting out our expectations of companies in addressing forced labour in global supply chains.

Global regulatory pressure, changing consumer demands and an increased focus on responsible investment is leading to greater scrutiny on every link in the supply chain. Labour standards can no longer afford to be the weakest link and there are many stakeholders primed to ensure it isn’t.