Responsible investment: Bangladesh

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Over 1 500 people died after the collapse in April 2013 of the Rana Plaza, an 8-storey building in Savar, Bangladesh, that contained five garment factories. It was the latest of four similar deadly incidents relating to the same industry, in the same country. Studies indicate that over 40% of Bangladeshi factories have serious safety deficiencies that could affect one million workers.

The severity of the case drew media attention and caused outrage all over the world. It was probably because it was far from being the first such event that companies and organisations reacted in the search for an end to unsafe working conditions. The response was an historical move to address the endemic problem:  the signing of a five-year, legally binding agreement by NGOs, global unions and apparel companies.

The Accord

The Accord on Fire and Building Safety (ACCORD[1])  is run by a Steering Committee chaired by the International Labour Organisation (ILO) with equal representation chosen by trade union signatories and company signatories. It covers all Bangladeshi suppliers to the signatory companies and addresses a series of critical issues:  mandatory repairs and renovations; independent safety inspections, publicly reported; and financial support. The Accord establishes a vital role for workers and trade unions.  Moreover, it has established a firm governance procedure.

Given the legal nature of the Accord, some US companies refused to sign up, fearing it would make them vulnerable to the US love of litigation. Others – such as heavyweight retailer, Wal-Mart – insisted on going solo. Wal-Mart says it will conduct its own audits and inspections.  While its desire to take responsibility can be appreciated, this response poses several problems.  First, the real value of the Accord lies in the legal commitment undertaken by the signatory companies. That is why it has been massively applauded by civic societies and trade unions.  Some US companies, such as American Eagle, consider this as more important than the risk of not signing. Secondly, if companies like Wal-Mart limit their actions to short-term inspections, that in itself will not resolve such a deeply complicated issue.

Audits might not suffice to provide the assurance needed against workplace abuse. They may involve low quality methodology and/or high levels of fraud. Studies prove that managers frequently coach suppliers to give the “right answer” and that in many cases, the additional direct costs of the audits were ultimately paid by the workers[2]. In Bangladesh, the lack of legal contracts (75% of waged workers in the garment industry[3]) leaves workers extremely vulnerable in that it prevents them from making any claims.

The Accord’s Plan of Action recognises the complexity of the issue. If working conditions are to change, a combination of policies are needed. Collaborative action involving the Bangladeshi government, national trade unions and worker representatives is not just a prerequisite – it is the only way forward. Such recognition materialised among the companies that committed to Bangladesh’s Tripartite Plan of Action on Fire Safety (a national initiative)[4], a long-term, multipartite platform for change.

So what can investors do?

The short answer is to do their best so that similar tragedies do not recur.  The Rana Plaza incident had a clear impact on international brands: not only on their image, but in disrupting their value chains, with consequent financial losses.  Further, if workers’ conditions are not improved it is likely to lead to social unrest and protests.  And as the government increases its health and safety inspections,  some factories risk being closed. The risk is undeniable.

For that, those investors with stakes in apparel companies can first encourage them to be part of the solution by joining the Accord; secondly, they can ensure those companies stick to their promises. These are precisely the objectives of the investor coalition coordinated by the Interfaith Center on Corporate Responsibility (ICCR). The coalition is backed by over 200 global institutional investors representing over USD 1 trillion in assets under management[5]. A subset of over 100 investors has started engaging with companies by urging them to sign up to the Accord.

As commendable as that is, investors can in fact go further. Any potential future tragedy would constitute a material risk to companies’ brand value, whether or not they are legally liable, so it is wise for investors to first assess the most exposed garment companies within their portfolios.

Let’s look at three top European apparel companies:  H&M, Kering (Puma) and Inditex

None of these companies was directly exposed to the Rana Plaza collapse. However, they outsource between 6% and 8% of their total production to Bangladesh[6].

H&M’s business is based on a 100% outsourcing model, of which Bangladesh represents 10% and China, 30%. Sourcing from Asia is crucial to H&M maintaining its competitive price structure and 80% of all its production comes from there.

Kering (Puma)’s outsourcing strategy also relies on Asia, which supplies 89% of its total outsourced volumes. Of this, China and Bangladesh represent 39% and 8% of total volumes, respectively.

The model used by Inditex (Industria de Diseño Textil) is different. While its basic products are outsourced from Asia, more elaborate processes are undertaken closer to its end markets, in Spain, Portugal, Morocco and Turkey.  Bangladesh represents between 5 % to 6% of its total outsourced volumes.

These three apparel companies have made significant efforts to heighten their corporate responsibility. Better control of their value chain is one pillar of this process. All three have developed a comprehensive Code of Conduct that applies to all contractors and is subject to external verification. However, lack of reporting at country level hinders any assessment of operational risks and impedes the monitoring of progress.

Inditex uses an internal rating system for suppliers, based on external audits. H&M’s audits focus on factories rather than suppliers. Neither H&M nor Inditex discloses the outcomes of such audits at country level.  In contrast,  Kering (Puma) evaluates suppliers through an internal rating tool that identifies risks at country level. 50% of problems identified through audits in Bangladesh were resolved, and the company’s average problem resolution rate was 78% [6].

But even on looking deeper into this approach by Kering (Puma), it is hard to know the real scope of its audits. The Rana Plaza event revealed that illegal subcontracting – a widespread practice in Bangladesh – was ‘business as usual’, whether intentional or not.  The norm is for international brands to send their purchasing orders to their parent companies, which in turn subcontract to other local companies.  In many cases, international companies use third-party agents to find manufacturers to manage the garment orders.  This procurement labyrinth makes it even more difficult to verify and control working and safety conditions. Audits tend to include those suppliers who have direct contracts with the purchasing department, and even when that is not the case, verifying the robustness of audits at that level is challenging and costly.

Understanding companies’ supply chains is imperative. Only with a transparent overview of the entire supply chain and how it operates can investors start evaluating how companies genuinely manage social risks. Dialogue is an important part of this, so that there is both individual and collective engagement in asking companies for higher levels of transparency.

Conclusion

The importance of agreements such as Accord cannot be denied. The Accord is a milestone agreement because the participating companies have not only taken responsibility for immediate reparation and accepted third-party safety inspections, they have also accepted being legally bound to it and publicly accountable for it. They have recognised the depth of the problem. They have consciously joined the long-term tripartite forum to address not only working conditions but also some of the other most pressing issues, such as the need to extend legal contracts or ensure living wages.

Whether or not Bangladesh poses the biggest risk, the practices underpinning the entire purchasing chain need deep, responsible examination and revision if breaches in minimum working conditions are to be eliminated globally. Investors can make a valuable contribution by encouraging companies to sign up to multi-stakeholder agreements such as the Accord; by seeking real transparency at country level and by assessing how companies manage labour standards within their supply chains.

Discover more about Socially-Responsible Investing (SRI) funds on Parvest website.

[1] http://www.bangladeshaccord.org/

[2] See Ethical Trading Initiative DVD (2007) ‘Secrets and Lies’ or Impactt. Impactt Ltd (2009) ‘Getting Smarter: Ethical Trade in the Downturn Annual Report 2008’. In the 98 site assessed by Impactt, 45 per cent were found to have double books and 43 per cent coached workers to give the ‘right answer’; in South East Asia the percentages were 83 per cent and 40 per cent.

[3] Oxfam GB, February 2010, Better jobs in Better Supply Chains.

[5] Exane Research, August 2013

[6] Kering (Puma), Annual Report 2012, page 71

Helena Vines Fiestas

Head of Sustainability Research at BNP Paribas Asset Management

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