Wednesday, July 24, 2024

The ambitious regulations cleaning up fashion’s supply chain

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The fashion industry’s supply chain practices contribute to climate change and foster poor working conditions. But drastic European regulation is coming to change that — and American companies won’t be able to avoid the resulting changes.

In the United States, recent years have seen the passing of the Uyghur Forced Labor Prevention Act, which bans products from the Xinjiang region of China, where China has been accused of detaining more than a million Uyghur people — and U.S. lawmakers have called into question whether brands such as Shein used forced Uyghur labor in their supply chains. In January 2022, the Garment Worker Protection Act came into effect in California, forbidding California-based factories from paying their workers per piece and holding brands, even ones based outside the state, responsible for wage violations in the factories they source from.

But such regulations are about to become much tougher. As early as January 2024, a series of European Union regulations will demand concrete changes to company supply chains, impacting American fashion brands with sizable markets in the region. U.S. regulation could be moving in the same direction: a proposed New York bill is targeting climate and labor issues in fashion brands with similar tactics.

Such regulations are not a fleeting trend, said Maxine Bédat, director of the New York-based nonprofit New Standard Institute

“It’s going to happen,” she said. “You can take a leadership position and get ahead of it, and you’re ultimately going to be in the right, not just the right place morally but from the market as well.” 

She encourages companies to “dive in.” 

Making murky supply chains transparent

In December 2022, the EU passed the Corporate Sustainability Reporting Directive, which requires all large EU companies, “whether listed on stock markets or not” to “disclose data on the impact of their activities on people and the planet and any sustainability risks they are exposed to” and have this data audited by a third party, according to the press announcement. By 2025, this directive will also apply to non-EU companies with more than 150 million euro, or approximately $163 million in annual sales revenue. Additionally, small- to medium-sized non-EU enterprises listed on European stock markets can defer reporting and compliance requirements until 2028. According to a report by the financial data firm Refinitiv and provided to The Wall Street Journal, the CSRD will likely apply to more than 3000 U.S. companies

A draft of the standards is out now for public review and covers a wide variety of issues, including marine impacts, climate change, and adequate wages of supply chain workers and “affected communities.” The standards require businesses to demonstrate how their operations’ greenhouse gas emissions comply with a 2015 international climate treaty’s goal of limiting global temperature increases to 1.5 degrees Celsius. Businesses are also required to show that they take into account supply chain workers’ perspectives when they make decisions related to those workers’ well-being.

The reporting requirements are a necessary first step toward change, said Justine Nolan, director of the Australian Human Rights Institute and a professor in the faculty of law and justice at the University of New South Wales in Sydney. 

“Most companies don’t have visibility over their supply chain,” said Nolan. 

They might know their tier-one suppliers, but “things like modern slavery and forced labor are most common in the lower tiers of the supply chain,” she said.

A second piece of EU legislation will hit even more foreign companies, applying to any business with more than 40 million euros in European revenue. This legislation ups the ante, so to speak, and moves beyond monitoring into sanctioning.

The Due Diligence Directive, which will become effective in three to four years, requires companies to monitor and “prevent, end or mitigate” issues such as pollution, biodiversity loss, slavery and labor exploitation. This will affect the company itself and apply across the value chain, “including not only suppliers but also sale, distribution, transport, storage, waste-management and other areas,” according to the official press release. Sanctions include taking goods off the market and fines of at least 5% of worldwide revenue. 

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