Can the textile industry prevent another Rana Plaza?

31-01-2014 | Engage | Peter van der Werf

Faced with growing stakeholder scrutiny in the wake of last April’s Rana Plaza tragedy, the textile industry is under growing pressure to safeguard the health and safety of its garment workers. Engagement Specialist Peter van der Werf explains how RobecoSAM is engaging with clothing companies to encourage them to improve their practices.

House of cards
The disaster at Rana Plaza in Bangladesh last April, where an eight story building housing six garment factories fell like house of cards, killing 1,134 workers, has put a spotlight on health and safety issues in the textile industry. As a result, the media, government, consumers and other stakeholders are increasingly holding clothing companies accountable for health and safety violations in their supply chains.

Investors are also beginning to take a closer look at how textile companies manage health and safety risks in their operations. As shareholders of textile and apparel companies, investors are exposed to the financial and reputational risks arising from incidents related to dangerous working conditions at these companies’ production sites. Therefore, investors have an important stake in encouraging companies to implement appropriate health and safety practices throughout their own and their suppliers’ operations.

In order to identify engagement opportunities with companies in the textile industry, we commissioned a study by research provider Maplecroft to evaluate how eight clothing and apparel companies held in our investment portfolios – Associated British Foods (Primark), Burberry, H & M, Inditex, Kering, LVMH, Marks and Spencer and VF Corp – manage their health and safety risks. The research addresses risks such as fire safety, building safety, the use of chemicals, and hygiene and sanitation conditions in textile and clothing factories. Health and safety risks associated with the production and sourcing of raw materials such as the harvesting of cotton, however, were outside the scope of the study.

Few players control a complex supply chain
The textile industry has a complex supply chain involving numerous players: it stretches from the sourcing of raw materials, to textile manufacture, clothing design and manufacture, and finally to design, marketing and retail, which offer the greatest profit making opportunities. Yet it is a buyer-driven industry in which a relatively small number of retailers and brand owners exert most influence over the supply chain. The buyers are typically large multinational companies that control how and where the manufacturing process takes place, the production schedules and the price paid for the end products. In many cases, the buyers may only have direct business relationships with their first-tier suppliers – the clothing manufacturers – and therefore have limited contact with or knowledge of suppliers and subcontractors in second and subsequent tiers such as textile manufacturers and raw material suppliers. At the same time, other key stakeholders such as trade unions, non-governmental organizations (NGOs), government agencies and industry associations, put additional pressure on the supply chain.

"In order to mitigate health and safety risks at their suppliers’ operations, companies must implement policies and management systems that go beyond merely complying with local regulations."

Going beyond regulatory compliance
Some countries experiencing rapid growth in clothing exports have inadequate health and safety regulations and weak enforcement mechanisms. Therefore, in order to mitigate health and safety risks at their suppliers’ operations, companies must implement policies and management systems that go beyond merely complying with local regulations. This is particularly true as consumers and other stakeholders often hold the buyers – i.e., the clothing brands – responsible for health and safety accidents that take place at the factories of unauthorized subcontractors.

Engagement objectives
We have identified five engagement objectives that we consider to be critical to enhancing health and safety practices in the textile industry. In line with these objectives, we seek to assess the company’s policies and risk assessment practices and verify whether they have obtained third party verification for their health and safety procedures. We also strongly urge companies to improve the transparency and public disclosure of their risk management practices, reflecting their commitment to the health and safety of their workers. In addition, we examine whether companies are proactively taking part in industry-wide collaborative initiatives, which we believe can play an important role in improving health and safety standards throughout the industry. Most importantly, we focus on how companies monitor their subcontractors and relationships with second-tier suppliers, as it is in this part of the supply chain that companies have the greatest exposures to health and safety risks similar to those seen in the Rana Plaza disaster.

"We focus on how companies monitor their subcontractors and relationships with second-tier suppliers, where companies have the greatest exposures to safety risks."

Preventing loss of brand value
Over the next three years of dialogue with the textile and apparel companies, we aim to gain insights into their approach to worker safety. This will help us understand their exposures to reputational and financial risks associated with working conditions at their production sites. Such financial risks include the payment of fines and damages, such as in the wake of the Rana Plaza disaster, or lost revenues and diminished brand value due to declining customer loyalty as consumers switch away from brands that do not appear to be taking their responsibility seriously. By engaging with these companies, we remain committed to encouraging them to improve their awareness, management and disclosures on health and safety issues in their operations, and aim to help ensure that similar tragedies do not repeat themselves in the future.

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peter-van-der-werfPeter van der Werf
Engagement Specialist