The garment industry remains tormented by problems with poor working conditions, but the promise of cheaper working capital financing for emerging market suppliers could be one way to raise ethical standards. Rebecca Spong reports.
Stories of factory workers taking home less than US$3 a day, forced or child labour and dangerous working conditions in emerging market countries such as Bangladesh, Myanmar and India have cast a shadow over the global clothing industry and the insatiable demand for fast fashion in the developed world.
It was the collapse of the Rana Plaza garment factory in Bangladesh in 2013, which killed more than 1,000 people, that thrust the issue onto the front pages of the world’s newspapers. Consumers suddenly realised the human cost of their cheap clothing.
The problems persist today. In February, a Netherlands-based organisation called the Centre for Research on Multinational Corporations (Somo) published a report looking at the working conditions in Myanmar. It cited stories of garment workers living in slums with no electricity or running water, earning a minimum wage of €2.48 per day, forced to work unpaid overtime. Salaries are not paid if workers cannot work due to illness, the report said.
With increasing public awareness of working conditions in such countries, large retailers know they have to demonstrate to the consumer that they are doing enough to ensure their supply chains are meeting certain ethical standards.
One option currently being pioneered by the World Bank’s private finance arm, the IFC, is to provide cheaper working capital funding to emerging market suppliers if they perform well against certain ethical, environmental and safety criteria.
It is more of a “carrot” rather than a stick approach, says Nevin Turk, principal investment officer, financial institutions group, at the IFC. “Instead of pushing them to do this or that, you are showing them clearly: this is what you will get and you can use this money for additional improvements or other working capital purposes. It becomes a very clear incentive for them to improve their sustainability rankings,” she says.
The programme has been running for three years. Turk says the IFC is currently negotiating to bring more buyers on board this year, and has plans to expand into new markets.
How it works
One of the first companies to get involved in the programme back in 2014 was jeans manufacturer Levi Strauss & Co.
The scheme works by building on the IFC’s original global trade supplier finance (GTSF) programme launched in 2010 at the height of the financial crisis to ensure small and medium-sized businesses had access to finance. Under that system, the IFC provides working capital to smaller suppliers, backed by receivables from the international buyers.
“We are taking the credit risk of a global company or buyer purchasing from many smaller suppliers and in this programme we are discounting the receivables of the supplier after approval of invoices by the buyer,” says Turk.
In this version of the programme, the discount is also based on Levi’s own internal supplier rating, which is generated after it has conducted an audit to check whether the supplier has met with the required social and environmental standards. The better the supplier performs, the lower the cost of access to working capital funding.
Last year, European sportswear brand Puma joined the scheme, with the first phase of the programme to be introduced into Bangladesh, Cambodia, China, Indonesia, Pakistan and Vietnam.
“This financing programme enables our suppliers to leverage their relationship with us and benefit from Puma’s strong reputation and financial position,” said Lars Sørensen, Puma’s chief operating officer, in a statement at the time of closing the deal.
French bank BNP Paribas is a parallel lender on the programme with the IFC. As with Levi’s, the lower costs for working capital for suppliers are calculated based on the supplier’s adherence to Puma’s ethical standards.
German discount apparel retailer KiK also partnered with the IFC in mid-2016 to start offering cheaper short-term financing to its suppliers in China. The clothing company is looking to expand the programme to its suppliers in other Asian countries, including Bangladesh.
The IFC currently has a further two companies involved in similar schemes, says Turk, who anticipates the programme will expand this year. “There is a lot of interest. There is a push [from corporates] to really do something on the sustainability side, and it is not just lip service,” she says.
Banks too, particularly those in Scandinavia, but also in Australia, are interested in the scheme and in partnering with the IFC to get help with the assessment of buyers’ existing policies, procedures and implementation capabilities, says Turk.
She adds that there are a couple of companies currently in negotiations and that she expects deals to be finalised this year. Some of these talks are, however, taking slightly longer than previous deals, due in part to the relatively smaller size of the buyers.
“The main challenge in some of those entities who do the monitoring is they don’t have their own audits. They rely on information mostly provided by the suppliers, but they don’t necessarily go and check all these facilities and that could be a sometimes risky proposition,” she says.
In that case, the buyers look to work with external consultants. Turk cites the example of Better Work, a joint venture between the IFC and the International Labour Organisation (ILO) set up in 2009, which has a particular focus on labour conditions.
The challenge of accurately auditing garment suppliers is an industry-wide issue. “Predominantly, audits are only conducted periodically and results are often not representative of the average working conditions year-round,” says Steve Swartz, a partner in the McKinsey Centre for Business and Environment, who co-authored a report on sustainable supply chains published in November.
“The credibility of the snapshot audit remains a significant problem for business, but there are important initiatives afoot,” says Alexandra Channer, principal human rights analyst at Verisk Maplecroft, a global risk research and advisory company. She gives the example of the Association for Professional Social Compliance Auditors (APSCA), based in the UK, which is setting up an auditor accreditation system to start in 2018.
“Setting a common standard will build trust in the quality of the auditors who are out monitoring conditions in factories and farms,” she says.
Somo’s report into working conditions in Myanmar highlights some of the inconsistencies in auditing processes in the country.
The report recommends that corporates should work together to improve the way they monitor how workers are treated. “An industry-wide approach requires companies to join forces in risk analysis, share findings of social audits and investigations,” reads an extract from the report.
“They must ensure that they, together with their suppliers, identify and tackle these risks before placing any orders. Our research shows that companies are not doing this adequately,” says Martje Theuws, researcher at Somo.
Channer says a key challenge is what businesses actually do with the audit information it collects. “Improving working conditions is only possible when businesses act upon information received, working with suppliers and other stakeholders like NGOs, over the short and long term to fix root causes and change behaviours,” she says.
The OECD has added its voice to the call for more joint efforts in auditing. In early February, it released a due diligence guide to encourage responsible supply chains in the garment industry. It calls on buyers to collaborate with each other to avoid “supplier audit fatigue”.
“Most importantly, the new guidelines require brands to assess the human rights impacts of their purchasing, price setting and ordering practices. Recognising the unintended impact of purchasing practices on distant factories could go a long way toward improving the safety and wellbeing of garment workers,” says Channer.
Advances in technology will help retailers access more accurate and up-to-date information on suppliers’ activity, says Swartz. “Several start-up organisations are working to create a more direct and real-time linkage between brand owners and the workers in their supply chains, leveraging mobile technology.”
In his report, Swartz gives an example from outside of the garment industry, citing a software tool developed by Unilever in conjunction with the University of Aberdeen. The tool collects data from farmers that are using sustainable practices in its supply chain. The Cool Farm Tool is offered to farmers for free and aims to help them lessen their carbon footprint while at the same time collecting data that could be shared with the industry.
A broader scope
As efforts are made to improve standards in the garment industry, the IFC will work to expand its supplier finance programme to new companies and new markets.
“We are looking into applying the concept to large domestic programmes in emerging markets where there are buyers with large supplier bases. Mexico is one
of them,” Turk says.
Ethiopia is also on the IFC’s radar as global retailers are looking at encouraging their suppliers from other countries to set up manufacturing facilities in the East African country’s special business zones.
“This is something we are monitoring very closely,” she says.