It is impossible to ignore the controversies that have emerged this year in the UK’s Leicester textile industry, which include allegations of modern slavery and other serious misconduct levelled at suppliers of household retail fashion names. This is not an isolated incident. From the Rana Plaza factory collapse to increasing reports of modern slavery and worker exploitation in garment factories across Southeast Asia, similar controversies are increasingly common for retail supply chains.

While one particular fashion retailer bore the brunt of the headlines, these events have had an impact across the retail sector. Prudent businesses are reassessing the policies and processes needed to understand whether similar practices are taking place within their supply chains so they can address them decisively. Investors and shareholders are also expecting more consistent action from retailers and are using financial leverage to influence supply chain policies, processes and performance.

Why are privileged investigations important in the retail sector?

The regulatory landscape has moved from disclosure-based requirements to compliance obligations covering environmental and social issues across the supply chain. Germany, France and the UK are among the jurisdictions where civil claims are increasing against major brands and companies at the top of large supply chains, based on charges of environmental and social harm that occurs deep in their supply chains. Against this backdrop, businesses find that privileged investigations may be used to establish the facts and get ready for potential legal proceedings.

In the regulatory space, the EU is developing supply chain human rights due diligence laws that will have extraterritorial reach and liability for non-compliance. While a draft law will not be available until 2021, the EU Commissioner for Justice has indicated that the European Commission is considering a range of liability options, including civil and criminal liability as well as supervision at a local and European level. A number of countries in Europe have already developed similar laws or are in the process of doing so; for instance, France, the Netherlands, Germany and Switzerland.

In the UK, proposals for supply chain human rights due diligence were included in a draft environment bill earlier this year and supported by civil society and environmental groups. More recently, the UK government announced a consultation to develop new laws that would prevent large companies from using commodities grown on land that has been illegally deforested. This would include a requirement to undertake due diligence and fines for non-compliance.

What issues are we talking about?

Supply chain investigations of this nature need to grapple with a number of complex issues. Often arising from the interplay between domestic regulatory requirements, international law and sector-based standards for working conditions, minimum wage standards, and modern slavery and human rights issues – all while being closely scrutinized by investors, lenders, customers, the public, and the media.

Key issues in retail supply chains include:

  • workforce exploitation and modern slavery, including use of forced and child labor, abuse of migrant workers, gender discrimination, working hours and freedom of association;
  • living wage;
  • health, safety, and working practices;
  • environmental degradation and pollution;
  • impacts on use of and access to land and natural resources;
  • inadequate engagement with indigenous peoples and affected communities; for instance, leading to forced evictions and involuntary relocation; and
  • intimidation, harassment, and abuse of human rights and environmental defenders.

Five questions for retail businesses

The vast scope of raw material and products and the range of sourcing, production, and manufacturing geographies across their supply chains means that retail business will be among those most exposed to increasing liability in this space. They will also be keen to respond to increasingly sophisticated investor demands driven by evolving sustainability risk disclosure requirements for investors, shareholders and lenders.

Although retail businesses will almost certainly have supply chain due diligence protocols in place, they should consider these five key questions as they evolve their approach:

  1. Strategy and governance: Does my sourcing strategy align with my overall corporate strategy and is this reflected in supply chain and sourcing policies and risk protocols?
  2. Risk protocols and prioritization: Are risk protocols effective to identify potential misconduct at both tier one and lower tiers of the supply chain in line with internationally recognized standards and best practice?
  3. Sourcing contracts: Are compliance protocols being passed down to subcontractors as required under mandatory contract provisions and are context-specific key performance indicators used to enable more flexible objectives to be set and managed outside strict contractual requirements. For instance, positive incentives to drive continuous improvement or specify remedial outcomes as well as punitive measures for failure to perform to a minimum acceptable standard?
  4. Incident response and crisis management: Are incidents flagged and investigated even where they arise beyond direct sourcing relationships?
  5. Disclosure: Is disclosure framed by reference to the overall sustainable sourcing strategy and prioritization of risks to ensure a consistent and factual narrative used to manage stakeholder relationships, especially in response to incident reporting?