Last week the Organisation for Economic Cooperation and Development (OECD) released guidance designed to help companies identify and prevent potential “negative impacts” related to human rights, labour, the environment, and corruption in garment and footwear supply chains worldwide.
Called Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector, it recommends that enterprises take a collaborative and risk-based approach to identify ways to address impacts of their operations and sourcing decisions and monitor progress over time, while encouraging ongoing engagement with business partners in developing economies. The guidance also calls on buyers to embed social, human rights, and environmental considerations into their purchasing practices.
Without doubt, the clothing industry is particularly prone to the multitude of high-profile risks that organisations and compliance officers are keen to avoid. This is especially the case as so much of the source material and labour that fuels the sector comes from developing countries that have had historically poor reputations for implementing and enforcing regulations designed to stamp out the worst abuses linked to it—namely child- and bonded-labour sweatshops. Consequently, the OECD—whose aim is to fuel growth in tandem with economic reform and improved governance—has decided to lend a helping hand.
The 186-page guidance document was developed using feedback and collaboration between the OECD and emerging economies, trade unions, non-governmental organisations, and other experts. It is structured in two parts. The core of Section I is a set of guidance on how enterprises in the garment and footwear sector may conduct due diligence in alignment with the OECD Guidelines for Multinational Enterprises, a set of voluntary principles and standards that were most recently updated in 2011 that governments around the world consider to be in line with expectations of responsible business conduct consistent with applicable laws. Section II provides information on how enterprises may apply the due diligence recommendations under Section I to sector risks in the garment and footwear sector.
Section 1 provides multinational organisations with an approach that they can consider using to help them embed responsible business conduct in their operations, as well as help identify actual and potential harm in the enterprise’s own operations and those of its suppliers. This includes, for instance, not only having a policy that spells out the organisation’s commitments regarding its own activities, but also sets out what conduct it expects from its business partners—including suppliers, licensees, and intermediaries—across the full length of its supply chain and stipulates what activities (if any) can be sub-contracted. It also recommends that organisations have a complaints mechanism in place so that concerns can be reported and incidences investigated and remediated.
Section 1 also has some useful advice about how organisations can detect potential—and actual—harm that its activities may cause or contribute to. Key characteristics of the garment and footwear supply chain—low skilled labour intensive, dispersed production, short lead times—make it higher-risk for certain labour and human rights impacts. Many of these risks exist at every level of the supply chain. Similarly, the materials themselves used in products and processes to develop products increase the risk of certain environmental harms at various stages of the garment and footwear supply chain: Wet processing is higher-risk for use of hazardous chemicals than cut-make-trim, for instance.
Enterprises should “carry out risk- based due diligence, for example by incorporating it into their enterprise risk management systems, to identify, prevent or mitigate actual and potential adverse impacts.”
To avoid potential prosecution, litigation, and reputation backlash, the OECD guidance stresses the importance of organisations’ ensuring that they take appropriate due diligence. Under its Guidelines for Multinational Enterprises, the OECD lists several key expectations of what responsible business conduct should look like, and how organisations should detect these same practices in their supply chains and attempt to remedy them. The OECD guidelines say that enterprises should “carry out risk-based due diligence, for example by incorporating it into their enterprise risk management systems, to identify, prevent, or mitigate actual and potential adverse impacts” while “the nature and extent of due diligence depend on the circumstances of a particular situation,” adding that companies should “avoid causing or contributing to adverse impacts on matters covered by the Guidelines, through their own activities, and address such impacts when they occur.”
Furthermore, the OECD’s Guidelines say that enterprises should “seek to prevent or mitigate an adverse impact where they have not contributed to that impact, when the impact is nevertheless directly linked to their operations, products or services by a business relationship. This is not intended to shift responsibility from the entity causing an adverse impact to the enterprise with which it has a business relationship.”
The OECD’s latest guidance splits risks into three categories: human rights and labour risk (which includes child/forced labour, discrimination, health and safty, and the right to join a union and use collective bargaining); environmental risks (which includes water and air pollution, water consumption, and the use of hazardous chemicals); and integrity risk, which is namely bribery and corruption. The guidance says that “severity of harm is judged on scale, scope and irremediable character,” whereby “scale” refers to the gravity of the adverse impact, “scope” concerns the number of individuals that are or will be affected, and “irremediable character” means any limits on the ability to restore those affected to a situation at least the same as, or equivalent to, their situation before the adverse impact.
Below is a look at due diligence process and supporting measures for responsible supply chains from the OECD guidance.
Embed responsible business conduct in enterprise policy and management systems
Adopt a policy that articulates the enterprise’s commitments to responsible business conduct in its own operations and in its supply chain.
Strengthen management systems in order to conduct due diligence on risks of harm in the enterprise’s own operations and in its supply chain.
Identify potential and actual harm in the enterprise’s own operations and in its supply chain
Scope the risks of harm in the enterprise’s own operations and in its supply chain.
Conduct a self-assessment of the enterprise’s own operations.
Assess suppliers associated with higher-risks at the site-level.
Assess the enterprise’s relationship to impacts.
Cease, prevent or mitigate harm in the enterprise’s own operations and in its supply chain
Cease, prevent or mitigate harm in the enterprise’s own operations.
Seek to prevent or mitigate harm in the enterprise’s supply chain.
Verify, monitor and validate progress on due diligence and its effectiveness in own operations (the effectiveness of due diligence is measured by the extent to which actual and potential harm is prevented and mitigated in the enterprise’s own operations and in its supply chain).
Verify, monitor and validate progress on due diligence and its effectiveness in the enterprise’s supply chain.
Communicate publicly on the enterprise’s due diligence processes, including how the enterprise has addressed potential and actual harm.
Communicate with affected stakeholders.
Provide for or cooperate in remediation when appropriate
Establish a process to enable remediation in the enterprise’s own operations.
Commit to hearing complaints against the enterprise that are raised through legitimate processes.
One of the most notable risks that has gained prominence on organisations’ risks registers is that of auditing and monitoring the supply chain, particularly with regard to new suppliers whose way of working may not be entirely compatible with the approach that the organisation sourcing the goods/labour is trying to set. The OECD admits that constant checking can lead to “assessment fatigue” and box-tick compliance, so it recommends that audits are conducted when there are “gaps in information” and “changes in context,” such as taking on a new supplier. The OECD also recommends that organisations conduct ongoing monitoring rather than one-off assessments, as this can be used “to trigger where and when further assessment is needed,” particularly for existing suppliers.
Section II of the guidance, meanwhile, is comprised of modules on specific sector risks and how to mitigate them, such as child and forced labour, wages, sexual harassment and workplace gender-based violence, and environmental risks (including the use of hazardous chemicals and greenhouse gas emissions).
With regard to child labour, the OECD guidance outlines the particular risks that organisations should be aware of and the local conditions that may lead to a heightened possibility that children could be used to perform some work. Typical reasons include poor education facilities in the host country; lack of regulation and enforcement; low wages and widespread use of casual/migrant labour; and use of credit schemes with recruiters that basically result in bonded labour for children.
Consequently, to minimise their exposure to risk, the OECD advises that organisations should carry out assessments on their suppliers, and establish controls to prevent child labour being used directly or indirectly. However, there are also other steps that organisations can take that they may be unaware of. These can include, for example, reviewing their purchasing policies and price negotiations (the cheaper the product, the more likely child labour is involved in the process), leveraging their influence on suppliers to cut out child labour, and working with other companies and NGOs to share information and best practices about how to tackle the problem.
While the OECD is at pains to say its Guidelines “are not a substitute for, nor should they be considered to override, domestic law and regulation,” the latest guidance is a useful document for compliance officers to refer to when checking how robust their own organisations’ supply chain monitoring controls and procedures are.