Time is Ripe for Fashion’s Scope 3

Ongoing human rights abuses across global supply chains reinforce the case for adopting an industry-wide disclosure framework.

Much has been done through collective initiatives, industry networks and shareholder engagement to improve the fashion sector’s human rights track record.

But looking at progress achieved to date, it is clear much remains to be done.

Data from the Business and Human Rights Resource Centre (BHRRC) recently evidenced the ongoing abuse of migrant workers across global supply chains – including those supporting the fashion sector – with 324 allegations linked to 224 identifiable companies recorded during the first half of the year alone.

Another survey from the BHRRC, focused on the garment industry in Bangladesh, showed many brands still failed to pay employees on time and in full. For Natalie Swan, Labour Rights Programme Manager at the BHRRC, the situation underscores the unreliable and unstable nature of supply chains and the widespread uncertainty experienced by employees.

“While there is a general trend among companies towards acknowledging the importance of worker rights, all [of them] must act immediately to ensure workers have access to stable and decent jobs and are not paying the price of supply chain instability,” she says. “Workers face a constant fear that brands will relocate their business to another country, highlighting the urgent need to provide suppliers and workers with the confidence and stability they deserve.”

Some investors have strived to address the issue. The freshest example might be the series of proposals filed by Nike shareholders ahead of the company’s September AGM, which sought to foster supply chain transparency and promote the implementation of worker-driven social responsibility principles in high-risk countries.

This initiative built on a letter sent last year by 70 investors representing US$4 trillion in AUM, demanding the brand paid an estimated US$2.2 million late wages and benefits owed to 4,000 Thai and Cambodian garment workers.

But all shareholder proposals at Nike’s AGM this year failed to secure a majority vote. Those asking for reports on pay equity and sustainability goals however received the largest share, with about a quarter of the votes cast each.

“The apparel industry is rife with abuse, and investors have certainly taken note,” says Chavi Keeney Nana, Director of Equitable Global Supply Chains at the Interfaith Center on Corporate Responsibility (ICCR), which took part in the Nike proposals.

“This case is one of many in which workers do not receive what they are owed and illustrates the need for continuous monitoring of policies and procedures to promote responsible business conduct – as well as the duty of buyer companies to routinely engage with their suppliers to ensure workers’ rights are protected further down the supply chain.”

Investors’ growing role

A number of collaborative initiatives are already in place to tackle a range of worker and human rights abuses in the fashion sector and beyond.

These include Platform Living Wage Financials, the Investor Alliance for Human Rights (coordinated by the ICCR), the Workplace Disclosure Initiative (launched in 2016 by nonprofit ShareAction to kickstart corporate disclosure), and Advance – a stewardship-focused initiative led by the UN Principles for Responsible Investment (PRI).

All of them count asset owners and managers among their signatories, demonstrating growing awareness in the investment community.

“A lot of the time, suppliers are seen as liable for resolving the problem, but the [UN PRI] initiative is trying to flip that responsibility, making sure that buyers also have a role to play in addressing the root causes of responsible purchasing practices and remediating any human rights violations,” says Jessica Wan, Social Research Lead at UK-based investment manager Redwheel.

Wan describes a progressive “mindset shift”, with pockets of forward-thinking investors who are now actively thinking about evolving practices.

“I wouldn’t say there’s a lot of action yet, and I certainly wouldn’t say there’s real investor pressure yet on the corporates – but there is a growing wave of recognition,” acknowledges Richard Wielechowski, Senior Investment Analyst for Textiles at think tank Planet Tracker. “Investors are still working out what it all means and what pressure they need to apply, and where to protect their interests and push those who are lagging behind.”

Sources agree investor efforts in this area are still “nascent” and lack coordination. They are also dwarfed by engagement on other sustainable investment priorities, such as climate change, and nature preservation and restoration.

“I’m definitely seeing some investors championing this issue and asset owners taking more robust approaches, but overall the priority is given to climate,” says Sarah Couturier-Tanoh, Director of Shareholder Advocacy at the Shareholder Association for Research and Education (SHARE). “That’s the difficulty with human rights: it’s not as straightforward as climate. There are supply chain-related themes, but aside from that, there’s a myriad of other subjects – such as racial equity, women’s rights, gender equality, or digital rights.”

Given the challenges in identifying and attributing the negative consequences of corporate practices on human lives, it is perhaps unsurprising that investors and others find them more difficult to measure than impacts to biodiversity and the environment.

“It’s hard to track the effectiveness of policies in this regard: it’s a lot vaguer in terms of context, and there’s not as much quantifiable data associated with human rights,” said Aine Clarke, Head of KnowTheChain and Investor Strategy at the BHRRC. “As a result, there’s less visibility over the topic, and investors tend to shy away from it.”

Levelling the playing field

If the inextricable link that exists between preserving biodiversity and protecting the planet has taken as read, the human rights dimension to our collective future has been given much less air time.

Though the human cost of the climate transition is increasingly accounted for, including through projects and plans to close down polluting industries and support nature-positive agricultural systems, investors, policymakers and businesses are still falling short of a truly holistic approach – which Clarke and others deplore.

“You can’t have a transition to a net zero economy without upholding the rights of the people and workers who are going to make it happen,” Clarke insists. “Climate change is exacerbated and implicated within human rights risks and impacts, and vice versa. That alignment hasn’t materialised in the last five years and is slow to get off the ground, but it’s really a framing that needs to happen if we want to tackle some of the more systemic problems.”

Pointing to data covering the 2024 proxy season, Clarke observes lower levels of engagement and voting support for shareholder resolutions on human rights-related topics – as demonstrated during Nike’s AGM.

“If you look at this purely from a voting perspective, you might say investors have lost interest,” she adds. “I would like to see more investors come out publicly in support of shareholder resolutions that push investee companies to conduct due diligence and uphold human rights within their value chains. We’re not really seeing that at this point.”

The lack of standardisation in the human capital reporting requirements and processes of companies further compounds oversight challenges, with some pointing to a fragmentation problem.

“From talking to suppliers, one of their bugbears is there isn’t a standardised framework followed by corporates – each of them has their own questionnaire that they send a long,” says Planet Tracker’s Wielechowski. “The audit process is becoming increasingly present: if you’re not auditing your supply chain, that’s a problem. But standardisation, a framework, is absolutely where we need to go next – for ease of use and comparability, a lot of reasons will drive us down that track.”

For Dutch asset manager Robeco, which last year unveiled a new engagement equities strategy aiming to drive “positive change” in fashion, the absence of reliable and consistent information is a prominent issue.

“When it comes to the social pillar, data is generally less present and covers the very end of the production process –much less so the beginning,” says Portfolio Manager Dora Buckulčíková. “To rank companies on sustainability, we do need some trustable data. We see some investors who see it the same way, and others who are more focused on the short term – or perhaps don’t take this into consideration.”

Overall, the fashion sector is still “lacking in investor focus”, Wielechowski observes.

Time for change

Similarly to the difficulties faced by companies in tracing Scope 3 carbon emissions across their entire value chain, the fashion sector may struggle to track down human rights data across all the different players involved in the four tiers of its production process – which cover everything from raw material supply, to fabric making and final assembly of garments.

“The Scope 3 analogy is quite true in a lot of ways: by tier four, you’re no longer exactly sure who you’re dealing with, so it’s the same problem as with carbon emissions,” says Wielechowski. “At the moment, it’s a real challenge, but I don’t think ‘it’s difficult and it costs money’ is an excuse we can let by any longer.”

While policymakers in some jurisdictions have tried to address the issue through new regulation and legislation – including the EU’s upcoming Corporate Sustainability Due Diligence Directive, the California Garment Worker Protection Act and the New York Fashion Sustainability and Social Accountability Act – many loopholes remain.

“The biggest challenge that companies seem to face is traceability: there’s still a long way to go before they can understand exactly where their supply chain is at beyond tier two, and what risks they’re actually facing,” says Couturier-Tanoh. “I am not necessarily optimistic about this for now. In the short term, I think we should prioritise effective remediation for workers while encouraging traceability and accountability for tiers below two.”

Meanwhile, others are in favour of a universal framework – such as those established by the Task Force on Climate-related Financial Disclosures, or the Taskforce on Nature-related Financial Disclosures – that would focus on social and human rights accountability, and could apply to the fashion sector and beyond.

“Human rights disclosures are mostly voluntary and vary greatly between companies, so having something similar in place would be very helpful in standardising practices and assessing them,” said Aditi Pai, ESG Analyst at American Century Investments. “But especially in the US, it’s still early days. There’s a long way to go in terms of putting such frameworks in place. At this rate, it would probably be long term.”

The framework could include key indicators such as working hours, staff turnover, number of migrant and female workers across the supply chain, and pay.

“That’s really good baseline data to understand how a company tracks human rights risks and impacts across its supply chains,” Clarke suggests. “But you really need to measure the lifecycle of those policies – not just whether a company has them in place, but how they’re implemented, who has oversight, and how effectiveness is being monitored.”

Due to formally launch this month, the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) – a merger between the Taskforce on Inequality-related Financial Disclosures and the Taskforce on Social-related Financial Disclosures, backed by the likes of Manulife, CalPERS and the PRI – could develop a framework featuring some of these components.

“There’s the science-based targets on climate, and we’ve also got science-based targets for nature now – so you could have some for social impact,” says Wielechowski. “Maybe science isn’t the right term to use, but I don’t see why there can’t be a framework whereby people report on these metrics [across supply chains]. It should be very doable.”

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