BLOG - Investors: Here Is An Example of Meaningful Stakeholder Engagement

When in 2020 the covid pandemic hit, many apparel brands decided to cancel their orders, with devastating consequences. Combined with stringent lockdowns, a number of clothing factories went bankrupt and workers faced mass dismissals and a lack of wagepayments.According to the Asia Floor Wage Alliance, 1 in 10 workers lost their job permanently, 7 in 10 were laid off, and 7 in 10 fell into poverty. In some production countries, the pandemic was used as an opportunity to target union leaders and members, either by dismissing them under the pretext of pandemic-related economic hardships or by using the crisis as an excuse to crack down on union activities. Wage and severance theft has become one of the key Environmental, Social and Governance (ESG) risks to take into account in the Textile, Garment, Shoe and Leather (TGSL) industry. Wage theft refers to the illegal withholding of wages or benefits owed to workers, while severance is the compensation paid to workers who have been laid off due to business closures or restructuring. While it is difficult to quantify the magnitude of wage and severance theft globally, studies and reports have highlighted the widespread nature of the issue in the TGSL industry. Wage and severance theft is unlawful, and therefore a key ESG risk for investors.

In March 2021, over 1,000 Thai garment workers were left without jobs after Brilliant Alliance Thai, a factory supplying Victoria’s Secret, closed due to bankruptcy. The factory failed to provide the 1,250 laid-off workers with their legally mandated severance pay-outs. After several months of protests and negotiations, the workers finally received an unprecedented $8.3 million settlement, with Victoria’s Secret contributing through a loan arrangement with the factory’s owners. About a year later, the closure of Vald’or, a garment factory in Haiti, left over 1,100 workers unemployed and without severance pay. The factory produced clothes for brands such as Tommy Hilfiger and Calvin Klein, owned by PVH. After the Worker Rights Consortium (WRC) intervened, PVH agreed to pay $1 million in compensation to cover missed severance pay, pension contributions for the workers, and the government pension fund. As a result, most former Vald’or workers received the equivalent of more than six months’ wages, with some obtaining over a year’s pay.

While these cases were successfully settled after much protest and negotiations, to ensure workers in the global TGSL industry reliably receive the wages and benefits they are entitled to, a binding and enforceable agreement between brands, employers and unions is needed. With the upcoming EU legislation on human rights due diligence, there is much talk about the importance of locally-led development, worker voice, and stakeholder engagement. Less is known, however, about what it takes for those processes to be meaningful and the importance of movement building. In her recent reportBuilding Worker Power in Global Supply Chains: Lessons from Apparel, Cocoa, and Seafood,Judy Gearhart describeshow during the pandemic the transnational supply chain advocacy network was able to do an incredibly fast pivot to help workers document and call out wage theft and how that was made possible by years of trust building and knowledge sharing across regions, practices that enabled a proposal that is currently on the table, the Pay Your Workers - Respect Labor Rights Agreement.

The Pay Your Workers - Respect Labour Rights (PYW-RLR) agreement is a legally binding and enforceable agreement proposed by over 40 unions active in the TGSL industry and supported by more than 280 endorsers. If brands sign the agreement they commit to establishing a Severance Guarantee Fund where workers can file a claim if their employer is unwilling or unable to pay, they commit to settling any outstanding Covid-related wage theft, and they commit to setting up an independent mechanism to investigate and remedy violations of basic labour rights. The agreement is foreseen to be governed through an independent body with an equal number of seats for unions and companies. The total premium, along with the estimated cost for brands to cover unpaid wages and benefits and establish the independent inspectorate, will not cost brands more than ten cents per t-shirt.

It is not just a matter of ethics and social responsibility for brands to ensure their workers receive their contractual payment. In several European countries, such as France and Germany, human rights and environmental due diligence is now required by law. Such legislation was not present in 2013 impeding workers in the Rana Plaza building to effectively hold brands accountable. Due diligence is about to become mandatory for many more businesses as the European Commission is working on a directive that lays down due diligence obligations for companies in the EU. Brands and retailers with cases of wage and severance theft in their supply chains now face several legal risks, including fines and penalties, exclusion from public contracts, civil liability and regulatory action. If a brand does not comply with the requirements of the German Supply Chain Act, for example, and fails to take appropriate preventive and remedial measures to address wage and severance theft risks in its supply chain, it may ultimately face fines of up to two percent of its average annual global turnover. This could have a significant financial impact on the company.

This legislation invariably emphasizes the importance of meaningful stakeholder engagement in conducting due diligence. In herreport, Gearhart points out that only the NGO and union coalitions are enabling meaningful engagement because it is built on trust over many years and a sharing among peers. “Stakeholder engagement requires resources and a concerted effort to ensure affected populations are not only consulted but supported in their efforts to engage proactively. Stakeholder engagement is both a key component of robust [human rights and environmental due diligence] HREDD processes and essential to making development programs more responsive to local communities. This report illustrates the important role independent stakeholders play, especially those most directly connected to worker communities and seeking to build countervailing power“ (p.57).

For brands, the PYW-RLR Agreement is a cost-effective due diligence solution that addresses several critical aspects of supply chain management, risk mitigation, and legal compliance in a systematic and comprehensive manner. On the contrary, identifying and redressing wage and severance theft on a case-by-case basis can be resource-intensive, time-consuming, and attract negative publicity. Investors can use their leverage to encourage companies to address wage and severance theft, as well as directing finance towards those brands that commit to signing the PYW-RLR agreement. They can introduce assessments of company performance in relation to the payment of wages and severance, and integrate these concepts into ESG metrics, modelling frameworks and rankings. Investors can also include participation in the PYW-RLR agreement as a criterion or indicator when appraising a (potential) investee’s ESG performance. Investees that do not address the risk of wage and severance theft should be excluded from Article 9 funds, as defined by the European Union’s Sustainable Finance Disclosure Regulation (SFDR). These funds have a responsibility to ensure their investments contribute to ESG objectives.

For brands, signing the PYW-RLR Agreement thus allows them to comply with a variety of requirements from existing and upcoming due diligence legislation. Investors that take ESG risks seriously can call upon their investees to do so. Moreover, the PYW-RLR Agreement deserves to be understood as a prime example of what HRDD can look like if meaningful stakeholder engagement is taken seriously. According to Judy Gearhart, „[t]his is perhaps the most illustrative example of how CCC [Clean Clothes Campaign] members combine shared industry knowledge with a commitment to rapid response that is supported by a multilayered web of bilateral and multicountry collaborations that function both independently and in concert with the CCC secretariat. The speed with which groups were able to pivot and document the situation demonstrates a substantial potential that should inform HREDD processes“ (p.33).

Carolijn Terwindt, Clean Clothes Campaign

10 December 2023