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It seems that every year or so we’re informed of gross labour and safety issues that lead back to the stuff we buy and where we buy it. The responses by retailers thus far have been, for the most part, one of ignorance. They often had (or claim to have had) little or no idea of the risks in their supply chains. Why?

 

Risky Information

These days, a company’s typical response to a CSR issue is “we didn’t know”, whether that referred to the problems in the facility or the knowledge that the facility was part of their supply chain at all. Walmart’s response to their involvement in the 2012 factory fire in Dhaka, Bangladesh was to state that they were unaware of having a relationship with that factory at all (their contractor had used an unauthorized sub-contractor). [1]
 

In order to anticipate CSR issues, a company must undertake a methodical audit of their supply chains to pinpoint the issues. However, even knowing what your own CSR issues are dangerous. That knowledge becomes incriminating if the crisis occurs before a company has made an effort to deal with it. In terms of PR, it is better to be able to say “we didn’t know” instead of “we knew, but we didn’t do anything”.

 

Currently, companies exist in a grey area of voluntary responsibility; once a company shows interest in collecting CSR data, they will be expected (to varying degrees) to act upon that information, taking voluntary responsibility for something that they could have legally and financially ignored. The other half of Walmart’s story in the Dhaka factory fire is that Walmart had received information on fire safety issues across multiple supply chains and had rejected a proposal to fund the improvement of fire safety in related facilities. [2] Would you rather say to the public “we didn’t know” or “we knew, but we actively decided it wasn’t worth addressing”?

 

 

Corporate Motivators and CSR – Why Isn’t CSR a Priority?

First, CSR is not a compliance issue. Compliance issues have direct financial repercussions if they are not met, and therefore are usually addressed by companies. Regulations and mandatory industry agreements usually apply to the facilities, labour, and materials controlled directly by the company in a region, not those along the supply chain and outside the regulating body. So, most of these CSR issues are not addressed through compliance because they are happening in 1) a separate entity from the company that has the influence, has the responsibility, and is subject to robust regulations 2) a separate region with their own weaker regulations and 3) a region where regulations may not be adhered to strictly.

 

Second, CSR is not a significant risk issue. Risk analysis is a common practice in most companies to effectively prepare for possible changes in the market. CSR issues, while a risk, aren’t usually addressed along with the rest, Risk is often judged on two things 1) the likelihood of the crisis happening and 2) the expected impact. CSR issues have an added element; a CSR crisis with a large negative impact may not affect a company’s bottom line at all. So, CSR crises are so unlikely to influence companies significantly they rank at the bottom in terms of risk priorities.

 

For instance, many Canadian mining companies have been accused of involvement with violence against the population residing near mining sites. [3][4] This registers with the average person immediately as a huge CSR issue: illegal and a violation of human rights. In direct relation to a company, this kind of event likely alienates a company and makes it difficult for them to continue conducting business in the area. However, these accusations haven’t visibly influenced these businesses or caused them to change. Often, an event doesn’t result in the exclusion the company from being a supplier; it doesn’t sufficiently alienate customers; it doesn’t change the conditions of agreements that they may have with financial institutions; it doesn’t alienate investors; and it doesn’t result in fines through regulations.

 

A sufficiently large CSR issue can contribute directly to the disruption of supply chains, but a sufficiently diverse company with diverse suppliers may not be significantly affected by the disruption. For instance, while George Weston Limited’s Joe Fresh brand had a supply chain that was completely disrupted as a result of the Rana Plaza building collapse, but it contributed so little to the company’s overall business that supply chain disruption wasn’t a compelling risk for them. Moreover, the financial strain of a disrupted supply chain was insignificant to the company. It was the jeopardizing of the company’s reputation on the Joe Fresh brand and its sister brands (such as Loblaws), as well as a moral impetus, that caused them to respond with proposals for change.

 

Stages

We could look to the stages in evolution in corporate sustainability to see if it can suggest to us how CSR might evolve. However, compliance and risk were two major drivers of the evolution of corporate sustainability. Because they aren’t big motivators in CSR its not entirely practical to look to the evolution in corporate sustainability to predict the evolution in corporate social responsibility. The elimination of risks to regulatory fines motivated the push to compliance in the earliest instances of corporate sustainability. The potential savings and reduced supply chain risk motivated the later movement toward proactive pollution prevention beyond regulatory requirements. CSR doesn’t have any of these motivators.

 

The current stage of CSR could be likened to an even later stage of corporate sustainability, product stewardship. Companies in this stage track their products across their life cycles to find out their impacts. This is a huge undertaking; most sustainable companies have only made some headway in getting a clear picture of their products’ complete impact. Its a similar process in CSR, requiring the systematic auditing of a whole supply chain to be aware of all the risks and social issues across the supply chain. The slow progress in this stage in corporate sustainability give us some indication of how difficult this undertaking is and the progress we might expect in similar CSR undertakings.

 

However, one thing we can learn from the stage of pollution prevention is the utility of anticipating and preparing for impending legislation. While there are no current significant risks, a company can be caught unprepared when new legislation requires a significant change in the way they must do business. Currently, Gap Inc. is the biggest major hold out for signing the Bangladesh Fire and Safety Code. [5] The question is, how long will this strategy help Gap? If there are future international agreements and possible legislation, Gap’s competitors will be better prepared and Gap will have to catch up on possibly years of progress. Given the difficulties of supply chain mapping, this doesn’t seem to be a feasible strategy.

 

 

Current Mechanisms

CSR spans companies and countries, making it difficult to create any sort of mechanism for CSR progress. There are a few current strategies that have met with varying levels of adoption and success.

 

1. Voluntary International Industry Agreements

Voluntary International Agreements are often made in an industry to commit a significant amount of players to the added costs and effort of making changes not mandated by law. This is especially important given that the international aspect of supply chains make them almost impossible to regulate, and an industry agreement is one of the few mechanisms that can span multiple countries and companies. However, voluntary agreements usually do not have incentives to deliver on commitments, nor enforceable penalties to assure commitments. This means that these agreements can end up being quite ineffectual. However, the commitment to these agreements indicates a certain amount of acceptance of responsibility and eliminates a company’s to outright deny responsibility.

 

2. Binding International Industry Agreements

Binding industry-wide agreements are still voluntary, but once a commitment has been made, there are penalties for not adhering to commitments. This is a less common strategy, as an industry will not likely come together to develop an agreement that could impose fines or reduce their own competitiveness. However, the severity of an issue may induce an industry to do so, as many companies have done with the Bangladesh Fire and Safety Accord, which has penalties for non-adherence.

 

3. Preferred Trade Agreements

There is a precedent for countries use preferential trade agreements to allow other countries to safety raise their quality of life standards through regulation. These agreements are supposed to allow countries to impose more rigorous workers rights legislation by giving the country preferential treatment, increased quotas, and lower tariffs on manufactured goods like textiles. This approach requires rigorous auditing, like the implementation of the Better Factories Cambodia system for the U.S.- Cambodian Textile Agreement. However, the trade agreement must provide the sector with sufficiently large quotas and prices in order to both pay for the increased costs and to support the majority of the sector. If such an agreement expires (as it did the US-Cambodian agreement in 2005) the factories may be suddenly severely uncompetitive in a free market without their former protected market.

 

4. Regulatory Compliance

Regulation are not a common mechanism for international CSR issues, but can be implemented by a political body for the most critical issues. For instance, a provision in the 2009 Dodd-Frank Act requires some companies to disclose their consumption of “conflict minerals” coming from ten countries. Disclosure in this case should be enough to induce change; companies will not be allowed to avoid the issue by not auditing their supply chain. Once their relationship is known the issue is enough of a human rights issue that companies will implement change themselves.
 

Forward

Currently, the biggest barrier to good CSR is motivation; companies don’t perceive enough internal or external pressure to address CSR issues themselves. Second, there is a moderate disincentive to undertake the auditing process; it will be costly, difficult, and open up a company to further criticism when initial issues are revealed. However, it should be noted that if companies don’t audit their own supply chains, other interested parties will begin to do it for them. Greenpeace has been known to map supply chains to reveal huge environmental damage in company supply chains. Also, motivated retailers may require their suppliers to disclose their supply chains as a condition of business, as Walmart has done for many of its suppliers. If a company wants the chance to manage its own message on their supply chains, it will have to be proactive and do its own auditing first.

 

[1] http://www.webcitation.org/6CV5W5nFD

[2] http://www.bloomberg.com/news/2012-12-05/wal-mart-nixed-paying-bangladesh-suppliers-to-fight-fire.html

[3] http://www.miningwatch.ca/news/complaint-asks-ontario-securities-commission-investigate-tahoe-resources-after-wiretap-evidence

[4] http://www.miningwatch.ca/news/barrick-gold-s-porgera-mine-papua-new-guinea-linked-grave-human-rights-abuses-environmental

[5] http://laborrights.org/creating-a-sweatfree-world/news/protesters-call-on-gap-to-sign-bangladesh-safety-accord

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