Traceability and sustainability due diligence: the new obligations in the USA and Europe

On June 21, the Uyghur Forced Labor Prevention Act came into force in the United States, the law enacted by the Biden presidency to counter the entry into the American market of goods produced in the labor camps of the Xinjiang region, where the Chinese government is accused of having implemented a program of repression, detention and work against Uyghur Muslims and other ethnic minorities.

The law, approved by the United States Congress in December last year with overwhelming bipartisan support, requires companies intending to import goods from the Chinese region to provide proof that they were manufactured without the use of forced labor, under penalty of seizure of the products by of the customs authorities.

It imposes an unprecedented traceability burden in the US regulatory landscape, which will closely affect the textile sector: in fact, around 20% of the world's cotton is produced in China and most of it in Xinjiang.

The dissemination of the news by the BBC in March 2021 (confirmed more recently by new shocking revelations) had prompted many famous brands, including H&M, Nike and Adidas, to publish declarations of commitment not to source cotton from the Chinese region, with serious consequences both from a reputational and economic point of view, due to the sudden interruption of supply chains and reprisals by the Chinese government.

Fashion Sustainability and Social Accountability Act

The Uyghur Forced Labor Prevention Act, however, will not be the only obligation that companies in the sector will have to comply with in the coming years in terms of traceability.

The Fashion Sustainability and Social Accountability Act, (known as the "Fashion Act"), is currently pending before the New York State Assembly Consumer Protection Committee, a piece of legislation that, if passed, will impose stringent obligations on companies in the sector that market their products in the New York area.

The act is aimed at apparel and footwear companies operating in the jurisdiction of the State of New York with a turnover of more than 100 million dollars, which will be required to map at least 50% of their supply chain, identifying environmental impacts and social aspects of their production.

In particular, if approved, companies will be required to disclose, through an annual report, information on the actual and potential negative environmental and social effects of their own business and that of the suppliers identified in the due diligence activities. They will have to include data on greenhouse gas emissions, water consumption, management of chemicals and raw materials used, as well as, from a social point of view, information on working conditions and wages received by workers involved in the supply chain.

Furthermore, based on the information collected in the tracing activity, companies will be required to set targets for the reduction of negative environmental impacts, in line with the objectives of the Paris Agreement, and adequate actions to remedy any violations of human rights found along the supply chain.

A last important note deserves the sanctions regime: in the event of non-compliance, sanctions of up to 2% of the annual revenues are envisaged, which will flow into a fund dedicated to the financing of environmental justice projects, specifically set up; furthermore, not only the Attorney General, but also individual citizens of the State of New York and trade associations, will be entitled to seek judicial enforcement of their obligations by companies.

New obligations arriving in Europe: Corporate Sustainability Due Diligence Directive

We have talked so far about the new legislation arriving from overseas, but important new requests regarding due diligence and supply chain tracking also come from the European Union.

On 23 February, in fact, the European Commission adopted the proposal for a Directive on the due diligence of companies in matters of sustainability. The proposal follows the resolution adopted in March 2021, precisely following the Xinjiang scandal, with which the European Parliament requested an intervention on the subject and presented its own draft text.

The new directive, if approved, will provide new and significant obligations for companies with respect to the prevention and neutralization of the negative effects on human rights and the environment resulting from their own activities and those of their commercial partners.

In particular, according to the current text, companies will be required to:

• integrate the duty of care into corporate policies, adopting codes of conduct that illustrate the rules and principles to be followed by employees and subsidiaries;
• take steps to identify actual or potential negative impacts on human rights and the environment caused by their activities or those of companies with which they have established business relationships;
• prepare and implement an operational plan for the prevention of negative impacts on human rights and the environment and ask each commercial partner with whom they have a direct business relationship contractual guarantees regarding compliance with the code of conduct;
•  if an adverse impact is verified, neutralize it or minimize its extent, including through the payment of compensation to the individuals and communities affected, and prepare and implement a corrective action plan that provides for reasonable and precise deadlines;
• offer targeted and proportionate support to SMEs with which they maintain a consolidated business relationship if compliance with the code of conduct, the operational prevention plan and the corrective action plan jeopardizes their economic viability;
• suspend or terminate business relationships with partners who fail to comply with their obligations or are responsible for violations of codes of conduct;
• establish and maintain an effective procedure for reporting violations;
• monitor the effectiveness of the policies and due diligence measures adopted;
• publicly account through appropriate means of information of the fulfillment of the obligations.

The new obligations will affect all companies formed in accordance with the law of a Member State which, in the last financial year, had, on average, more than 500 employees and a worldwide net turnover of more than €150 million, as well as foreign companies which generated in the European Union a turnover in line with these thresholds. However, it is important to underline that the current bill provides that these limits are reduced to 250 employees and € 40 million in turnover for companies operating in "high impact sectors", including that relating to the "manufacture of fabrics, leathers and related products (including footwear) and wholesale of fabrics, clothing and footwear”.

The proposal is currently being examined by the European Parliament and Council for approval. Once adopted, member states will have two years to transpose the Directive.

Conclusions

According to Fashion Revolution's Fashion Transparency Index 2021, 47% of surveyed brands have published a list of tier-1 suppliers, only 27% have published information on tier-2 collaborations, and a paltry 11% have provided information on raw material producers.

Unlike the food sector, which is subject to strict regulations and the scrutiny of ad hoc government departments, fashion brands have not so far been forced to reveal their sources; yet the production of clothing can have a very high ethical cost: from the collapse of Rana Plaza in 2013 to the denunciation of the labor camps in Xinjiang in 2021, the scandals in which big brands have been involved are many.

Sector and consumer associations have long been calling for greater transparency and accountability on the part of the sector and with these legislative initiatives, the institutions are responding to the request.

The effectiveness of the intervention and the effects it will have on the sector will be verified in the coming years; as of now, however, it is necessary for companies to prepare themselves to return the expenses that will be forced to support profitable investments and not mere costs, intercepting the requests of that part of the market that is increasingly interested in the purchase of ethically produced clothing.

Cikis Studio can help your company in this adjustment process, establishing priorities and intermediate objectives to make the supply chain not only more ethical, but also more efficient.