AN INVESTOR GUIDE TO ADDRESSING FORCED LABOR IN THE APPAREL INDUSTRY AUTHOR Nancy Reyes Mullins, Master of Development Practice, Class 2020 SOURCE Human Rights and Business Initiative, UC Berkeley PUBLISHED July 2020 Contents EXECUTIVE SUMMARY 3 ISSUE BACKGROUND 6 THE INVESTMENT CASE 8 Materiality 8 Apparel Industry Risks Related to Forced Labor 9 Investor Expectations 10 Fiduciary Duty 11 ADDRESSING FORCED LABOR 12 Regulation 12 Supply Chain Management 17 The Corporate Responsibility to Respect 19 GUIDANCE FOR INVESTORS 20 Recommendations 20 Due Diligence Process 22 Conclusion 28 APPENDICES 34 Appendix A - Country Risk 34 Appendix B - Apparel Company Benchmarks 35 Appendix C - Investment Analyst Survey 42 2 EXECUTIVE SUMMARY The issue of forced labor is one that has received much attention from civil society organizations and increasing attention from governments, but has not yet been widely acknowledged by the investment community. Investors are faced with wildly fluctuating markets, demanding clients, tight deadlines, and the challenge of identifying for each prospective investment which issues and metrics should be considered and prioritized when making investment decisions. This Guide is intended to assist with the last item -- how to conduct due diligence, specifically as it relates to forced labor in the apparel industry. It approaches due diligence based on well established human rights frameworks, most notably The UN Guiding Principles on Business and Human Right, which under Guiding Principle 17, states that “In order to identify, prevent, mitigate and account for how they [companies] address their adverse human rights impacts, business enterprises should carry out human rights due diligence1 .” Globally, slavery is estimated to generate $150bn in profits each year, and approximately one third ($46.9 billion) is generated in developed countries. So, regardless of whether a business is based in Italy or Indonesia, investors in the US are likely to have exposure to forced labor in their portfolios. A survey of 31 analysts found that investors recognize the importance of forced labor metrics, but also that there is no primary tool or resource used by the majority of those conducting research on this issue. Data on forced labor is distributed across company reports, policies, nongovernmental organizations, and other third-party sources. This fragmentation makes it very challenging for investors to aggregate the information and identify which factors matter. However, the good news is that there is data out there, and substantial efforts are being made to aggregate and report it in a way that can be utilized by investors and the public at large. With the goal of helping investors identify how they can approach this issue, this Guide uses the apparel industry as an example of an industry in need of their attention, and concludes with recommendations of how to begin addressing it through their analysis. Although the target audience is institutional asset managers, it may also be of value to individual investors interested in understanding how their investments may be exposed to forced labor. All of the data sources mentioned in the guide are publicly available. It is the hope of the author that the proposed guidance will make identifying forced labor an issue that is both urgent and feasible, and by doing so, remove a barrier to addressing and ultimately eliminating it. 1 https://mk0globalnapshvllfq4.kinstacdn.com/wp-content/uploads/2018/08/un-guiding-principles-on-business-and-human-rights.pdf 3 The impact of the current global crisis, COVID-19, on laborers in the apparel industry As this paper is being finalized, the world is faced with a global crisis that has brought most businesses to a halt. In response to the spread of COVID-19, many countries have applied some form of shelter-in-place, requiring citizens to social distance and all but essential businesses to close for an unknown period of time. This uncertainty means that demand for clothing has plummeted and fashion brands have responded by cancelling orders from their suppliers. Manufacturers all along fashion’s complex supply chain, already fragile to slight disruptions, are scrambling to cut costs and labor is one of the easiest areas for them to immediately make changes. Workers in developing countries, where the majority of apparel manufacturers are located, already struggling to make a living, will be pushed further into poverty. Free the Slaves, an NGO which campaigns against modern slavery, has issued a call to action for society to pl an for the global pandemic’s consequences, including when debt will force many families into forced labor. They warn that traffickers with false promises of lucrative work abroad will target impoverished villages2 . The Partnership for Sustainable Textiles (aka The Textiles Partnership), founded in October 2014 in response to the deadly accidents in textile factories in Bangladesh and Pakistan, has created a centralized resource page to help companies stay up to date with the latest industry developments related to the COVID-19 crisis, as well as guidelines for responsible purchasing practices to mitigate short-term negative effects, with additional guidelines to be developed for the longer term. The guidelines are publicly available on their website3 . There was a clear need for better supply chain management prior to the Covid-19 outbreak. There is an even greater need now. As institutions begin to rebuild from the Covid-19 crisis, much like the rebuilding after a major war, there is an opportunity to establish more transparent and responsible standards. The investment industry can be a major catalyst to set higher standards and put pressure on companies to disclose how they are managing their forced labor. I hope that this report will be one of many tools to support that endeavor. 2 https://www.freetheslaves.net/covid-19-impact-on-communities-plagued-by-slavery/ 3 https://www.textilbuendnis.com/en/covid-19/ 4 Abbreviations AGM Annual General Meeting BCG Boston Consulting Group BHRRC Business & Human Rights Resource Centre CHRB Corporate Human Rights Benchmark CLRA Consumer Legal Remedies Act ESG Environmental, Social and Governance FAL Fashion Advertising Law FTI Fashion Transparency Index GFA Global Fashion Agenda GRI Global Reporting Initiative HRW Human Rights Watch IAHR Investor Alliance for Human Rights ICT Information and Communications Technology IFC International Finance Corporation IIRC International Integrated Reporting Council ILAB Bureau of International Labor Affairs ILO International Labour Organization KTC KnowTheChain NGO Non-Governmental Organization OECD Organisation for Economic Co-operation and Development PRI Principles for Responsible Investment RAFI Human Rights Reporting and Assurance Frameworks Initiative SAC Sustainable Apparel Coalition SASB Sustainability Accounting Standards Board SDG Sustainable Development Goal UCL Unfair Competition Law UNEP FI United Nations Environment Programme Finance Initiative UNGP United Nations Guiding Principles on Business and Human Rights US SIF The Forum for Sustainable and Responsible Investment 5 ISSUE BACKGROUND Forced Labor The International Labour Organization (ILO), a United Nations agency whose mandate is to advance social justice and promote decent work, reports that at any given time, an estimated 40.3 million people are in modern slavery4 . By many accounts that’s the highest number of people in modern slavery than at any other period of time. Modern slavery takes many forms, including domestic servitude, sex trafficking, forced labor, child labor, and criminal exploitation. Of those in modern slavery, 24.9 million are living in conditions of forced labor, and of those 24.9 million, 16 million are exploited in the private sector5 . Forced labor refers to work undertaken involuntarily, often through manipulation, and typically enforced by threat of physical violence, deportation, or financial obligation. The most common types of forced labor in the apparel industry are bonded labor, labor resulting from trafficking, and state-imposed forced labor. Forms of Forced Labor The apparel industry, one of the largest consumer goods sectors in the world, was selected as the focus of this report for its high risk of exposure to forced labor, as well as its global economic significance. The International Labour Organization (ILO) estimates that of those in forced labor in the private sector, half (8.2 million) are in bonded labor, and that proportion rises above 70% for adults who were forced to work in manufacturing (which includes apparel, agriculture, or domestic work) 6. Further, the global nature of the apparel industry value chain means that unchecked, any apparel product may unwittingly be produced using forced labor. The Walk Free Foundation’s 2018 Global Slavery Index7 , which provides a country by country ranking of the number of people in modern slavery, identified apparel (garments) as one of the top five products imported into the United States at risk of having been made using forced labor (along 4 https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_575479.pd 5 https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_575479.pd 6 https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_575479.pdf 7 https://www.globalslaveryindex.org/resources/downloads/ 6 with electronics, fish, timber, and cocoa)8 . Solving this issue requires the collaboration