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The fashion industry’s supply chain practices contribute to climate change and foster poor working conditions, but sweeping European regulations are poised to change that, and U.S. companies will not be able to avoid the resulting changes.
In recent years, the Uighur Forced Labor Prevention Act was passed in the United States, banning products from the Xinjiang Uighur Autonomous Region, where China is accused of detaining more than one million Uighurs, and U.S. lawmakers have questioned whether brands such as SHEIN have used Uighur forced labor in their supply chains. In January 2022, the Garment Worker Protection Act went into effect in California, prohibiting California-based factories from paying workers a per-piece wage and making even brands based outside the state liable for wage violations in the factories they source from.
But those restrictions are about to get tougher: As early as January 2024, a series of European Union regulations will require specific changes to companies’ supply chains, affecting US fashion brands with large markets in the region. US regulations may be moving in the same direction: A proposed bill in New York State uses similar tactics to target fashion brands on climate and labor issues.
Maxine Bedat, president of the New York-based nonprofit New Standard Institute, said the restrictions are not a passing fad.
“It’s going to happen,” she said. “If we can show leadership and get ahead of it, we’ll end up being in a position that’s not only morally right, but also right from a market perspective.”
She encourages companies to “jump in.”
Making the supply chain transparent
In December 2022, the EU passed the Corporate Sustainability Reporting Directive. According to a press release, the directive requires all large EU companies, “regardless of whether they are listed on the stock market,” to “disclose data on the impact of their activities on people and the planet, and on the sustainability risks to which they are exposed,” and to have this data audited by a third party. By 2025, the directive will also apply to non-EU companies with annual sales of more than 150 million euros (about $163 million). In addition, small and medium-sized non-EU companies listed on European stock markets can defer reporting and compliance requirements until 2028. According to a report provided to The Wall Street Journal by financial data company Refinitiv, the CSRD will likely apply to more than 3,000 U.S. companies.
The draft standard is currently publicly available and covers a range of issues including ocean impacts, climate change and decent wages for supply chain workers and “affected communities”. The standard requires companies to demonstrate how greenhouse gas emissions from their operations align with the goal of limiting global temperature rise to 1.5 degrees Celsius, a goal of the 2015 international climate treaty. Companies are also required to demonstrate that they take into account the perspectives of supply chain workers when making decisions about their welfare.
Justin Nolan, director of the Australian Human Rights Institute and professor of law at the University of New South Wales in Sydney, said mandatory reporting was a necessary first step towards change.
“Most companies have no visibility into their supply chain,” Nolan said.
They may know about their first-tier suppliers, but “things like modern slavery and forced labor are most commonly found lower down the supply chain,” she said.
The second EU bill would hit even more foreign companies by applying to any company with revenues of more than 40 million euros in Europe, in effect upping the ante and moving beyond surveillance to sanctions.
The Due Diligence Directive, which will come into force in 3-4 years, will require companies to monitor and “prevent, terminate or mitigate” issues such as pollution, biodiversity loss, slavery and labour exploitation. This will affect the companies themselves and apply to the entire value chain, “including suppliers as well as areas such as sales, distribution, transport, storage and waste management,” according to the official press release. Sanctions include the removal of goods from the market and fines of at least 5% of global revenues.
Nolan said the due diligence directive would force brands to consider labor issues more holistically, rather than simply focusing on the worst offenders, such as forced labor of Uighurs. She cited the 2013 Rana Plaza factory collapse in Bangladesh, in which more than 1,100 people died.
“It wasn’t so much a tragedy of forced labour as it was a tragedy of no one caring about the state of the buildings and the neglect of basic occupational health and safety by brands and factories for years,” she said.
These regulations will force brands to rethink their traditional model of spending big on marketing and distribution and saving on labor costs. Brands may want to pretend they’re innocent, but getting cheap deals with tier 1 suppliers means workers further down the supply chain are treated poorly, Nolan said.
“Many brands [the business plan] “And people will say, oh, it’s terrible what’s going on there,” she says, “but it actually starts with them.”
Change from Within
Europe also has legislation targeting environmental supply chain issues, something even smaller brands cannot avoid. The Ecodesign Framework for Sustainable Products, passed on July 12 and expected to come into force within the next 2-3 years, applies to all products sold in Europe. According to the final document, the European Commission will now set environmental and sustainability standards that “enable products that are climate neutral, resource efficient and suitable for the circular economy.” It also mandates “product passports” to make it easier for consumers to understand and compare the environmental impact of products based on life cycle assessments.
Philip Meister, global head of fashion and sporting goods at consulting firm Quantis, said documenting and changing supply chains “requires a complete overhaul of the fashion model.”
Currently, sustainability and business concerns within companies “are still managed in two separate worlds,” Meister said.
The two need to be integrated to change how products are sourced, he said, and “it will definitely change the way the company operates.”
Brands also need to get more involved in their supply chain practices, according to Bedat. Cleaning up the supply chain cannot be achieved by simply changing suppliers, he said, as the current landscape is shaped by the demand for cheap manufacturing and raw materials.
“The big overall change is [going from] “We need to view our suppliers not just as trading partners but as true long-term partnerships because improving sustainability requires joint investments,” Bedat said.
When it comes to ensuring workers are treated fairly, Bedat said, “the responsibility lies not just with the suppliers but with the brands themselves” – something the Garment Worker Protection Act already makes clear, for example.
Lina Hirwani, head of sustainability and human rights at international auditing firm KPMG, whose clients include American fashion brands, agreed.
“From a sustainability perspective, cutting ties with suppliers who are lacking in sustainability behavior is a last resort,” she said in an email to Fashion Dive. “Leverage matters, and when organizations cut ties, they miss an opportunity to effect positive change. This is especially true when there are issues that threaten human rights.”
“Fashion brands need to start now.”
Meanwhile, in the US, New York state is considering the New York Fashion Act. Similar to the European regulation, the bill would require companies with global revenues over $100 million to disclose and be accountable for their supply chain practices that take into account environmental and human rights concerns. The bill proposes fines of up to 2% of annual revenues, with the amount to be reallocated to affected workers or environmental projects. It is currently in committee and is expected to be taken up in the 2024 legislative session that begins in January. At the federal level, Senator Kirsten Gillibrand (D-NY) formally reintroduced the Fashion Accountability and Real Institutional Reform Act in the US Senate this month. Among other changes, the bill would hold both brands and factories liable for wage violations, similar to California’s Garment Worker Protection Act.
Given the current situation, “fashion brands need to start now if they want to comply,” even if the new rules don’t come into effect for several years, Meister said.
Like any big change such as digitalization, this one may require some upfront investment, but costs are likely to stabilize in the long term, he added. Smaller businesses could benefit because they can be more agile in the transition, and transparency and closer partnerships with suppliers could also lead to unexpected opportunities for innovation and efficiency, he said.
Far-reaching laws level the playing field, according to Bedat, who helped write the New York Fashion Law. Regulations like the EU law and the New York Fashion Law correct “market failures,” he said, meaning that until now some companies have been able to benefit from sustainable practices without paying the extra costs they entail.
“Right now, companies are at a competitive disadvantage if they do the right thing,” she said. “This needs to change,” she added.
New ways of doing business
Manufacturing countries lack laws to protect workers because, historically, “producing countries have been at a global disadvantage in enacting environmental and labor laws,” Bedat later wrote in an email to Fashion Dive. “Let’s say Bangladesh dramatically increases its minimum wage, raising production costs. If there are no laws in the selling country, fashion brands will simply choose to produce elsewhere. That’s the global trend we’re facing.”
One unusual example is the international agreement that was created in the wake of the Rana Plaza tragedy, which saw over 200 brands and factories in Bangladesh directly agree to improve labour practices and extend to Pakistan, while Bangladeshi trade unions continue to fight for fairer wages.
More is expected in Europe, where, for example, the EU Strategy on Sustainable and Circular Textiles adopted this year announced a regional commitment to legislate to ensure that textile products entering the EU market “have a long life, are recyclable, are made from recycled fibres wherever possible, are free of hazardous substances and are produced with respect for social rights and the environment by 2030.”
Meister said he expects EU reporting and due diligence laws will influence decision-making in other countries, and that with many companies changing their practices, it’s likely to create “healthy peer pressure” for brands that aren’t directly subject to the laws.
“This is the way business is done, and it should be,” Meister said.
