Beyond Compliance: Adding Value Along the Supply Chain
Companies increasingly view Environmental, Social and Governance (ESG) compliance and audit systems as an effective way to manage vast and complex supply chains. Brands that monitor the social and environmental performance of suppliers can mitigate reputational risk, find cost-savings, and add value to suppliers and the communities in which they operate.
AccountAbility is working with the German Development Agency, GTZ, to understand the compliance and audit system in the apparel and textiles sector in India. This research and engagement process will identify pressure points in the system and make recommendations for improvements so that manufacturers see a strong business case for improving ESG performance.
It is well known that audits can help factories identify inefficiencies in their production practices. For example, an audit that looks at water usage in a factory's production process could encourage the factory to adopt water recycling measures. These outcomes not only improve environmental performance but also help the factory save money on utilities. Audits also allow manufacturers to access markets in which buyers demand higher levels of ESG performance.
However, in a world where factory owners need to guarantee low prices and commit to quick production turnaround times, meeting ESG requirements is neither easy, nor cheap. Even where factories are fully compliant, they are still subject to the same price and time pressures that buyers place on all suppliers. What incentive is there for manufacturers to comply?
To ensure that audit and compliance systems benefit the environment, along with workers, manufacturers, and buyers, preliminary findings from AccountAbility's research in India suggest:
- Buyers should extend contracts to sustainable factories: Buyers should reward companies that comply with ESG requirements by offering incentives of preferential contracts and long-term relationships.
- Buyers should train and support suppliers to enhance ESG performance: Buyers and factory owners have an opportunity to provide training on issues such as reducing toxic sludge or enhancing health and safety. In fact, this is already happening in some areas. In India, the Okhla Garment Textile Cluster Association in New Delhi provides training for its members to enhance their energy efficiency. This approach is reducing costs, improving the ESG performance and is making the cluster more desirable to international buyers.
- Manufacturers should adopt voluntary standards that strengthen internal compliance systems: Certification schemes such as SA8000, or principles established by sector groups such as the Better Cotton Initiative, can help companies understand where the social and environmental risks lie in their supply chain and offer mitigation solutions. By adhering to these standards, companies can manage risks and increase revenue, while enhancing ESG performance.
- Integrate worker feedback into audits: The compliance system currently relies on external auditors coming into factories and assessing them using "tick-box" criteria. However this approach does not unearth core issues in many factories, or issues such as industrial relations or discrimination. Embedding worker feedback into the compliance system helps ensure that audits remain material, inclusive, and up to date.
- Develop a sector-wide approach to audits: The textile sector, like many others, is characterised by multiple brands ordering from the same supplier, resulting in factories undergoing multiple audits throughout the year.
Developing an industry standard for audits that includes ESG criteria will overcome the current 'audit fatigue' and enhance performance. It is clear that audit and compliance systems need an overhaul in order to maintain legitimacy and impact. Embedding the principles of accountability into the system -- by ensuring that workers are involved in audits, the most relevant questions are being asked, and manufactures are in a position to respond to expectations -- will take compliance to the next, very necessary, phase.
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