The fashion industry’s supply chain practices contribute to climate change and foster poor working conditions. But drastic European regulation is coming to change that — and American companies won’t be able to avoid the resulting changes.
In the U.S., recent years have seen the passing of the Uyghur Forced Labor Prevention Act, which bans products from the Xinjiang region of China, where China has been accused of detaining more than a million Uyghur people — and U.S. lawmakers have called into question whether brands such as Shein used forced Uyghur labor in their supply chains. In January 2022, the Garment Worker Protection Act came into effect in California, forbidding factories based in that state from paying their workers per piece and holding brands, even ones based outside the state, responsible for wage violations in the factories they source from.
But such regulations are about to become much tougher. As early as January 2024, a series of European Union regulations will demand concrete changes to company supply chains, impacting American fashion brands with sizable markets in the region. U.S. regulation could be moving in the same direction: a proposed New York bill is targeting climate and labor issues in fashion brands with similar tactics.
Such regulations are not a fleeting trend, said Maxine Bédat, director of the New York-based nonprofit New Standard Institute.
“It’s going to happen,” she said. “You can take a leadership position and get ahead of it, and you’re ultimately going to be in the right, not just the right place morally but from the market as well.”
She encourages companies to “dive in.”
Making murky supply chains transparent
In December 2022, the EU passed the Corporate Sustainability Reporting Directive, which requires all large EU companies, “whether listed on stock markets or not” to “disclose data on the impact of their activities on people and the planet and any sustainability risks they are exposed to” and have this data audited by a third party, according to the press announcement. By 2025, this directive will also apply to non-EU companies with more than 150 million euro, or approximately $163 million in annual sales revenue. Additionally, small- to medium-sized non-EU enterprises listed on European stock markets can defer reporting and compliance requirements until 2028. According to a report by the financial data firm Refinitiv and provided to The Wall Street Journal, the CSRD will likely apply to more than 3000 U.S. companies.
A draft of the standards is out now for public review and covers a wide variety of issues, including marine impacts, climate change, and adequate wages of supply chain workers and “affected communities.” The standards require businesses to demonstrate how their operations’ greenhouse gas emissions comply with a 2015 international climate treaty’s goal of limiting global temperature increases to 1.5 degrees Celsius. Businesses are also required to show that they take into account supply chain workers’ perspectives when they make decisions related to those workers’ well-being.
The reporting requirements are a necessary first step toward change, said Justine Nolan, director of the Australian Human Rights Institute and a professor in the faculty of law and justice at the University of New South Wales in Sydney.
“Most companies don’t have visibility over their supply chain,” said Nolan.
They might know their tier-one suppliers, but “things like modern slavery and forced labor are most common in the lower tiers of the supply chain,” she said.
A second piece of EU legislation will hit even more foreign companies, applying to any business with more than 40 million euros in European revenue. This legislation ups the ante, so to speak, and moves beyond monitoring into sanctioning.
The Due Diligence Directive, which will become effective in three to four years, requires companies to monitor and “prevent, end or mitigate” issues such as pollution, biodiversity loss, slavery and labor exploitation. This will affect the company itself and apply across the value chain, “including not only suppliers but also sale, distribution, transport, storage, waste-management and other areas,” according to the official press release. Sanctions include taking goods off the market and fines of at least 5% of worldwide revenue.
The Due Diligence Directive will force brands to consider labor issues more holistically, Nolan said, rather than allowing them to simply focus on the worst offenders, such as Uyghur forced labor. She gave the example of the 2013 collapse of the Rana Plaza factory in Bangladesh, in which more than 1,100 people died.
“That was not a tragedy of forced labor so much,” she said. “It was a tragedy of no one caring about the condition of a building, basic occupational health and safety that was ignored for years by brands and by factories.”
This type of regulation will require brands to rethink the usual model of spending big on marketing and distribution and saving money on labor. Brands may want to play innocent, but cheap prices contracted with a first-tier supplier mean that workers further down the chain are getting short-shrifted, Nolan said.
“Too many brands tend to skip over [the business plan] and say, oh, that’s terrible what’s happening down there,” she said. “But it’s actually starting with them.”
Change from within
There’s also European legislation targeted at environmental supply chain issues that no fashion brand, not even the smaller ones, is likely to avoid. The Ecodesign for Sustainable Products Framework, passed on July 12 and likely to come into effect within two to three years, applies to every product for sale in Europe. The European Commission will now set environmental and sustainability standards “to enable products fit for a climate-neutral, resource-efficient and circular economy,” according to the final text. It also mandates a “product passport” so consumers can easily understand and compare products’ environmental impacts based on life-cycle assessments.
Being able to document and change supply chains “requires an overhaul of the fashion model,” said Philipp Meister, global fashion and sporting goods lead at consultancy firm Quantis.
Currently, sustainability and business concerns within a corporation are “still managed in two separate worlds,” Meister said.
The two should be integrated to change how products are sourced, and “that will definitely change how businesses are going to be operated,” he said.
Brands will also have to get more involved with supply chain practices, according to Bédat. The current landscape has been shaped by demand for cheap manufacturing and raw materials, so cleaning up a supply chain won’t be achieved by simply changing suppliers, she said.
“I think the overall sea change is [going from] seeing your suppliers as something just transactional to a real long-term partnership, because it will require co-investment in sustainability upgrades,” Bédat said.
When it comes to ensuring that workers are treated fairly, Bedat said, “the responsibility won’t just lie with the supplier, but with the brand itself,” as the Garment Worker Protection Act, for example, already affirms.
Lina Hilwani, sustainability and human rights lead at KPMG, an international auditing firm whose clients include American fashion brands, agreed.
“From a sustainability perspective, the last resort is to exit a supplier due to lack of action on sustainability,” she wrote in an email to Fashion Dive. “Leverage is key, and if an [organization] exits a relationship, an opportunity is lost to make a positive change. This is particularly true when there are issues threatening human rights.”
“Fashion brands need to start now”
Meanwhile in the U.S., New York is considering the New York Fashion Act. Similar to the European regulation, this would require companies with global revenues of more than $100 million to disclose and be held accountable for supply chain practices, taking into account environmental and human rights concerns. The bill proposes fines of up to 2% of annual revenues, which would be redirected to affected workers or to environmental projects. It is currently in committee and will be taken up in the 2024 legislative session, which starts in January. At the federal level, this month Sen. Kirsten Gillibrand, D-N.Y., formally reintroduced the Fashioning Accountability and Building Real Institutional Change Act to the U.S. Senate. Among other changes, the bill, like California’s Garment Worker Protection Act, would make brands as well as factories responsible for wage violations.
Given the current state of things, even if some new rules won’t apply for a few more years, “fashion brands need to start now if they want to comply,” Meister said.
Like any major change — digitization, for example — this one may require initial investments, but costs will likely level out in the long run, he added. Smaller companies could benefit because they can be more agile in making the transition, he said, and transparency and closer partnership with suppliers may also unexpectedly lead to opportunities to innovate and drive efficiency.
Wide-reaching legislation levels the playing field, according to Bédat, who has helped shape the New York Fashion Act. Regulations such as the EU laws or the New York Fashion Act correct “market failures,” she said. This means that until now, some companies have benefited from not paying the extra costs associated with sustainable practices.
“At the moment, a company is at a competitive disadvantage” when they do the right thing, she said. ”That needs to change,” she added.
The new way of doing business
Within manufacturing countries, there’s a lack of legislation to protect workers. That’s because, until now, “production countries put themselves at a global competitive disadvantage in passing environmental and labor labor laws,” Bédat wrote later in an email to Fashion Dive. “Let’s say Bangladesh substantially increases their minimum wage and thus production costs increase, well, without laws in the selling countries, the fashion brands would just choose a different production location. That is the global dynamic we find ourselves in.”
One rare example is the International Accord, which was created in the wake of the Rana Plaza tragedy. The Accord is a direct agreement between more than 200 brands and factories in Bangladesh to improve labor practices, and is expanding to Pakistan. Meanwhile, unions in Bangladesh are still fighting for fairer wages.
In Europe, there is also more to come. The EU Strategy for Sustainable and Circular Textiles, for example, adopted this year, announces the region’s commitment to enacting legislation “to ensure that by 2030 textile products placed on the EU market are long-lived and recyclable, made as much a possible of recycled fibers, free of hazardous substances and produced in respect of social rights and the environment.”
Meister said he would expect to see the EU’s reporting and due diligence laws influencing other countries’ decision-making as well. And as a swath of companies change their practices, this would likely “create a healthy peer pressure” on brands that aren’t directly subject to legislation, he said.
“This is going to be, and should be, the way of doing business, full stop,” Meister said.