AsiaLaborEnviroRisk2013forSRIinvestorsKateLarsen8april2013

Asia CSR
Supply Chain
labour and
environmental
conditions and
risks,
summer 2013.
Consumer goods factory
production
Presentation April 2013 by Katie Larsen katie@csrwinwin.com.
Independant CSR-Supply Chain labour/environmental standards consultant.
Copyright or please acknowledge to use. Thank you to CSR industry & NGO respondents to survey.

Agenda (15mins)
• Scope: Consumer goods, upstream (more factory conditions focused
review)
1.Some Top 10 risks and Who Cares? (How are they material?)
2.Review Top 10 examples
• Touching on throughout:
• What does a survey of industry practitioners think will happen
summer 2013?
• What can investors encourage brands to do? Opportunities to align
what's better for workers, environment, factories, brands and
investors.
Presentation April 2013 by Katie Larsen katie@csrwinwin.com. Independant CSR-Supply Chain labour/environmental standards consultant.

The Region:
hot-spots

The survey
• Asia reps from:
• 18 brands
• 5 consultant/NGO/think tank
• Roles:
• CSR, labour standards, social compliance,
sustainability, sustainable manufacturing, etc
• Manager, Director, Senior Manager, Officer, etc
• Industries:
• 5 working with tech/IT (some crossover)
• About 20 working with
fashion/garment/shoes/homewear
• Nationalities:
• American, Chinese, HKese, Swedish, Japanese
• Companies:
• American, British, Swiss, Swedish, German
• Sent April 4
12. Do you, or did you in recent
years work in an international brand
CSR team?

Top10 issues Review.
Survey (responses throughout) asked :
“Thinking about labour (primarily, and some environmental) issues in
the Asia supply chains for apparel and lifestyle goods companies and
brands,
and what you might like investors who own shares in publicly listed
international brands to know (so that they might influence companies to
improve how they support workers in the supply chain):”

Top 10 risks in the region impacting
supply chains in recent years. Factory:
1. Faintings
2. Fires
3. Water pollution
4. Child labour
5. Prison labour
6. Workers Strikes
7. Worker Suicides
8. Worker Shortages
9. Natural disasters: floods, tsunami
10. Bankruptcy/boss runs off cases

Who Cares?
Top 10 examples
1. US university customers: Badidas case
2. Western brands: Paying after Badidas case
3. Western customers: H&M media over Kingsland
4. Western customers: Greenpeace “Detox”
5. Western customers: Apple Foxconn
6. US workers: Walmart strikes, solidarity
7. Brands: Shipping challenges after Thai floods
8. Chinese customers: IPE GCA list
9. Chinese customers: China worker treatment
10. Asian communities: Bangladesh/Pakistan fires

What do you
see as key risks
in the Asia
supply chain
summer 2013
which be in the
press and/or
cause delayed
shipment?
Total votes 24

1. Mass faintings of 100s of workers in
Cambodia garment factories:
Ken Loo, Secretary General
Garment Manufacturers Association Cambodia, Sept 2012
Excessive
Overtime cause?
Massive increase
in exports 2005-
2012, without
corresponding
doubling of
workforce

1. Mass faintings of 100s of workers in
Cambodia garment factories:
Why?
1.Some indications “mass” faintings psychosomatic
2.Nevertheless, first few faintings in each factory real
Because:
3.Out in the heat to buy lunch in the middle of the day to buy lunch, plus
4.Not eating enough, plus
5.Not sleeping enough
•crowded housing in heat
•excessive work hours
Because
6.Not earning living wage, plus
7.Traveling an hour to work standing in heat in a truck
•Material impacts? Production disruption, cost, causing strikes, protests in the west against
key buying brands, unproductive when workers unwell.
•What can investors ask brands to do? Ask factories to provide morning snack and
canteens (some now do), and free seated transport to work.

Do you think faintings will continue to be in the
press?

2. Deaths of 100s of workers in Fires in
Bangladesh and Pakistan garment factories:
Why?
1.Local government not monitoring safety
2.Pakistan factory cheated on SA8000 certificate social audit:
•cheating on audits rife in “CSR” industry
•SA8000 certificate often cheated in Asia
•factories cheat for pass/fail customers who don’t use continuous improvement
approach
1.Bangladesh factory was unmonitored subcontractor:
•brands not manage risk in lower “tiers”?
•brands not checking production where declared
•Material impacts? Production disruption, lost product, caused strikes,
reputational, brands had to pay compensation in some cases
•What can investors ask brands to do? Improve auditing to include offsite
worker interviewing (recommended by NGOs) and checking production status,
increase safety training, capacity building approach

Are there
approaches
that could
improve the
quality
(ROI/value) of
audits?

**Highlight:
Brands social compliance with factories/supply-chain:
• Quick audit
• Pass or Fail (drives
cheating)
• Excessive auditing by
different customers
• Change often
• Next factory
• Rely on agents
• Don’t really know where
your product is made
• No incentive to factory
for social/environmental
compliance as buyers
move to cheaper
competitor if raise price
to pay legal wage
• High risk
• Deep audit
• Understand baseline (reduce cheating)
• Brand collaboration whenever possible
• Support capacity building overtime
(productivity, HR, communications
improvement) & monitor improvement
• Internal ownership (improving buying
practises: order timing, critical path,
prevent last minute changes, reward
improvement through balanced
scorecards)
• Longterm partnership and factory skills
grow with brands (e.g. Nike-
PoChuen/Yuyuen, Apple-Foxconn, Italian
suppliers)
• Risk known, managed, reduced
Old Model:
New Model:

Do you believe brands
should increase
investment in capacity
building in factories? If
so, in what ways?

What ROI have you seen from factory
capacity building programs?

3. Brands accused of water pollution from
China supply chain factories:
Two NGOs ongoing campaigns pushing brands on China
supply chain water pollution prevention, management,
disclosure:
a)Institute of Public and Environmental Affairs (IPE)’s
Green Choice Alliance (GCA) coordinating 40+ grassroots
NGOs across China wrote to brands requiring they check supply
chain in IPE-GCA database and report:
• 2008 ranked top 35 IT brands by who reported,
campaign “Apple rotten to the core” (FT, NY Times,
etc) until eventually responded
• 2012 ranked 50 top fashion brands, e.g. Marks&Spencer
did not respond gained poor press Vs Levis, H&M, Nike
positive. Chinese press misinterpreted rank and
criticized all brands.
•Greenpeace “Detox” and “Dirty Laundry” campaign
asked brands to commit to “Zero Discharge Roadmap”:
• targeted brands starting with Nike, Puma, Adidas,
H&M,
• more recently Italian luxury brands

NGO water pollution accusations:
•Material impacts?
•Initially, reputational.
•Rapidly cost of investing in industry collaboration (Sustainable
Apparel Coalition US$20,000 per year plus need internal experts,
projects, travel, etc) to work out how to “Detox” supply chain
•Greater cost will be in coming years when verify suppliers
complying, as environmental auditing expensive.
•May drive some sourcing out of low-cost countries if e.g.
dyehouses can’t detox as other customers demand use of “toxic”
dyes, etc
•But......driving innovation e.g. “Levis water-less jeans”, Nike new
“waterless dyeing”
•driving efficiencies e.g. NRDC “Clean by Design”, REEEP
•What can investors ask brands to do?
•If not already targeted, garment and IT selling brands with China
sourcing (most) can get ahead of competitors by:
•following Greenpeace & IPE guidance before targeted.
•Work to educate designers, suppliers and brand collaborate to
reduce water use before prices rise, communities target sites,
etc.
•Innovate.

4. Child Labour
Still a risk?
• China: labour shortage driven “holiday internship” situations
but with extremely long hours, pay not to youth workers
• Cambodia: labour shortage driven summer holiday influx
• Bangladesh: only 500/2600ish factories registered to export
so 2000+ unmonitored subcontractors
• India: pockets of areas where schooling access still poor
Material impacts?
•Obvious reputational.
•Quality issues.
•Supply chain disruption. Remediation expensive.
•Risks with new legislation? “California Transparency in Supply Chains Act” 2010,
“Transparency in UK Company Supply Chains (Eradication of Slavery)” private members bill?
•Invest in deeper auditing, unannounced, with offsite worker interviewing, more training for
audit teams (not solo auditors).
•Join industry collaborations to create solutions for remediation.
•Stay with factories and monitor that youth supported into education so supplier incentive to
hide reduced-this keeps supply chain stability also.

Are there specific
industry initiatives
you believe more
brands should be a
part of to generate
more stability long
term in Asia
working conditions
for all?:
**AFBCF: Hong Kong based
brand CSR Manager run Apparel
& Footwear Brand Collaboration
Forum (topped at 20 brands
members)

5. Prison/Forced Labour
Still a risk?
• China: as means to deal with labour shortage, “fast fashion”
urgent order shipments, rising wage rate
• Vietnam: Columbia Sportswear supplier subcontracted to
forced labour site
• North Koreans?
• Burma?
Material impacts?
•Obvious reputational.
•Inability to monitor production
•Risks with new legislation? “California Transparency in Supply Chains Act” 2010,
“Transparency in UK Company Supply Chains (Eradication of Slavery)” private members bill?
•Invest in deeper auditing, unannounced with offsite worker interviewing (allows auditors to
monitor), more training for audit teams (not solo auditors).
•Monitor production in factories

What do you think are the key
things brands should be asked
by investors to do to reduce risk
for investors (where reducing
risk and helping workers can
align):
Balanced Scorecard (still rare):
Rank (1-5). Track
record on:
Factory/Sup
plier 1
Factory/Suppli
er 2
Factory/Su
pplier 3
Price
competitiveness 4 3 4
Quality reliability 3 4 2
Ontime shipping 3 4 5
Labour standards 3 4 2
Innovation/
Product
development
3 4 4
Total Score: 16 19 17
Wins the order this season

6. Worker Strikes
Still a risk?
• China, Vietnam: “new generation” “80s generation” want
better wages
• Cambodia, Bangladesh: Demand for Living Wage
• Indonesia: Wages and use of short-term contracts
Material impacts?
•Honda production halted after key supplier in China had strike
•Reputational for Foxconn
•Indonesia strikes 2012 halted production
•Invest in balanced scorecard establishment so are rewarding factories who balance
decent wage with price, quality, shipping time
•Needs investment in stronger audit programmes so data is robust
•And supporting capacity building in factories of improved worker-management
communication
•e.g. through ILO Better Work in Cambodia, Vietnam, Indonesia.
•If Bangladesh buyer, support H&M CEO request to Prime Minister for regular review
of minimum wage rate and increase so level playing field.

Do you think factory worker
strikes will continue in summer
2013?
Total votes 18

7-8. Worker Suicides/Shortages
Still a risk?
• China: “new generation” “80s generation” want to be treated
like human beings
• sparked a national debate with academics, even politicans
commenting
• improved Apple CSR programme and IT industry efforts.
Material impacts?
•Largely reputational
•unless causes large strikes, or damages morale, productivity, and
worker hiring, retention, productivity and quality
•Some increase in cost of CSR programme, although balanced with
benefit of preventing future fires (Foxconn factory they blew up),
etc.
•Promote worker hotlines in China
•Promote worker-management communication improvement programmes
•Ensure have “critical path” for final order changes and stick to timing (no
last minute changes: Apple woke 1000s of workers midnight to make
changes to iPhone.

8. Natural Disasters
Seen in recent years
• China: Sichuan Earthquake
• China: south China snow then floods
• Thailand: Tsunami
• Thailand: Floods
• Japan: Earthquake-Tsunami
Material impacts?
•Sometimes brands couldn’t ship (for 3-8 weeks) with Thai floods
•Brands reliant on some Japanese components impacted after earthquake
•South China factories couldn’t do business when flooded
•Ensure balanced portfolio across countries
•Ask Risk Management team to work with CSR to map supply chain risk
•Join industry initiatives on water: SAC, Business for Social Responsibility (BSR)
water groups, National Resources Defense Council (NRDC),
•Set up cooperation to protect wider Watersheds

10. Bankruptcy/boss runs off
Seen in recent years:
• Cambodia: Kingsland case
• Indonesia: PT Kizone compensation paid by Nike, Dallas
Cowboys, “Badidas’ campaign to make adidas pay
• Pakistan: Factory owner disappeared after fire, German brands
paid workers compensation
• China: Frequent past cases of Korean owners locked in
factories when workers suspected they might run away
Material impacts?
•Compensation payments: Nike paid US$521,000 in PT Kizone case
(even though already paid supplier for goods)
•Reputational
•Possible supply chain or store disruption
What can investors ask brands to do?
•Improve policy so sourcing add wording to ensure suppliers will pay workers what legally due in
event of factory close down
•Use leverage of full brand voice (COO, CEO, etc) with vendors or manufacturing associations
when possible to cause factory owners to pay workers
•Hire more CSR staff with more experience to engage stakeholders and keep solutions private

New Issue:
Do you see Myanmar/Burma sourcing beginning
for listed famous garment brands?
If so, how do you rank the risk to brands reputations
compared to e.g. China?
Higher Risks due to lack of:
1.factory knowledge of labour standards
2.agreement with international human rights standards increasingly followed in
the region?
3.experienced labour standards monitoring and capacity building expertise
(third party and brand) on the ground, and solutions.

Summary: Top “Hot” issues:
1. Worker shortages
2. Workers strikes
3. Fire risk
4. Faintings (Cambodia)
5. Factory shutdown compensation protests
What can be done? Ensure brand/supplier holdings
invest in:
1.Industry Collaboration solutions (SAC, BetterWork, FLA, ETI)
2.Capacity building promotion or sponsorship to improve factory
management
3.Better auditing: offsite, unannounced, better training, FLA, etc.

AsiaLaborEnviroRisk2013forSRIinvestorsKateLarsen8april2013

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