Conventional wisdom in the West suggests that labor and ethical standards are problems — just not here. But as LQRA’s JP Stevenson explores data that says this simply is not the case.
While many global companies are coming to grips with environmental monitoring and reporting, LRQA’s latest bi-annual supply chain ESG risk ratings report suggests that economic and geopolitical turbulence is disrupting ESG standards in labor supply chains.
The common perception is that Eastern production hubs like China, Bangladesh and Vietnam have greater problems with ethical and labor standards than their Western counterparts. However, data we have compiled from over 20,000 audits worldwide in the last year contradicts this notion.
Many Western markets, presumed by some to be excluded from the most damning ESG risk events, were revealed to be higher risk in the past year. The United States, in particular, exhibited a decrease in every key labor index, including forced labor and child labor, with countries in the EU following close behind.
There are three key reasons for this drop in ESG ratings:
Forced labor related violations became more prevalent across developed markets, in part due to increased reliance on foreign migrant workers.
Among the most vulnerable labor cohorts, foreign migrant workers are especially at risk of becoming entrapped in forced labor arrangements due to their irregular status and limited access to social and legal protection.
In 2020, the International Organization for Migration noted the migration of people from Mexico to the United States was the highest migration corridor worldwide. Other Western nations experiencing a high degree of exposure to forced labor practices include the United Kingdom, Canada and Australia. Spain, Italy and Greece, particularly in sectors such as agriculture, construction and domestic work, often serve as entry points for migrants and refugees from Africa and the Middle East.
Another result of the increasing number of migrant workers is rising child labor in the West. Adding to this is poor enforcement of child labor laws across various states in the U.S. There have been numerous investigations that have revealed the use of child labor in the agricultural sector and directly implicated many of the West’s largest consumer product brands, especially in the U.S. The number of children employed who are under 15, excessive working hours and poorly enforced laws across many states have contributed to this. Thirty-three of them, including Texas, California and New York, are now ranked as high-risk. No American state received a rating of low risk, or even medium risk, which puts them at par with production hubs like China and Vietnam.
Inhumane treatment of workers
The rapid rise of e-commerce globally has led to an increase in warehouse workers, who are often exploited. Kansas, New York and California were ranked as extreme risk for inhumane treatment of workers, thanks to practices such as subjecting workers to unrealistic productivity targets, excessive surveillance, ill treatment of pregnant or disabled workers, poor safety measures and a lack of adequate breaks.
How are Western corporate practices affecting suppliers in other nations?
There is evidence that a combination of lower prices, changing buying practices and new legislation is creating conflicting pressures on non-Western manufacturers and producers. This has led to a decrease in audit transparency, especially in the wake of the pandemic, with auditors unable to access accurate information and make conclusions from site visits and suppliers continuing to struggle to balance commercial and social challenges.
If audit deception is increasing, it’s important to know what the underlying reasons are so action can be taken to mitigate risk. There are a few key areas to watch out for:
- Tight production deadlines and turnaround times may lead to excessive working hours. This could be down to buying practices, such as orders being amended on late notice, or shorter lead times, for example. Often the requirements to deliver a product on time conflict with social compliance, which adds to the pressure suppliers face, resulting in an increased amount of false data and audit deception.
- Low margins linked to corporate buying practices may motivate suppliers to cut costs. Factories that are struggling financially look for ways to compete and survive, which can result in non-compliance and less transparency. There is an increasing amount of pressure on suppliers to deliver more at a lower price, which is incredibly difficult to do while adhering to increasingly stringent standards and social compliance policies.
- Globally, auditing standards are growing increasingly more thorough. Greater attention is being paid to every layer of a company’s supply chain and ESG principles. Incoming due diligence regulations such as the EU’s Corporate Sustainability Reporting Directive (CSRD) and the U.S. Uyghur Forced Labor Prevention Act (UFLPA) have led to suppliers resorting to falsification of data and limiting auditor access to their facilities and documents.
- The use of “one-size-fits-all” industry scheme audits may cause suppliers to conceal issues. This approach can discourage suppliers from being transparent about their challenges and non-compliant practices during audits, in fear of facing penalties from buyers or losing business. This has led to an overall decrease in transparency in APAC countries like China and Vietnam, which are production hubs for various retail and consumer goods giants.
How can these be improved?
The current geopolitical, economic and legislative climate has made it increasingly difficult for businesses to be confident about ESG risk in their supply chains. Higher levels of due diligence and systematic and proactive risk assessment, monitoring and management are needed to enable companies to better monitor risk in their supply chain practices.
Operations should be thoroughly audited, with organizations working more closely with suppliers to ensure accuracy and transparency in reporting wherever possible. This may involve convening working groups across operations and putting new processes in place to gather and validate the relevant supply chain data.
It is only through responsible sourcing programs and insightful, quality data that organizations can start to truly mitigate ESG risk and continue to meet both customer and investor expectations.