With the COVID-19 pandemic provoking a global health and economic emergency, the OECD’s Dorothy Lovell looks at how OECD guidance on responsible business conduct can help governments and business address the impacts of COVID-19 in a way that mitigates harm to workers and supply chains in the garment sector.
The COVID-19 crisis has caused immediate and devastating impacts to many workers and supply chains, perhaps nowhere more so than in the garment sector. Retailers have experienced an instant loss of footfall as they had to close stores and a drop in demand has also hit online sales, creating direct shocks in producing economies. An ITMF survey of 700 textile companies worldwide revealed that globally current orders dropped by 31% on average. Separately, 959 factories in Bangladesh have reported demand shocks linked to COVID-19 representing 826.42 million pieces worth USD 2.67 billion of export orders either cancelled or held up by global buyers, according to Fair Wear. In addition to halting new orders, buyers are also asking suppliers not to ship clothing that has already been made and deferring payments (City A.M). In these cases, manufacturers have already incurred costs and may be in debt to their raw material suppliers. Even while some companies are repurposing their supply chains to produce personal protective equipment for medical purposes (Human Rights Watch), this may not be practical for many manufacturers and it will not provide enough jobs for all those laid off. The ramp-up and re-structuring of supply chains under incredibly short lead times may also carry other risks for workers such as excessive overtime and health and safety considerations for those risking infection by working at the height of the pandemic.
While reappraisal of stock levels and orders by fashion retailers is inevitable in the medium to long term, the cancellations that have been reported are devastating an already fragile supply base, forcing factories out of business, sending millions of workers already in precarious employment into even more dire straits, and jeopardising the resilience of the industry to turn production back on after this crisis has passed.
In terms of how companies should act responsibly in this climate, the OECD Due Diligence Guidance for Responsible Supply Chains in the Garment & Footwear Sector serves us well, providing a good basis for helping us think through these issues.
1. Responsible purchasing practices
The OECD Garment Guidance says that companies should address their purchasing practices as part of their due diligence.
We know that poor purchasing practices, such as unfair contract clauses, inadequate technical specifications, impractical leadtimes and ever lower prices, undermine suppliers’ efforts to meet minimum social standards for their workers. Research by the ILO made this link, and highlighted the role that buyers can play, by imposing extreme pressure on suppliers’ price quotes. For example, 52% of textile and clothing suppliers in the study reported to have accepted orders whose price did not allow them to cover their production costs. In Bangladesh particularly, in real terms, the price per garment unit has dropped by 1.94% over the past five years for imports to the EU (source: Eurostat) while wages and raw materials costs have gone up.
The OECD Garment Guidance specifically advises that companies should:
- Engage in two-way dialogue with suppliers.
- Develop pricing models that account for the cost of wages, benefits and investments in decent work.
- Track relevant indicators of practices, such as prices and percentage of orders placed late or changed after the order is placed.
- Develop procedures for purchasing teams to follow in instances in which practices could contribute to harm. For example, in instances in which orders are changed after order placement or orders are placed late.
Collaborative initiatives which provide tools for businesses to assess and monitor their purchasing practices, such as ACT on Living Wages, Better Buying and Fair Wear can be part of the solution and could lead to a more resilient future for the industry beyond wafer-thin business margins and wages that do not meet the needs of workers and their families. These needs include the provision of social security, which should be consistent with ILO standards including medical care, sickness, employment injury and unemployment protections.
2. Ending supplier relationships responsibly
The OECD Garment Guidance requires companies to consider carefully the consequences of ending a relationship with a supplier (disengagement), including weighing the leverage (or ability to effect change) that the company has with the potential harm to workers caused by disengagement. Companies are encouraged to first exhaust all possible means to prevent, cease and mitigate harm to workers in the supply chain before ending a relationship. These principles also apply to the COVID-19 pandemic. Even though the pressures retailers are under are not to be underestimated, companies should prioritise paying for products for which suppliers have taken on liability (raw material stocks, labour and freight costs) as an absolute minimum, while engaging in two-way dialogue with the supplier to discuss how best to mitigate the loss of future orders. Collaboration with other retailers, manufacturers and unions, to find meaningful solutions which avoid workers losing their income overnight, is necessary, as is taking a proactive and transparent approach. This could mean: i) assessing the socio-economic impacts of various contingency options, as well as the availability of any loan or emergency relief packages and support; ii) consulting with workers or their representatives, including at a global level, on the contingency options, and iii) seeking out donor support or other aid to mitigate the socio-economic effects of cancelled business. Companies who can help their suppliers weather the storm will be better placed to restart more quickly during the recovery period (see the OECD note on COVID-19 and responsible business conduct).
3. The role of governments
We know that companies are looking to governments in terms of solutions. What the role of governments should be can’t be answered universally, and will depend on the government. Of course since the 2008 financial crash company bailouts have been less and less attractive and justifiable to the general public. Many governments are already taking action to preserve jobs through paid furlough schemes. In the finance sector, the European Central Bank urged lenders to stop dividend payments and share buybacks until at least 1 October in order to give banks a financial cushion to support businesses and households. In the garment sector, Bangladesh, which has seen more than USD 2.8 billion worth of orders canceled or postponed since the start of the coronavirus crisis, announced a stimulus package worth USD 590 million on 25 March, to spend on salaries for workers (Daily Star). In South Africa industry and government reached a deal where the 80,000 garment workers would be guaranteed full pay for six weeks during and after the government’s COVID-19 lock down (Ecotextile). The EU has extended EUR 5 million to support workers and SMEs in the garment sector in Myanmar (Global New Light of Myanmar). These rescue deals provide immediate lifelines but won’t last long and efforts are needed to: i) extend wages and protections through the period of shutdown, ii) carefully consult on plans for reopening factories to prioritise the safety of workers, and iii) to ensure that post-crisis a new level playing field is set to ensure garment workers are paid wages that meet their needs, comprising the full gamut of social security protections, according to ILO standards. Governments can play a role to legislate, facilitate multi-stakeholder dialogue, and lead by example in their public procurement practices.
Prospects for mid to long-term recovery depend on responsible action now
The COVID-19 crisis is extraordinary and has exposed the cracks in an already-fragile economic system undermined by ever lower per unit prices and other problematic purchasing practices. Companies should engage with their suppliers and adopt fair and common sense approaches to mitigate losses from current and future orders, based on a commitment to responsible business conduct as laid out in OECD Guidance. It may seem difficult in the immediate reaction to take RBC impacts into consideration, but doing so will play a role in reducing the devastation in the short term, while buying time for a clearer picture to emerge of the medium term needs of the sector, and positioning companies better for recovery. Governments should step in to honour social security commitments, and facilitate medium term support for the sector, while directing policy efforts to ensure these protections are built into the economic system in future. Without this, the resilience of the sector and chances for mid to long-term recovery are in doubt.
Applying an RBC approach in the response to this crisis will enable businesses to minimise the adverse impacts on people and the planet, but it will also help them to build more long-term value and resilience, and improve their prospects for recovery in the medium to long term.
OECD responses on COVID-19 and responsible business conduct
Find out more about Responsible Supply Chains in the Garment and Footwear Sector