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As pending supply chain legislations are set to reshape the industry landscape, preparation for these changes is becoming increasingly important. Governments around the world are beginning to recognize the need for stricter regulations to ensure ethical and sustainable practices, which are designed to address issues such as forced labor, human rights violations, environmental pollution, and unsustainable sourcing practices.
Building an ethical and sustainable supply chain has become a critical business strategy that no retailer or corporation can afford to overlook. The apparel, home goods, and other product industries are particularly vulnerable to risk due to their complex and often global supply chains. From raw material sourcing to manufacturing and distribution, each step of the supply chain requires careful consideration to ensure ethical and sustainable practices. Businesses that fail to comply with these evolving regulations may face legal consequences, reputational damage, and loss of consumer trust.
Below, we highlight several pending legislations that will be pivotal to the industry if they are successfully passed. Take a few moments to explore the potential implications and challenges that these legislations may pose for you and your business - it just might end up saving you thousands of dollars in the long run.
In 2022, the Fashion Act or Senate Bill S7428A passed the New York State Senate and Assembly and is awaiting signature by the Governor, which is expected to pass given the Senate, Assembly, and Governor are all members of the same party. It will require fashion apparel and footwear retailers and manufacturers doing business in New York ($100M or more global annual revenue) to disclose environmental and social due diligence policies.
Objective:
Annually, the New York Attorney General will be required to publish a list of the companies found to be non-compliant. Failure to comply could subject companies to fines of up to 2% of their annual revenues. Amounts collected as a result of non-compliance will be deposited to a new community benefit fund administered by the New York Department of Environmental Conservation to be used for environmental justice projects.
Who Will Be Impacted?
The New York Times writes that this bill would affect “[p]ractically every large American and international fashion name, almost all of which do business in New York, ranging from the very highest end — LVMH, Prada, Armani — to fast-fashion giants such as Shein and Zara. The bill requires fashion companies that generate more than $100 million in revenues to disclose their supply chains across all production tiers and where in that process they create the most impact — think labor abuses, greenhouse gasses, and chemical use.”
How Can You Prepare?
Large retailers and corporations will need to prepare supply chain maps for at least 50% of their products, demonstrating responsible manufacturing processes from raw materials to finished products. They will need to publish annual social and environmental sustainability reports, which include information such as targets in place for impact reductions, identified areas of environmental risk, responsible business policies, data about workers’ wages, and more.
In February 2022, the European Commission presented a proposal for a law on corporate sustainability obligations – the Corporate Sustainability Due Diligence Directive, and in December 2022, European countries agreed on an EU-wide supply chain law, called the draft European Supply Chain Act and which requires that EU companies carefully manage social and environmental impacts along their entire value chain, including direct and indirect suppliers, their own operations, as well as products and services.
Who Will Be Impacted?
The new due diligence rules will apply to the following companies and sectors:
How Can You Prepare?
This directive applies to the company's own operations, their subsidiaries, and their value chains. In order to comply with the corporate due diligence duty, companies need to:
National administrative authorities appointed by Member States will be responsible for supervising these new rules and may impose fines in case of non-compliance. In addition, victims will have the opportunity to take legal action for damages that could have been avoided with appropriate due diligence measures.
In March 2023, the European Commission published its proposal for the Green Claims Directive - to address greenwashing concerns by tackling the risk of companies misleading EU consumers over environmental claims. The new requirements will necessitate significant changes to the way many companies currently evidence and communicate their environmental claims, as well as how they manage information related to their environmental credentials.
Who Will Be Impacted?
The proposed requirements would apply to the vast majority of EU operating companies, but sectors that have existing or forthcoming rules on environmental claims (such as financial services) would be exempt.
How Can You Prepare?
Under the proposed rules, companies will need to substantiate environmental claims using life cycle assessment, communicate them accurately and holistically, and have them externally verified. Common phrases such as ‘net zero’, ‘carbon neutral’, and ‘eco-friendly’ would be prohibited in advertisements, in social media posts, or on packaging unless they were sufficiently substantiated and verified.
To meet the new requirements, companies will need to have a robust environmental claims management framework. This is likely to require changes to be made to key elements of their operating model, from organizational capabilities to data management and technology; and enhancements to governance structures.
As well as fulfilling regulatory requirements, more robust management of environmental claims could help companies to reduce reputational and litigation risks, and support brand value. It may also generate new insights and guide better decision-making. However, some companies may conclude that it is more cost-effective for them instead to limit the environmental claims made.
Once the Directive enters into force, Member States will have 18 months to transpose it into national legislation. We estimate therefore that in principle the requirements will apply from 2026, although this timeline may change depending on the speed of EU negotiations on the final text.
The Fashioning Accountability and Building Real Institutional Change (FABRIC) Act is intended to improve the labor rights of garment workers and buoy the American garment manufacturing industry after decades of offshoring. Methods such as incentivizing tax credits for reshoring may encourage some companies to bring their garment manufacturing back to the United States, potentially leading to the revitalization of the domestic garment industry. This move will not only improve conditions for current workers, but create new job opportunities for American workers and contribute to local economic growth.
According to The FABRIC Act, this act reweaves American garment manufacturing in 5 central pillars:
Who Will Be Impacted?
The passing of The FABRIC Act is likely to have a significant impact on various stakeholders within the garment industry. Firstly, American garment workers stand to benefit greatly from the enforcement of minimum wage standards and the elimination of wage theft in US factories, ensuring fair compensation for their labor and improved working conditions.
How Can You Prepare?
Should the Fashion Act pass, large retailers and manufacturers will find themselves required to map the sources of at least half of their materials and products and disclose the environmental and social impacts involved in their production. This includes fair wages, energy, greenhouse gas emissions, water use, and chemical management. Brands and retailers will face increased accountability and pressure for supply chain transparency, as the act aims to combat workplace violations. Therefore companies may need to invest more resources in monitoring and ensuring compliance throughout its supply chains.
Get Help from Experts
TO THE MARKET can de-risk your supply chain by helping you to build an ethical and sustainable supply chain through a network of responsible, vetted suppliers. Boost your ESG by accessing our digital platform which includes automated impact reporting, vendor scorecards, carbon offsetting, and more. Contact us to discuss how we can help you prepare for upcoming legislation at [email protected]
