The S Factor: Why investors should be using Better BuyingTM data to better understand human rights risks in supply chains
Investors as part of their active engagement on ESG should be asking non-participating companies to join Better BuyingTM and participating companies to share scorecards with them, says Dr Martin Buttle, Head of Good Work, ShareAction.
1. Growth in investor interest in the “S” of ESG
The world of finance has been going through an ESG revolution. It is increasingly recognized by financial sector leaders that the interests of society and business align over the long-term.
According to Bloomberg, by 2025 global assets under management with some form of ESG integration could reach $53tn or roughly a third of all assets under management worldwide. As a result, investors expect greater visibility of an ever-growing range of non-financial metrics to understand and analyze social and environmental risks.
2. Materiality of “S” factors in the apparel sector
Even before Covid-19, the S of ESG was often reported to be lagging. But the pandemic underlined the significant and material impacts of treating workers badly, and alerted long-term investors to issues with the fashion sector’s business models, brand reputations and long-term license to operate.
At the start of the pandemic, stories abounded of apparel and general merchandise brands reducing or canceling orders, or implementing Force Majeure clauses in their contracts, leaving their suppliers in precarious financial situations.
Undeveloped or no social protection schemes for workers in many sourcing countries left the global workforce extremely vulnerable. Better BuyingTM covered these issues extensively in its 2020 Better BuyingTM Index Report.
Slow vaccine rollouts have also left suppliers reliant on workforces that are still vulnerable to the Pandemic even as developed nations reopen.
In the UK, fast fashion brand boohoo was the subject of an ESG scandal in July 2020 after it was revealed that workers in its supply chain in Leicester were being forced to work despite testing positive for Covid-19, which in turn contributed to Leicester being the first UK city to enter a second lockdown. It is alleged that at the same time there was wide-scale furlough fraud in the sector. Some ESG data-platforms had given Boohoo a high score on ESG relative to its peers due to its UK sourcing and because up to that point there had been no scandals even though the warning signs had been clear. boohoo’s share price fell 175 points (43% of its value) and has remained volatile ever since.
3. Poor quality disclosures and alternative sources of “S” data
One reason for the S lagging has been that broadly speaking, corporate disclosures on the S of ESG are poor quality, qualitative, non-comparable and often at the policy-level rather than the outcome level. As with boohoo, ESG ratings often rely on lagging indicators such as evidence of past scandals rather than forward-looking data points.
Beyond policies, understanding purchasing practices is key to understanding whether companies are truly working in partnership with their suppliers. Investors require independent, non-partial, outcome-level data on brand purchasing practices to understand the degree to which companies and brands are responding to these issues. Better BuyingTM plays an invaluable role for ESG investors interested in understanding how companies in their portfolio are treating their suppliers.
By sourcing data directly from suppliers on material metrics on how a brand is managing the purchasing cycle from planning and forecasting, design and development, cost and cost negotiation, payment terms, managing the purchasing process and the alignment between CSR asks and commercial asks – Better BuyingTM provides true insights on company practices, while individual brand scorecards can demonstrate how different companies from the same sectors compare.
Large publicly listed companies are already using Better BuyingTM data [we can link to the subscriber webpage here]. Investors, as part of their active engagement on ESG, should be asking non-participating companies to join Better BuyingTM and participating companies to share Better Buying ™ Scorecards with them.
Better BuyingTM is a key tool in the arsenal of measuring the social risk of in the garment and general merchandise sector. It is independent, verified data that digs below the surface of typical “S” disclosures.