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January 12, 2010
Investors Remain at Risk Due to Corporate Breaches of Supply Chain Standards
    by Robert Kropp

According to a new EIRIS report, companies in consumer industries are responding to NGO pressure, but recommends investor engagement with companies on supply chain polices, management, and reporting.

Basing its analysis of corporate supply chain standards on the framework of the Declaration on Fundamental Principles and Rights at Work adopted in 1998 by the International Labour Organization (ILO), EIRIS, a UK-based provider of corporate environmental, social, and governance (ESG) research, found that 45% of companies “have no policy or management systems in place to protect labor standards in their supply chain and fail to report on the issue.”

The categories included in the ILO’s Declaration are freedom of association and recognition of the right to collective bargaining, elimination of forced or compulsory labor, abolition of child labor, and elimination of discrimination in employment and occupation.

The EIRIS report, entitled A Risky Business? Managing Core Labor Standards in Company Supply Chains, focused its analysis on the clothing and footwear, consumer electronics, and agricultural crops industrial sectors, where the risk of breach of the ILO standards is highest. Problematic areas of the world identified by EIRIS include trade union rights in Export Processing Zones (EPZs), child labor in the Indian embroidery industry, forced labor in Jordan’s Qualifying Industrial Zones (QIZs), and forced pregnancy testing in maquiladoras in Central and South America.

Investors should be concerned about breaches of labor standards for several reasons, according to EIRIS. The concerns include reputational risk, time spent by management addressing issues raised by nongovernmental organizations (NGOs), poor product quality, and legislation that could limit access to markets.

EIRIS assessed 13% of the companies in its research as high or medium risk for supply chain labor standards, of which 66% are in the consumer industry sector, which include “food and drug retailers and general retailers which have been the focus of NGO campaigns” for years. Companies in the consumer industry have the lowest proportion of those showing no evidence of policy, management systems, and reporting on the issue, while 7% of them were assessed as good in their response.

On the other hand, more than half of industrial and technology industries show no evidence of any policies or systems, although a small number of such companies have begun to develop comprehensive policies and systems, according to the report.

While European and North American companies are more likely to have been accused of breaching labor standards in their supply chains, companies in those regions were assessed as having the highest response to such allegations.

The report concludes with a number of recommendations for investors, including engaging with companies on supply chain labor standards policies and management systems, encouraging companies to join such multi-stakeholder initiatives as the Ethical Trading Initiative (ETI), calling for comprehensive reporting, and encouraging long-term relationships with suppliers.

EIRIS also suggested that investors consider joining the Principles for Responsible Investment (PRI), whose Engagement Clearinghouse provides PRI signatories with a forum to share information about engagement activities.


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