The Dutch Agreement on Sustainable Garment and Textile. Taming transnational supply chains via corporate due diligence.

The six months between 2012 and 2013 represented a turning point for the garment industry. On 24 April 2013, the Rana Plaza building collapse in Bangladesh killed more than 1100 workers. Just a year before, more than 350 garment workers died in two factory fires in Pakistan and Bangladesh. These three tragedies, among the deadliest industrial disasters in recent times, generated a previously unseen level of outrage to which followed a considerable mobilisation by civil society, business communities, States, and international organisations. Apart from the horror stemming from the loss of lives, mostly of young women, the three catastrophes were particularly shocking for Western audiences as they exposed our ignorance and even complicity. It turned out that we - the consumers – turn a blind eye to the working conditions, including health and safety, of garment workers. Thereafter, it was impossible to ignore that well-known brands we regularly purchase were connected to these production sites, which were regular suppliers of many European and American clothing companies.

A certain consensus has since then coalesced around possible means to avoid the reoccurrence of such tragedies, which has pivoted on the concept of corporate due diligence in investigating the impact of their operations and taking measures to protect human rights. Due diligence relies heavily on corporate practice in defining and implementing strategies limiting their negative impact. Initiatives at the national level such as the Dutch Agreement on Sustainable Garment and Textile can be seen as interesting attempts to constrain into a more structured frame the due diligence process. The question, as usual, is whether this is enough.

Changing supply chain and novel transnational regulatory approaches

In Twenty-First century capitalism, manufacture spans across the globe in global value chains. Corporations in Western countries are connected to myriads of suppliers and contractors responsible for different steps in the production process. In the garment industry, retailers in the Global North are connected through a network of contractual relations to independent entities across the world which, in turn, often subcontract production and assembly to other firms and producers all the way down to those responsible for the production of inputs such as cotton and other fibres. The retailer has little influence on all these entities, and its control remains often indirect at best. Global value chains make it difficult for companies to structure their relations with their suppliers in a way which limits the negative impact linked to their activities. In addition, also single States are impotent in the regulation of diffuse supply chains if they want to limit their negative impact on human rights, labour rights, and the environment. Indeed, the contribution from countries where production is located is essential, especially for the enforcement of labour and health and safety standards. Also corporations are required to step up their efforts in dealing with their partners in the supply chain.

The several regulatory efforts initiated in the aftermath of the Rana Plaza illustrate a novel multi-actor, multi-level, and less top-down approach to the regulation of transnational business conduct which aims at overcoming the jurisdictional constraints of State rules. The proliferation of global value chains and their increased impact coincided with a process that, under international law at first, switched the consensus about which actors should be responsible for regulating supply chains, and by means of which tools. This process culminated with the United Nations Guiding Principles on Business and Human Rights, that affirmed the principle of corporate responsibility to respect human rights. Corporate due diligence was chosen as a regulatory strategy to ensure the protection of human rights. Due diligence is a continuous process which requires enterprises to assess actual and potential human rights impact directly linked to their activities. Companies must design strategies to proactively minimise and correct their negative impact.  Transparency in the form of communication of corporate impact to external stakeholders is an important component of due diligence. Companies are expected to regularly report about the effects of their operations and the corrective response taken in order to build trust of all actors involved, including workers, consumers, NGOs, and even investors.

It is within the framework of these principles that the many public and private regulatory efforts that followed the Rana Plaza disaster must be understood. As initiatives in the area of garment have proliferated, a peculiar form of ‘division of labour’ began to take shape at the transnational stage. On the one hand, initiatives involving trade unions, business actors, States and international organisations such as the ILO, have addressed worker safety in Bangladesh,[1] and compensations and reparations for the families of the victims.[2] On the other hand, States aimed at improving working conditions in Bangladesh through programs focused on training and capacity-building.[3] Other initiatives took a ‘global’ approach by creating mechanisms capable of harnessing business conduct generally, and not just in a specific country. Crucial OECD work has focused on the practical implementation of due diligence procedures. Thus, the OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector constitutes one of the first sector-specific implementing document of the OECD’s set of standards for responsible business conduct - the OECD Guidelines for Multinational Corporations, the first version of which dates back to 1976. 

Enter the Dutch Agreement on Sustainable Garment and Textile

The Dutch Agreement on Sustainable Garment and Textile is one of the first initiatives at the national level supporting the implementation by corporate actors of their due diligence obligations. At the same time, it attempts to ‘harden’ business obligations to perform human rights due diligence in the supply chain, and provides means to enforce an obligation which could not stem from the UNGP. The Agreement represents an interesting example of multi-stakeholder efforts in the regulation of fundamental socio-economic issues, where industry organisations, trade union, non-governmental organisations and the Dutch government agreed to join forces to ensure responsible business practices in the global garment and textile supply chain.

The Agreement expressly builds on the UN Guiding Principles and on the OECD Guidelines in order to i) making progress in 3-5 years towards the improvement the conditions of groups affected by adverse impacts in respect of specific risks in the garment and textile supply chains; ii) to provide business actors with a set of tools for preventing their operations and production from negatively impacting on their supply chain; iii) to develop joint projects to address issues that single companies could not tackle successfully. The Agreement was signed in July 2016 by 55 companies with their representative organisations - together constituting around 30% of the sectors in the Netherlands, 5 NGOs, the Dutch trade unions, and the Government. Signatories are expected to engage with business actors which did not enter into the Agreement and urge them to sign, so that the market shares of the companies involved reaches at least 50% by 2018 and 80% by 2022.

The commitments made by the enterprises

Enterprises party to the Agreement assume certain obligations, the main of which being the inclusion of nine ‘themes’ in their internal policies for responsible business conduct. Interestingly, the Agreement takes up a broad scope with respects to the supply chain risks which corporations must tackle, including not just human rights and work-related issues such as forced labour, freedom of association and living wage, but also safety and health concerns, and even gender themes, environment and pollution, and animal welfare. The detailed components of each specific theme are laid down in the Annexes to the Agreement. The obligation to address these issues is operationalised via due diligence processes which, in line with the OECD Guidance, must be communicated to all partners in the supply chain and other stakeholders, and must be performed in a manner proportionate to the size of the business and the specific circumstances of the operations.

 The commitment to conduct due diligence on the nine themes identified in the Agreement is far from being just hortative. In the first place, companies are given access to a set of tools for implementation provided for by the Secretariat. Corporate signatories are then required to annually submit an ‘action plan’ for assessment and approval by the Secretariat of the Agreement. Such an ‘action plan’ does not seem to be contemplated by the OECD Guidance, which only refers to a Corrective Action Plan with a different content. The action plan is not available to the public in light of confidential business information about suppliers and pricing policies. Nonetheless, the information required therein forces companies to gather information about their operations and to reflect upon their own practices. The plan must present the insights gained through due diligence about the structure of their supply chain. It must address how specific purchase practices of the companies, including prices, delivery times and duration of the contacts of supply, may increase risk in their supply chain. The action plan also requires companies to substantiate their policies with regards to the nine themes, and formulate measurable targets for improvement.

The Agreement explicitly stresses the ‘business case’ for an early-mover engagement in responsible production. Indeed, it allows signatories companies to anticipate the growing trend of mandatory due diligence, which is particularly noticeable in the EU. After the Directive on non-financial reporting and the Regulation on conflict minerals, the European Parliament has recently tabled a Motion to require the Commission to propose mandatory regulation for the garment supply chain. Different from mandatory due diligence as laid down, for example, in the conflict minerals Regulation, the Agreement does not contemplate third party auditing of due diligence, the outcome of which must normally be made public by companies. In any event, signatory corporations to the Agreement can publicise their participation, can rely on the support of other parties in its implementation, and have access to a growing corpus of best practices that the signatories are going to share within the framework of the Covenant. Companies can also rest assured that, in case information arises concerning an enterprise’s adverse effects in the supply chain, other parties (presumably NGOs) will not make the information public before the elapsing of a two-week period during which the involved company must produce a ‘satisfactory result’.

Institutional features, mechanisms for review and dispute settlement

Certain institutional features constitute the most innovative and interesting elements of the Agreement, which sets up permanent institutions responsible for monitoring companies’ action plans and for settling disputes. The Steering Group and its Secretariat are instrumental in overseeing compliance with the Agreement, in pushing companies towards respecting the commitments in their action plans, and in ensuring that continuous improvement takes place. The Steering Group, which acts by consensus and whose composition reflects the multi-stakeholder character of the Agreement, is responsible for its day-to-day management and possible projects for its implementation. The Steering Group is supported by a Secretariat.

The Secretariat serves as a central source of expertise, training and support for enterprises in the area of due diligence. Its most important task is, however, the assessment of companies’ action plans elaborated within the frame of their due diligence obligation. The assessment is performed against the text of the Agreement itself, the OECD Guidance, and the context of operation of the enterprise under review. Specific elements of due diligence are under scrutiny as well, such as the way the company communicates its principles and policies for ‘international responsible business conduct’, and how these policies are implemented in its daily operations. The review shall also appraise the way the company has analysed risk of adverse impact, whether it has collected sufficient information about its supply chain, whether it has prioritised its activities, and investigated the correlation between its own practice and adverse impact.

The review of the action plan evaluates the undertakings for improvement both with respect to the reduction of its adverse impact, the monitoring of its suppliers and the insights acquired over its operations, and theme-specific suggestions made by the parties to the Agreement. Further, the Secretariat compares the companies’ objectives with respect to each of the nine themes. Companies with less ambitious goals and which may be expected to do more, given their size and context of operations, will be ‘asked’ to scale up their efforts. Under this scenario, the enterprise is given the opportunity to present a revised action plan after two months. The Secretariat is also empowered to randomly verify that the information supplied is accurate. Finally, the Secretariat prepares aggregated annual public reports of the results achieved and of the improvements in the supply chain.

The review of action plans is given a prominent place in the Agreement, although it seems to lack real enforcement tools. A dispute settlement mechanism is created to solve disagreements (that the Agreement defines as ‘disputes’) between the company and the Secretariat about its assessment. Such disputes are limited to the review of the action plans, and not the appraisal of other elements of individual due diligence. An independent Complaints and Dispute Committee will be appointed by the Parties, with the competence to assess whether, with specific respect to action plans, a signatory enterprise is acting in accordance to the Agreement. The ruling of the Committee is binding both on the enterprise in question and on the Secretariat, which is entrusted with monitoring compliance. In case a company fails to comply with the ruling of the Committee after the timeframe it has specified, all information the Secretariat possesses on the company in question, including the dispute proceedings, is released to the Steering Committee members, excluding the business ones. The Agreement does not clarify whether the reports can be made public. At this stage, the Steering Committee can then only ‘issue written reminders’ to urge compliance. In the presence of further disagreement over compliance with a decision of the Complaints and Dispute Committees, one or more parties to the Agreement can submit the question to arbitration by the Netherlands Arbitration Institute (NAI). The standard of review of the NAI is expressly limited to ‘review marginally’ whether or not the company is in compliance with the binding advice of Committee. As it can be seen, no sanctions stem from failing to comply with the Committee’s advice. This questions whether the Agreement actually provides with real tools to scale up ‘sloppy’ commitments, or even just to enforce current ones, apart from offering a platform for discussion and peer pressure.

A second mechanism is contemplated for ‘complaints’, which can be raised by any stakeholder suffering injury, loss, or damage caused by a company party to the Agreement. As a non-negligible limitation, the subject matter of the complaint must be ‘of material significance’ to the complaining party, and must be substantiated in relation to the responding business party. This mechanism however is only ‘residual’. To the extent it may overlap with the jurisdiction of another dispute settlement mechanism (arguably the National Contact Point for the OECD Guidelines), the Agreement gives precedence to the latter one. It can therefore be expected that the complaints mechanism under the Agreement will deal with, for example, complaints linked to themes which are outside the scope of the OECD instruments. While the subject of the complaint and the parties involved are made public, the rest of the proceeding is not accessible, and the parties must withhold any information. Also the public nature of the binding ruling can be questioned, as parties can require confidentiality for competition and privacy concerns. The Committee will rule on whether the company is acting in accordance with the Agreement. In case further failure to comply with a ruling of the Committee is due to a supplier which cannot be induced to cooperate, such supplier is black-listed and parties to the Agreement are no longer allowed to purchase from it. In case of ‘unjustifiable’ failure to comply, parties can release information to the public about the dispute as well as express their opinion on the failure to comply. As a measure of last resort, parties can also request to the Steering Committee that the enterprise in question is expelled from the Agreement.

The challenges lying ahead

The Agreement is a much needed step to ensure more responsible practices in the Dutch garment sector, and to foster corporate due diligence. Its most important contribution appears to be the establishment of a system to enforce voluntary commitments. However, its multi-stakeholder nature has required certain compromises limiting the extent of review of due diligence practice and the amount of insight the public can acquire about a specific company and its supply chain. Although companies are required to perform due diligence, it is unclear whether, and if so to what extent, the way the due diligence process is operationalised in practice is checked. This should be compared with the approach followed by recent EU legislation contemplating auditing of the processes implemented by enterprises, and thereafter the release of the findings. Granted, the power of peer pressure should not be underestimated as a check on companies’ action plans. The establishment of a permanent structure capable of exercising pressure on corporate entities to force them to respect their commitments, and eventually to scale them up, appears a sensible approach to engage companies in behaviour that, as of now, goes beyond legal provisions which would otherwise be applicable.

Within this frame, it is regrettable that action plans are not made available in a disaggregated form, so as to allow the public to evaluate the commitments entered into by specific corporations. If one of the purposes of the Agreement is to establish a framework for accountability with respect to their own commitments, then more transparency would have certainly be welcomed. Wouldn't it be sufficient to remove sensitive information from action plan? Generally, transparency can also allow the public to form a better understanding of the garment supply chain in which Dutch companies operate. Admittedly, the situation could improve, as companies are to decide - within 1 year from the entry into force - which information to disclose and - within 3 years - how to communicate individually to the public. Developments are still possible as companies are expected to begin implementation of their actions plans in July 2017. Future practice of the Secretariat, the Steering Committee, and especially of the signatory companies will be key to determine the impact of the initiative.

[1] Alliance for Bangladesh Worker Safety, supported by US businesses; Accord on Fire and Building Safety in Bangladesh, which features a tripartite structure.

[2] Rana Plaza Arrangement.

[3] Sustainability Compact for Bangladesh.

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