2018 sector takeways

As recognized by, among others, the ILO and OECD, living wage constitutes a fundamental human right. As the PLWF, we are strongly convinced that living wage is a salient human right issue that requires urgent attention by companies worldwide. However, we are still noticing that the potential wage increase in sourcing countries is sometimes only perceived as a financial risk. Similarly, some companies heavily rely on wage increases pursued on the basis of efficacy or incentives/production targets alone, as opposed to other forms of interventions. We believe that this mindset needs to be abolished and that companies should clearly recognize that the provision of living wage constitutes a fundamental human right and a baseline point for any compensation awarded.

In an ideal world, governments in producing countries such as Bangladesh, Myanmar and Cambodia host social dialogue and set and enforce legal minimum wages at a living wage level. In most of these countries however this is not the case. Minimum wages, if they exist, are well below living wage estimates. This leaves a wage gap, in most cases a considerable wage gap, which is up to buyers to help close. But since they do not pay the workers and since local wage setting mechanisms are to be respected, they need to collaborate and create leverage to make progress.

Most of the companies under our assessment showed best practice when it comes to working with for instance the Fair Labour Association (FLA), global union IndustriALL and the ILO Better Work initiative. Some of the companies took up membership with the initiative ACT which aims at building sector-wide collective agreements in the producing region for garments. An innovative approach as these CAs would be accompanied by statements of buyers on responsible purchasing practices.

Living wage can only be realized if buyers agree to align their purchasing practices with their human rights policies. It is not enough to include a living wage policy in a Code of Conduct for the manufacturer to comply with nor to outsource living wage projects to a stakeholder initiative. Buying companies should own the process of implementation by assessing impact and integrating findings in their business. Changing purchasing practices that enable manufacturers to pay living wage is an essential feature.

We see great benefits in garment & footwear brands collaborating on social and labour issues within sectoral multi-stakeholder initiatives. We also see great benefits in brands getting access to the wide range of data and expertise accumulated by these multi-stakeholder initiatives and receiving support and guidance in developing adequate processes around human rights due diligence. Organizations such as the Fair Labor Association (FLA) or ACT have been active in stimulating partnerships and collaborations, passing on expertise, and bringing companies – some of which produce in the same factories – together to search for a solution to complex issues such as the provision of a living wage.

Although the level of collaboration within the garment and footwear sector has been steadily rising, particularly among luxury garment brands, we have been noticing substantial space for improved collaboration on social issues in the supply chain. We hope to further stimulate such collaborations going forward.

Although the average standard of disclosure in the garment and footwear sector is notably improving, the data that is reported often remains inadequate in the level of detail provided. Based on engagement results and learnings gained, it appears that some data is not reported because companies do not regularly gather such data in the first place. For example, the assessment expects that a company discloses the number of its suppliers and their geographic location per country and region (for large countries such as India, this should be done on a regional level). Best practice entails the disclosure of factory addresses, the approximate number of employees per factory, and approximate percentage of the company’s total volume sourced from a particular country or region. The assessment requires concrete, quantitative evidence. This is, however, often lacking. Similarly, we expect that companies are able to indicate concrete, detailed, and quantitative information regarding the results of their social audits, trends in excessive overtime and freedom of association (at least on a country level), as well as the number and content of collective bargaining agreements that apply to the companies’ supply chain workers.

We believe that the collection and interpretation of such data is essential to enable progress toward the payment of a living wage. Increased transparency (question 8 in our assessment methodology) is needed to ensure the integration of the living wage policy or statement in the heart of the business and to show progress or explainits lack on the ground.

Several companies from the engagement group have indicated that the provision of benefits other than financial compensation alone should be taken into account when assessing adequate compensation levels.

The Platform, however, believes that the provision of non-financial benefits cannot justify the provision of wages below a living wage level. However helpful it may be to pursue material interventions to fulfil those workers’ basic needs that workers might otherwise be unable to fulfil based on their current wage levels – such as the provision of housing, transportation costs, food benefits, healthcare, or education for the workers’ children – this does not tackle the problem at its roots. Our work is based on the premise that living wage constitutes a fundamental human right and companies thereby have a responsibility to ensure that the wage that is paid to their employees as well as to the people who make their products (supply chain workers) is enough to cover the workers’ basic needs. Therefore, we still encourage these companies to review and adjust their purchasing practices, identify cost efficiencies, and pursue other interventions ultimately aimed at raising the wage level.

Several companies have indicated that governments have a major role to play in ensuring that the legally mandated minimum wage is regularly reviewed and that it comes closer to or equals living wage estimates. The current system on which minimum wages are based is not sufficiently robust and there should not be a split between legally mandated minimum wages and a wage someone can live off.

One company described what happened in the UK after a living wage regulation was introduced. It disclosed that companies in the UK had for a long time claimed that they cannot pay living wages, but after the new living wage regulation came into force, they had no choice but to immediately start searching for a solution. Based on this experience, the company stated that it believes that living wage should be regulated, or that a change needs to be pursued through large industry-wide collective bargaining initiatives. Wage-related questions, particularly those concerning regular pay review, should also be made part of international trade negotiations. As a consequence, such an approach would also ensure a level-playing field among industry peers. In practice, this would mean that we need to ensure a regular minimum wage review that would be reflective of the cost of living (and other basic expenses). Provided this would not happen, the company believes we will never be able to pay a living wage.

Besides the UK, the company also named Bangladesh as an example. After minimum wage got substantially raised in Bangladesh, buyers did not leave the country; in fact, the opposite happened. The standard of production has also improved as factories in Bangladesh are now able to produce more sophisticated products. Besides that, even with the rise in wages, Bangladesh still remains a low-cost country.

From our discussions with several companies in the engagement group, it appears that corporate actors are not against further regulation provided the regulation is useful. This would appear to be the case with respect to living wage. In the end, the original ILO Conventions from 1919 do include a definition of a minimum wage that matches what we currently define as a living wage.

We believe that the companies we engage have a major say in this discussion and that a real, robust minimum wage that would meet the above criteria would be ultimately for the benefit of everyone.

We do acknowledge that for luxury brands, the issue of living wage may be less material than for fast fashion brands. This is because of factors such as the companies’ geographic sourcing locations, which are often predominantly located in developed countries, and higher profit margins. However, we do ask from the companies we invest in to have adequate processes in place to monitor and mitigate labour and human rights risks in the supply chain and to provide transparency about these processes and their effectiveness. We also ask for improved transparency, for example, with regard to their sourcing locations and the human rights risks identified in different sourcing locations, looking beyond financial materiality and focusing on human rights saliency instead. Some luxury brands still do not have such processes and adequate level of disclosure in place to be able to substantiate that living wage indeed does not constitute a salient human rights risk.

Several companies indicated that living wages should be negotiated, set, and regularly reviewed through collective bargaining processes. These processes should be sector-wide.
Correspondingly, as part of workers empowerment, the actual definition of a living wage and of the basic needs which should be covered should be determined in close collaboration with floor-level workers or even by the workers themselves through workers’ committees and trade unions. Collective bargaining processes play an important role in this process and should always be facilitated.

Going forward, we would like to explore out-of-the-box solutions to realizing living wage. This might include raising awareness with consumers and finding solutions as to how they might be able to make concrete contributions to a living wage. In considering the possibility to pass increased production costs onto consumers, one company stated that people might have to buy less if prices go up, but that it would be ultimately also better for the planet (beside the workers), thereby also contributing to companies’ and investors’ environmental goals.

Although we have not found a clear correlation between being a leader on living wage implementation and being a leader on ESG in general, our engagement and assessment efforts suggest there is indeed a correlation between the former and being a leader on labour and human rights issues (or, in other words, the ‘S’ of ESG). This showcases that companies that pursue more sophisticated interventions on living wage also have developed policies and processes in place on other labour and human rights issues. This information may, then, be directly fed into investment decisions.

Some companies indicated that benchmarks have not always been helpful in moving companies forward and that too much benchmarking can do more harm than good. We, the PLWF, have thereby adopted an approach whereby we clearly acknowledge that the objective behind the living wage assessment is not to create yet another benchmark that will lead to no performance-related changes on the part of the companies assessed (or, in other words, “to
benchmark for the sake of benchmarking”). The objective of the assessment is to stimulate sector-wide progress and to ultimately lift the level playing field. Concrete scores per company are thereby not be communicated publicly, but they serve as a guide for follow-up dialogues between investor members of the Platform and our investee companies.