In April 2013 the Rana Plaza complex collapsed in Bangladesh claiming more than 1,100 lives and leaving many more injured. Many of those killed were employed in the garment industry that supplies the clothes that end up on our high street in the stores whose shares end up in our pensions and ISAs. Our clothing supply chains have lengthened under a relentless pressure on costs. Emerging economies have offered lower wages, weaker labour laws and tax breaks to win these valuable contracts from brands competing in what has become known as the ‘race to the bottom’. As consumers we believe that no one should die to make our clothes. As investors we believe this is an unacceptable and unprofitable way to operate an industry. We want our investments in European and US retail brands to deliver the highest investment returns possible and believe this is best achieved through safe and decent supply chains. We noted in the weeks following the tragedy that a landmark agreement had emerged uniting global retailers, unions, civil society and supplier factories in a commitment to reform building safety in Bangladesh. We supported demands for the brands to sign this Accord on Fire and Building Safety which came into effect on 15 May 2013 with the support of 41 global retailers including H&M, Inditex, Marks and Spencer, Primark and PVH. Does the Accord mark a change in the ‘race to the bottom’, are brands now beginning to move beyond simple cost measures to issues of safe and decent working conditions and long-term sustainable productivity? Could the Accord signal the beginning of a global ‘race to the top’ and, if so, who will win? In its first year the Accord has gained many signatories and has achieved a great deal but there is still a long way to go. Compensation has still not been fully paid, the inspection and remediation process has suffered from a shortage of skills and materials and a competing code, the Alliance, has been set up which we consider to be both weaker and confusing for factory owners. Reliable information on progress covering the two codes and third government programme across more than 5,000 factories is very hard to obtain. Good investment requires accurate, timely and verifiable information and we simply could not get it using traditional investment research.Investor visit
As a response, on the first anniversary of the signing of the Accord we visited Bangladesh on a fact finding tour. We worked with Morgan Stanley’s SRI equity research team and several European apparel brands to host eight global investors across a week of meetings and factory visits. We tried to meet people from every aspect of the supply chain, from worker and union representatives to NGOs, representatives of the Accord, the Alliance, the ILO (International Labour Organization), worker training organisations, the British High Commission, the brands themselves and of course the factory owners. We conducted three factory visits hosted by the factory owners themselves and accompanied by brand representatives on two occasions. A trip of this nature can only ever give a narrow indication of the reality of the garment industry across Bangladesh. Although we took care to meet with as full a range of stakeholders as possible a pre announced trip by a group of global investors, we know is not an audit and we didn’t intend it to be. But by visiting some of the best factories we knew we would get a very clear idea of what best practice looks like and how it is being delivered.
The garment industry
This is a young industry playing a significant role in lifting a densely populated and rapidly growing economy out of poverty. It is an industry that contributes more than simple economic GDP growth by channeling that growth to historically disadvantaged women from rural areas. This has huge implications for their own personal freedoms and for the country’s economic development. The importance of this sector does nothing to diminish its responsibilities to provide safe and decent work, but we were reminded frequently on the trip, that what is needed is support for a transition to best practice without jeopardising the industry itself.
The business case for change
We were encouraged by the clear business cases underpinning the sustainability initiatives we saw. We could not verify pay, working hours or child labour but we could observe working conditions, child care facilities, health clinics, canteens, worker transport, water fountains, effluent treatment plants etc. Many of these admittedly seemed admittedly early stage but clearly positive and the pride taken in them by the factory owners was evident; There is a clear model
for other factories to move towards. Staff turnover represents a good example of the change we saw, with it usually running as high as 10/15% a month in some factories. This has implications for training costs, accuracy of supervision, productivity and quality. We spoke to factory owners and visited factories that had more than halved those rates through sustainability initiatives such as better pay, better training, attendance bonuses and subsidised food.
A living wage
Gains are finally being made on both wage increases and working hours but from a very low base with disagreement on who is to blame for overtime and ongoing concerns that rent and food inflation could wipe out wage gains. All factory owners we spoke to indicated that non cash remuneration may be key i.e. canteens, subsidised tiffins and potentially dormitory space. Recent increases in the minimum wage seem significant following the 77% increase to 5,300 Taka (£40) a month in place and proposals to raise that again above 8,000 Taka (£60). We worked through an average family’s monthly expenditure with worker representatives and concluded that wages need to continue to rise significantly. We also assessed how small labour costs are, as a proportion of total end product costs and concluded that the supply chain can withstand ongoing significant wage price increases. Finally the potential for productivity gains we saw through the better treatment of workers, which could allow these costs to inflate profitably to the benefit of workers, factories, the brands and the economy. We encountered very little resistance from those we met, to continued wage inflation provided they are accompanied by productivity gains and are not offset by food and rent inflation.
The concept of a good buyer
We saw clear evidence of a best practice model emerging with progressive brands working with progressive factory owners and empowered workers to the benefit of all. There are many factors contributing to these success stories but above all we saw the need for a change in buying practices. We saw great work from committed, long-term brands exercising responsible buying policies. We do not anticipate full vertical integration but we did note that the ‘good’ brandsare increasingly taking an interest in their share of responsibility for everything from the cotton mills to the port. We believe investment analysis must begin to differentiate between the very different buying practices of brands across their global supply chains. To compare a brand that conducts a tick box audit and negotiates purely on price with one that has 400 of their own staff in Bangladesh gaining a deep understanding of the risks and opportunities in these factories on a daily basis is missing a material aspect of the investment case in our view. Some companies are becoming better businesses by doing the right thing, as investors we need to identify them.
Conclusions: opportunities and responsibilities
It is clear to us that sustainable and responsible buying practices can provide a decent margin to factory owners allowing them to invest in the health, wealth and productivity of their workers. We believe this can create an extremely powerful long-term sustainable business model in Bangladesh. The aim of our trip was to obtain detailed information that would allow us to engage directly with the brands and enhance the supply chain analysis in our investment decisions. This is vital for our clients but also important steps in encouraging the right behaviour and channeling capital to brands that are adopting more sustainable business practices.
We have seen very encouraging pockets of good performance in Bangladesh which we believe need to be carefully supported and taken up globally. We will now work with the brands and the research teams across the financial markets to identify, support and invest in those companies that we believe will win this race to the top.
Neil Brown is an Investment Manager at Alliance Trust