Original Web Optimized Clothes Store Manager Min
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Fast Fashion – Tackling the problem of low wages for garment workers

Fast fashion and inexpensive clothing has caused an enormous increase in global clothing production, often with adverse consequences for the garment workers. In this article, Olena Velychko, ESG Analyst at Nordea Asset Management, talks about how to tackle the problems and ensure sustainability.

"Our perspective is that companies should address the risk by joining industry initiatives and adjusting purchasing practices to allow payment of living wages by their suppliers"

The growth of “fast fashion”, inexpensive clothing produced rapidly by mass-market retailers, has contributed to a doubling of global clothing production over the last 15 years, while at the same time the clothes utilization rate has decreased by 36% [1] . This over-consumption of clothing is being driven by more collections, quicker turnaround and lower prices. The result is a buy-dispose cycle which is permeating the entire apparel industry with adverse consequences for workers.

Increasingly low selling prices do not reflect the true environmental and labour costs of production. Fast fashion companies in search of cheap markets source their labour from countries like Bangladesh, Myanmar and Ethiopia, some of which allow for lower trade tariffs on apparel due to their least developed country status.

In many of these countries, the legal minimum wages are not enough to live on[1]. There is a large low-skilled labour supply in these markets, but fewer formal work opportunities, which means that workers have less bargaining power relative to factories regarding wages. Companies that barely meet the minimum wage threshold do not contribute to societal well-being or economic growth.

Nordea’s Responsible Investments team estimated the impact increasing wages to the living wage level would have on factory prices. Average monthly wages were estimated using factory wage data supplied by H&M[2], the only large apparel company disclosing wage data in their supply chain. We used the most recent living wage estimates by Global Living Wage Coalition[3], except for Turkey and Cambodia where we used WageIndicator.org.

 

The potential impact achieving living wages would have on prices paid to supplier factories depends heavily on the sourcing countries mix. Companies that are not engaging with their suppliers on living wages and require only minimum wages would face an increase of between 6% to 13% in factory price. When minimum wages or negotiated wages via collective bargaining agreements rise, they impact all buyers in the same way forcing even brands that have not committed to living wages to pay more to the factories. We see this as a factor that will put long-term pressure on the industry’s profit pool, particularly for companies that are not addressing the issue.

There is a business case for apparel companies to address the increasingly material ESG risk of lower than living wages. Our perspective is that companies should address the risk by joining industry initiatives and adjusting purchasing practices to allow payment of living wages by their suppliers.

They could also improve their own operational efficiency to absorb increasing costs or focus on their suppliers by enacting factory level standards, enhancing working conditions, reducing staff turnover and improving employee health and motivation. This would increase productivity and quality. They could also focus on increasing consumer awareness and preparing consumers to pay more for clothes. Finally, they could invest in R&D to replace costly and unsustainable elements of their supply chains and deliver products more efficiently to their markets[4]. It would be in any company’s interest to do these things.

Overall, responding to the challenge of lower than living wages in a sustainable way could help to improve the efficiency of their own operations as well as that of the supplier. These measures would increase product/service transparency towards their clients. As consumer demand for more sustainable apparel choices grows, efforts made to address the living wage question will not go unnoticed and could expedite companies’ process of adjusting their brand value proposition toward sustainability.

Sources:

[1] Living wage is defined as the minimum income necessary for a worker to meet basic needs for himself/herself and his/her family, including some discretionary income. This should be earned during legal working hours limits (i.e. without overtime). See also The Universal Declaration of Human Rights (1948) that states (article 23.3): “Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.”

[2] H&M, H&M Group Sustainability Report (2018)

[3] The Anker Methodology is a widely accepted and published new methodology to estimate living wages that is both internationally comparable and locally specific. It was developed by living wage experts Richard Anker (formerly ILO) and Martha Anker (formerly WHO). See the detailed description here.

[4] Eg. Levi Strauss (2018) ‘Project F.L.X. Redefines the Future of How Jeans Are Designed, Made and Sold’

Olena Velychko Print Nordea Min (1) 500

Olena Velychko, ESG Analyst at Nordea Asset Management

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