Customers, investors, suppliers, and other stakeholders are expressing their need for more attention to human rights issues and responsible supply chain management, by organizations. This development becomes especially evident as these topics emerge as highly relevant to different stakeholder groups when conducting a materiality assessment. The EU Directive on corporate sustainability due diligence, published earlier this year will require increased transparency from organizations around their supply chain management, also those organizations whose production and supply chains have previously been difficult to trace.

Requirements for European companies

Although the acceptance of the draft legislation by the European Parliament and the Council is still pending, the document already provides general requirements that European companies will have to comply with. The legislation will apply to the company’s own operations, its subsidiaries, and the value chains. The requirements are listed below:

• Integrate due diligence into policies;
• Identify actual or potential adverse human rights and environmental impacts;
• Prevent or mitigate potential impacts;
• Bring an end to or minimize actual impacts;
• Establish and maintain a complaints procedure;
• Monitor the effectiveness of the due diligence policy and measures; 
• Publicly communicate on due diligence.

Aside from adhering to legal regulations, human rights as well as responsible supply chain management should be a core ESG topic for organizations aiming to be sustainable and successful. As is clear when considering materiality assessments, these two aspects are assessed as fundamental topics for every (producing) company. This applies especially to high-impact sectors, such as agriculture, the extraction of minerals, as well as textiles/fashion and these industries will do well to give these the attention they need as the upcoming EU directive will have far-reaching impacts, especially for them.

Environmental and social concerns in the fashion industry

The fashion industry is considered a high-impact sector, due to its global value chains as well as the significant impacts on environmental and social matters. As part of the production process of a fashion piece, it not only passes through many parts of the textile chain but is also often transported around the world. Each step often takes place in a different country. For example, the cotton material, which is required for the majority of fiber production, is grown on agricultural land in for instance India, the USA, China, and Brazil. Due to this globalized production process, the multiple steps in the value chain reveal difficulties for the environment and can entail social issues. From an ecological point of view, extensive water use, waste, toxic chemicals, and greenhouse gas emissions are the main issues caused by the textile industry. The production process also has social implications, especially in developing countries, where poor working conditions and low labor standards are common, and many employees are not able to cover living wages.

Companies in the fashion industry, facing the mentioned social and environmental challenges, need to take action to ensure that no environmental or social violations take place. The upcoming EU Directive, will ensure high due diligence and environmental standards within the value chain of European fashion producers.

Human rights and supply chain management as material topics

The materiality assessment of the two biggest European fashion companies (by annual turnover) Inditex and H&M, resulted in topics such as human rights due diligence, human rights in the supply chain, traceability of the supply chain, and supply chain assessments ranking as highly important within the matrices of both companies. In addition, Inditex activates the materiality topic of Human Rights in the corresponding report, giving information about the company’s human rights journey: In 2016, the company introduced the first human rights policy followed by training the social sustainability team in due diligence processes in 2017 and preparation of the impact matrix on the supply chain in 2018. The latest milestone was achieved in 2021 by developing the social sustainability strategy in the supply chain and extending it to other relevant areas of the company.

However, having a look at the industry performance (RTS retailing) in the ESG benchmark Corporate Sustainability Assessment (CSA), it becomes clear that there is still room for improvement in terms of human rights due diligence within the overall industry. One reason for this perception is that the industry mean score for supply chain management only amounts to 10 points and human rights to 11 points. This assumption that follows is then, that although some companies such as Inditex and H&M are already putting human rights due diligence into the focus of their ESG strategies, the ESG maturity of the general industry, specifically with regards to these topics is still low.

Sustainable pioneers in the fashion industry

Although the big fast fashion companies have been the long-leading market leaders, the change in society towards more sustainable consumption is having an impact on the fashion industry. So-called ‘Eco-Fashion’ companies are gaining larger market shares, based on a sustainable business model, which comprises the production (e.g., the application of circularity), the design of the clothes, which are made to maximize their life span, as well as fair and ethical conditions throughout their value chain. For instance, the German Eco-Fashion company ARMEDANGELS focuses on transparency by disclosing the full list of their manufacturing partners and their subcontractors, including information about the supplier, such as certifications (GOTS and GRS), energy origin, and employee gender split. Human rights due diligence is incorporated in their 2021 action report as well as in the human rights policy. In addition, ARMEDANGELS has a strict supplier assessment in place, which focuses on social and human rights and on environmental standards.

The increasing success of Eco-Fashion companies, as well as the public attention towards sustainability, indicates that traditional fashion companies will need to prioritize actions that ensure their ESG performance is accelerated.

Materiality assessment as a foundation for ESG acceleration

A materiality assessment is the foundation of a solid and forward-thinking ESG strategy by enabling an organization to determine which ESG issues are most important, for both the organization and its stakeholders.

As of 1 January 2024 large public-interest European companies or non-EU companies with substantial activity in the EU (over 500 employees), already subject to the existing Non-Financial Reporting Directive (NFRD), will have to comply with the newly adopted Corporate Sustainability Reporting Directive (CSRD). In 2025 large companies that are not presently subject to the NFRD will have to comply followed by listed SMEs and other undertakings in 2026. The Directive replaces the NFRD and will substantially increase reporting requirements for companies falling within its scope.

On top of the Double Materiality assessment being foundational for integrating ESG in organizational strategies, it will be required as part of the new CSRD. To help you get started on your materiality assessment and accelerate your organization’s sustainability, the downloadable checklist at the top of this article is a helpful tool.

Interested in learning more about materiality?

At Finch & Beak we provide organizations with support to accelerate their sustainability strategies, and one of the ways in which we do this is by assisting organizations with conducting their materiality assessments. If your organization is considering a materiality assessment or require support with preparing for the upcoming EU directive, reach out to Johana Schlotter at johana@finchandbeak.com or  +31 6 28 02 18 80.

^{Photo by Johannes Pokorn on Unsplash}