Two-thirds of Fashion’s Supply Chain Risks Are Social in Nature

Fashion companies should be paying more attention to the oft-overlooked “S” in ESG, according to new numbers crunched by data science firm RepRisk.

Roughly two-thirds of all supply chain risk incidents in the apparel and footwear sector over the past five years—much more than researchers anticipated before they dug in—have been linked to social issues, it said. Driven by human rights violations and poor working conditions, such cases have doubled since 2020 and risen by 22 percent in the past 12 months alone.

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“We looked across fast fashion, we looked at premium fashion, and we also looked at luxury fashion segments,” said Alexandra Mihailescu Cichon, chief commercial officer at RepRisk. “And across all three of these sub-segments, we saw that the ‘S’ risks—the social risks—were the most prevalent.”

Dealing with exploitative behavior isn’t just a moral imperative, she said. As the judicial administrations of companies affiliated with boldface luxury brands such as Giorgio Armani, Christian Dior and Valentino—all within the span of a year—have shown, social risks aren’t just reputational albatrosses, but they can also quickly escalate into legal liabilities that bear tangible financial costs.

Despite the global reckoning that the deaths of more than 1,130 garment workers in Bangladesh began in 2013, supply chains are becoming more complex due to a convergence of existential factors, making them more difficult to get a handle on, particularly with continued outsourcing to lower-cost locations with less rigorous regulatory oversight, Cichon said.

Climate change, the energy transition, geopolitical conflict and trade turmoil “intersect and amplify” each other, generating increased volatility that can raise input costs and disrupt business continuity. And while retail is not the only industry to be affected, it is “by far” the most exposed in terms of risk, she added. Private companies are also nearly seven times more likely to be implicated than those that are publicly listed.

“Supply chains are not just operational backbones, but they’re really strategic assets,” Cichon said. “The globalization of fashion over the last three decades has created long, large, complex and sometimes opaque supply chains that often stretch across dozens of countries. And what has happened since the Covid-19 pandemic is a lot of change and a lot of added uncertainty that have increased the challenges, and therefore risks to the sector.”

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At the same time, the changing legislative landscape has created increasing governance expectations. Both Australia and the United Kingdom are looking at beefing up their modern slavery acts to more effectively tackle child and forced labor. Germany has its supply chain due diligence act. And despite flagging enthusiasm, the European Union is still moving forward with its corporate sustainability due diligence directive, meant to hold large businesses to account for their social and environmental impacts. All these have heightened the scrutiny that companies face in their operations.

Environmental risks are still an issue for fashion businesses, Cichon said. When RepRisk looked at the data, animal mistreatment ranked at the top of incidents, especially when it came to luxury brands. The fact that social problems dominate risks, however, is “primarily a reflection of the global nature of fashion supply chain,” she added.

“How many rivers can you pollute?” Cichon said. “Then think about how many production facilities for fashion can have bad labor practices? It’s why companies need to be able to focus and prioritize their engagement and auditing when it comes to strategic suppliers.”

Tools are available to help companies get ahead of these risks. RepRisk says it combines human expertise with machine learning and AI to scour 2.5 million documents each day across 150,000 sources in 23 languages. Data, Cichon said, can provide clarity and transparency despite the fast-changing nature of the risks associated with the industry.

“So rather than drowning in data, drowning in noise, not knowing where to start, I think data that is timely and relevant can help to really, not just help to address risks proactively, but also drive efficiency for complex supply chains,” she said. “These are issues that companies, investors and regulators are looking at and need to be aware of.”

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