Implementation of the Fashion Sustainability and Social Accountability Act – and its challenges

The Fashion Sustainability and Social Accountability Act (the Fashion Act) aims to change how fashion retailers – defined as those with global gross revenues of more than $100 million doing business in the State of New York – do business.

It would require them to map out their supply chains, disclose their adverse environmental and social impacts, and set targets to address those impacts¹; unsurprisingly, the scale of these objectives was enough to precipitate a brouhaha in an industry traditionally unaccustomed to disclosure requirements.

Companies at any stage of the sustainability journey, including those many years into their own, will need help meeting the requirements of the Fashion Act. What are the determinants of success in preparing for and complying with the Fashion Act? This article dives into the main provisions of the proposed law and outlines the challenges apparel brands and retailers face should the bill become law. The Fashion Act was originally expected to be voted upon during the 2023 legislative session but is now forecast for the 2024 legislative session.

Companies best positioned to meet the Fashion Act’s requirements have three features:

1. Strong transparent relationships with Tier 1 suppliers
2. Systems in place for tracking orders and textile volumes
3. Internal support, such as a budget and positions dedicated to sustainability and supply chain management

Unfortunately, for those responsible for preparing their companies for the Fashion Act, these may not apply. Your company may need a dedicated budget, systems for data collection or relationships with its Tier 1 suppliers. The Fashion Act, however, is about disclosing, progressively lowering and setting strategies around your impacts. Accordingly, the law’s requirements need not be daunting.

The supply chain jigsaw puzzle

Supply chain mapping arguably will be the most difficult of all the items requiring disclosure. Tier 1 suppliers often hold direct contracts with the company and handle finished product assembly and exporting. Tier 2 suppliers supply to Tier 1 suppliers and are responsible for material production, including dyeing and trims. Tier 3 suppliers are involved in completing raw material processing into yarn, such as cotton ginners. Tier 4 suppliers are the raw material extractors (e.g., a cotton farm). At a minimum, companies are required to delineate and disclose:

• Within one year of the law’s enactment, at least 75 percent of Tier 1 suppliers by production volume
• Within two years, at least 75 percent of Tier 2 suppliers by production volume
• Within three years, at least 50 percent of Tier 3 and 4 suppliers by production volume or dollar value

Of the 250 largest global fashion brands and retailers, 48% percent have disclosed their Tier 1 suppliers, 32% their Tier 2 suppliers, and 12% their Tier 3 and 4 suppliers as of 2022². Many apparel brands and retailers know at least several of their Tier 1 suppliers. However, that insight diminishes the farther down the supply chain you go, given that the relationships are typically between suppliers.

Other hurdles to mapping your suppliers include the complexities inherent in navigating globalized supply chains; the prevalence of subcontractors; the need for tracking systems for Tier 1 suppliers and their production volumes; inadequate rapport with Tier 1 suppliers; and no internal ownership of the issue.

Many existing platforms offering supply chain tracing services require Tier 1 suppliers to invite their Tier 2 suppliers to the same venue to provide information on every purchase order, followed by Tier 2 suppliers asking your Tier 3 suppliers and so on. Such an endeavor requires trust in suppliers, training, resources and transparency.

Many American apparel companies began this process for tracing cotton with the Uyghur Forced Labor Prevention Act, which prohibits the importation of products made with forced labor in China’s Xinjiang Uyghur Autonomous Region.

Many of these platforms, therefore, employ specially tailored onboarding questionnaires and documentation requirements for order tracing to ensure high-quality due diligence. These could be expanded to include information relevant to the Fashion Act. However, these platforms cost money, which invites the question of who would absorb these costs. Would it be the suppliers? Or perhaps your customers? What if the brands insisted that their suppliers use different platforms?

Measurement begets management begets reporting

Besides traceability, information on all tiers must be reported annually in a due diligence report. Such an undertaking would require collaboration among departments; processes for data collection and monitoring; time; expertise; and other resources.

It’s possible your company has yet to produce a sustainability report, or it has but didn’t cover all of the Fashion Act’s requirements. Information required to be disclosed includes:

• Measures for integrating responsible business into policies and management systems
• Policies, processes and activities for identifying and addressing potential adverse impacts
• Potential prioritized adverse impacts
• Actions taken to mitigate said material adverse impacts
• Steps taken to monitor and track implementation of said actions

You cannot report on (or manage) what you do not measure. Therefore, establishing the required policies, processes and workflows for achieving these items is necessary for reporting.

In addition to traceability and reporting, there are disclosure requirements specific to Tier 1 suppliers:

• Quantitative targets for greenhouse gas (GHG) emissions and energy, water and chemical management³
• Total annual volume of materials produced⁴ 
• Use of recycled materials in the production of materials⁵
• Median wages of workers⁶
• Approach to encouraging performance in labor rights among suppliers⁷
• Timelines and benchmarks for avoiding and mitigating adverse environmental and social impacts

You must first have benchmarks to set targets for energy, GHG emissions, and water and chemical management. A benchmark refers to a standard or point of reference against which progress is measured. KPIs for measuring your Tier 1 suppliers’ impacts would thus be an appropriate starting point. The mapped-out supply chains would also prove valuable for recordkeeping, as supply chain environmental and social impact monitoring isn’t possible without up-to-date records identifying your suppliers.

Tracking these factors can be challenging, but there are many different approaches you could take – for example, utilizing software solutions for ESG metrics, Excel functionalities, surveys and assessments that are commonly used in the industry. These assessments include the Higg Facility Environmental Module and Higg Facility Social & Labor Module – maintained by the Sustainable Apparel Coalition (SAC) – both suitable starting points for monitoring your suppliers’ ESG maturity and impacts⁸.

These assessments are standardized and thus recommended, as they limit the need for overhead for your suppliers. They’re also set up in a way that facilitates data sharing among multiple buyers. The Higg Index tools are used by prominent apparel brands such as H&M, Walmart, Nike, Levi’s and Patagonia – to name just a few of the SAC‘s 250 member brands – and there’ll likely be crossover in the suppliers used.

Finally, the assessments include levels and scores for monitoring progress and third-party verification. It’s worth noting, however, that no standardized assessment tool alone will be enough, as each has its shortcomings. The tools should be considered part of a holistic strategy and not a stand-alone way of measuring impact.

Measuring the total volume of material gets complicated when you consider that garments are rarely made 100% of one material; blends, certified and non-certified materials, and matching sets in one purchase order containing a variety of textile components are common. If you still need to track textile volume and component information or use a platform that does this for you, it can be an arduous undertaking. Certified materials are often much easier to deal with since they already require documentation through the supply chain’s tiers that can be requested and kept on record. The use of recycled materials, for example, is one factor that could be certified for which information gathering may be more accessible. The higher the frequency of tracking, the better the quality of the information.

The human rights question

The Fashion Act also covers governance, environmental and social aspects, which are difficult to quantify and only occasionally offer much in the way of supply chain-related insights. Human rights – a catchall term encompassing many of the social sustainability issues and metrics in this domain – in the supply chain were brought to the fore by leading apparel brands following the 2013 Rana Plaza disaster in Bangladesh. During this tragedy, a building housing multiple apparel brands manufacturers collapsed, resulting in many garment workers being seriously injured and an estimated 1,134 deaths.

Since then, numerous programs and compliance requirements have been implemented to promote safety and better conditions for workers. However, median wages and other labor rights issues largely remain a black box, and transparency remains an ongoing issue for the industry. Audits, though helpful, only provide a snapshot in time and, therefore, an incomplete picture of actual conditions on the ground.

Fostering honesty among your suppliers is crucial for gaining a complete picture of your supply chain’s impacts. The ideal approach to supplier relationship management emphasizes progress by giving credit where it’s due while discouraging punitive measures for correcting performance gaps. This approach considers the myriad challenges for suppliers and recognizes that far from always being the result of mismanagement, gaps often stem from inadequate resources and support.

Threatening separation or voiding contracts due to minor violations of supplier codes of conduct isn’t conducive to fostering the level of trust necessary for suppliers to feel comfortable disclosing those gaps from the outset. It also overlooks the important role of fashion retailers in creating counterintuitive incentives, such as unreasonable deadlines and not indexing wages to inflation, that can encourage suppliers to cut corners and mistreat workers. A strategy that integrates metrics and factors in all these considerations would be appropriate and ideally incorporated into your disclosure for the Fashion Act.

Obtaining consistent information from suppliers is a herculean endeavor inviting specific questions:

• What should be demanded of suppliers?
• What should the water and chemical management goals be?
• How are environmental and social risks identified and analyzed using this information?

Time is of the essence

It’s true that the Fashion Act might face obstacles on its path to becoming law. However, this uncertainty should not deter companies from taking bold steps towards sustainability. The pace of regulatory activity is accelerating, and stakeholders are becoming increasingly vocal in their expectations from companies.

The introduction of this bill paints a picture of a nation committed to accountability and transparency, echoing similar actions taken in other countries. Within the US alone, both federal and state legislation has passed or been introduced in recent years, reflecting the essence of the Fashion Act, including, but not limited to:

• California Transparency in Supply Chains Act (passed)
• Uyghur Forced Labor Prevention Act (passed)
• Fashion Workers Act (proposed)

Even if your company’s role might not fall directly under the law’s purview, it is wise to begin the journey now. Buyer demands for such transparency could be imminent. Furthermore, aligning with the bill’s disclosure requirements can uncover avenues for waste reduction, enhanced resource use and improved production efficiencies, all leading to increased profitability.

Recognize that compliance with the Fashion Act will demand considerable time and resources. To embrace this challenge, early adoption is key. An internal undertaking of this magnitude necessitates a dedicated timeline, likely around 18 months or more. Collaboration across departments, supplier cooperation and guidance from a trusted third party are essential components of success.

Kick-starting action from your procurement department is a strategic move. You likely already have relationships with, and influence over, suppliers. The potential for positive impact is immense.

Bear in mind that this proposed law carries weighty enforcement mechanisms. The New York State Attorney General can enforce it and publish a noncompliant company list annually. Furthermore, private citizens can initiate legal action. Accuracy and timely participation are paramount. Robust efforts ensure compliance.

How Mazars can help

With our supply chain management expertise and proven track record of success helping clients navigate an increasingly stringent regulatory landscape, Mazars can assist with all of the challenges described above – and has many recommendations.

Whether you have 10 or 10,000 suppliers, whom to prioritize will be a question of which supplier(s) you have the most influence over and which delivers most of your orders by volume, in addition to other criteria material to your company.
Engagement with suppliers is encouraged over separation, as threatening and following through on a threat to end a business relationship can diminish trust and hamstring potential remedies that could have generated benefits.

Incentivization is critical and should be aimed at fostering honesty and transparency rather than penance, which can create counterintuitive incentives; specifically, punishing suppliers for their inability to meet new requirements may lead them to take shortcuts or otherwise engage in dishonest business conduct, which would be detrimental to your sustainability goals and present reputational risks to your company.

One element of the Fashion Act that will work in your favor is that notwithstanding the bill’s being one of the first of its kind, leading apparel brands have already begun to address several provisions. For example, Walmart requires all Tier 2 suppliers to be registered and to disclose information on specific environmental impact metrics. Gap Inc. tracks women empowerment metrics for its most significant Tier 1 suppliers by volume⁹. Companies are likely asking the same questions as your suppliers, so you need not reinvent the wheel or engage in unnecessary work. The easier you make it for your suppliers to meet your goals, the greater the chance they can provide you with the information you need.

Our Sustainability/ESG team has extensive practical experience with sustainability management in apparel both in New York and globally, and that makes us the ideal choice for helping you meet any of the provisions of the New York Fashion Act.

Our services, listed below, can be tailored to your needs:

• Assisting with policies and processes for identifying and addressing impacts
• Conducting gap analyses
• Creating and implementing strategies, such as supply chain tracing
• Establishing processes for data collection
• Performing due diligence to reduce risk from corporate actions
• Assuring meeting all requirements
• Reporting on ESG information
• Setting KPIs for all relevant material topics

The time to act is now. The fashion industry is on the cusp of transformation, and your company can lead the way toward sustainable practices. Embrace this opportunity for change, not just for compliance, but for a brighter future for both your business and our world.

Work with us 

Author

Kajsa Ralston, Sustainability Manager

References

1 “Fashion Sustainability and Social Accountability Act”. S7428/A8352. New York State 2021-2022 Legislative Session.

2  Fashion Transparency Index 2022 by Fashion Revolution - Issuu,” July 14, 2022. https://issuu.com/fashionrevolution/docs/fti_2022.

3 GHG targets must be science based, in line with the GHG Protocol and independently verified.

4 Broken down by material type. Must also be independently verified.

5 Compared to growth targets. Must also be independently verified.

6 In addition to an analysis of how the wages compare to local minimum and living wages.

7 Including KPIs and performance incentives for rewarding them, e.g., longer-term contracts, price premiums and contract renewals.

8 Sustainable Apparel Coalition. “The Higg Index.” Accessed April 25, 2023. https://apparelcoalition.org/the-higg-index/.

9 Gap Inc. “Empowering Women.” Accessed May 1, 2023. https://gapinc.com/en-us/values/sustainability/empowering-women.

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.