With the Winter Olympic Games set to get underway in Beijing, U.S. companies face heightened scrutiny of their global supply chains as the Biden administration implements a law aimed at blocking imports of Chinese goods made with forced labor.
The Department of Homeland Security is seeking recommendations for best practices on providing transparency and accountability in supply networks of companies that rely on China for raw materials, partly finished goods and finished products. It's a thorny issue with activist shareholders focused on environment, social and governance issues, as well as lawmakers and consumers.
DHS will use the feedback in implementing the law signed in December and going into effect on June 21. The bipartisan legislation followed growing evidence that the Uyghur people and other ethnic minorities in China’s Xinjiang region have been coerced into work at factories, farms and mines for various industries including suppliers for apparel companies, food brands, solar panel makers, electric vehicle manufacturers and tech companies.
"No company wants to have forced labor in their supply chains," said Aron Cramer, president and CEO of BSR, a nonprofit that consults with 300 companies worldwide on issues including sustainable supply networks. "As we see companies raising their ambition on a whole range of ESG topics — labor standards, labor practices, carbon, water, other natural resource inputs, human rights — supply chains are essential to achieving their goals."
In a notice published in the Federal Register last month, DHS asked for information on tracing tools and due diligence methods that importers and U.S. Customs and Border Protection can use to avoid importing certain Chinese goods. It asked which types of evidence companies can share to rebut any presumptions about how products from China’s Xinjiang were made. It's also asking about the need for a common set of supply chain traceability and verification standards.
These concerns have heightened ahead of the Beijing Winter Olympics, which start on Friday and run through Feb. 20. The International Olympic Committee and its corporate sponsors have largely avoided discussing China’s human rights record despite diplomatic boycotts from the U.S., the U.K. and other nations, and calls from Republican lawmakers that companies including Airbnb Inc., The Coca-Cola Co., Comcast Corp.'s NBC and Visa Inc. acknowledge forced labor in Xinjiang and pull their advertisements from the Games.
Investors focused on ESG issues are urging companies to evaluate whether modern slavery is prominent among suppliers in China and across the globe. Apple Inc. shareholders will vote on March 4 on a shareholder proposal to require the tech giant to examine how its procedures avoid forced labor and human rights violations after the Securities and Exchange Commission rejected the company’s request to block the proposal from advocacy group SumOfUs.
“Our respect for human rights includes our commitment to ensuring everyone is treated with dignity and respect across our worldwide supply chain,” the company said in its 2022 proxy statement recommending investors vote against the proposal. “Apple has zero tolerance for forced labor, and looking for the presence of forced labor is part of every supplier assessment we conduct.”
The law’s implementation will be an opportunity for companies to look at how supply chains align with corporate ESG goals, including public commitments on responsible sourcing and human rights, and where they can improve on such metrics.
“Over the last several years, companies have been required to exercise increasingly robust vigilance over their supply chains, not only to satisfy new regulations, but also to comply with their environmental, social and governance commitments to stakeholders,” said Jeffrey Brian Margulies, Christopher Pelham and Stefan H. Reisinger, partners at Norton Rose Fulbright US LLP.
The statute marks the next chapter of this trend and will push companies to be more proactive in scrutinizing their suppliers and subsuppliers through internal investigations and reviews of vendor selection, monitoring procedures and other processes, the lawyers said in a note last month. As the government’s guidance on the law emerges, firms that have potential exposure to forced labor need to evaluate all of their public statements on their vetting for suppliers and vendors.
“For listed companies that may have supply chain connections to [the Xinjiang region], such statements may become a new area of shareholder litigation and governance disputes,” Margulies, Pelham and Reisinger said. “In fact, listed companies may consider taking this opportunity to review and update their ESG programs more generally.”
Hugo Boss, Calvin Klein
Companies and industry groups have made efforts to crack down on potential links to forced labor in the past two years. For example, Solar Energy Industries Association, which represents 1,000 member companies, in 2020 started working with solar companies to leave the Xinjiang region and provided a set of recommended policies and procedures to help firms responsibly source materials for solar panels and other components.
Meanwhile, fashion brands including Hugo Boss and PVH Corp., the parent company of Tommy Hilfiger and Calvin Klein, have vowed to improve verification processes to ensure clothes are not made with cotton harvested by forced labor.
Companies share the same interest with regulators, consumers and investors in strengthening the traceability of global supply chains to understand the conditions under which products are manufactured, BSR's Cramer said. “Without managing supply chains effectively, the companies' broad goals will not be achieved," he added.
While technology has helped supply chain management, tools currently available have limitations, Cramer said. Companies face difficulties in tracing the origins of raw materials that go through commodities markets. Factory monitoring systems also have room for improvement and in-person visits provide only a snapshot in time, not the full day-to-day experience.
Capturing the full picture of what goes into supply chains, especially internationally, will take time and require a wide range of technologic and policy measures, but that should not stop companies from working toward absolute certainty of zero forced labor in supply chains.
“We don’t want the perfect to be the enemy of the good,” Cramer said. “We need to use verification and traceability tools to improve the conditions of factories, whether in China, or anywhere, including the United States, and know that an iron-clad, 100 percent guarantee can be hard to prove.”