Our Thoughts on the South China Morning Post Investigation

The SCMP article by Finbarr Bermingham and Cissy Zhou shines a harsh light on the many challenges in the social compliance audit space. The many challenges around delivering transparent visibility around factory conditions, while highlighted by the article, unfortunately, are not new. These have existed in the industry for a while, and if anything, have been exacerbated by the prevalent and evolving macro-economic situation (sourcing shifts, trade war, Covid, changing demand, etc.).

What should not be missed from the many examples is the fundamental shift that is taking place.  In previous years, retailers and brands were the ultimate customers.  They dictated which audit firms could be used and the characteristics of the service, such as transparency and a clear view on issues such as wage underpayment and excessive hours.  Increasingly, the factory is becoming the primary customer.  It should therefore not surprise anyone that what a retailer wants from an audit is different from a factory.  Retailers want transparency, factories do not.  Retailers want to understand where their risks are, factories would prefer not to jeopardize their orders.  All of these factors lead to a negative vortex – putting factories in the driver seat of determining what audits they will have performed, and who will perform them – so they get a favorable result.

The shift from proprietary customer programs to audit sharing programs has successfully reduced audit fatigue, but by reducing the number of audits it has also reduced the number of times factories are visited.  By reducing the visits, audit sharing programs have inadvertently increased the risk around already risky factories.

This is all happening at a time when there is a much greater emphasis by the investor community on the S in ESG.  As private equity and large institutional investors dive deeper into the supply chain, they will look for greater transparency and high-quality insights.  This is even more likely with the deteriorating financial health of suppliers.  The trade war and pandemic have put many suppliers under enormous financial stress, and this invariably leads to more risk.

Since our founding, we have tried to do things differently at ELEVATE. We have partnered with our corporate customers and worked hard to perform supply chain assessment work with care, diligence, and professionalism.  We have advocated for greater transparency, continuous improvement, worker voice, and capacity building.  We recognize that to bring about sustainable change, you cannot ignore the business impact of the solution.  Otherwise, you will get pass the audit solutions.

This is not to say that we are not susceptible to the challenges outlined in the article.  We have implemented a strong integrity oversight program (including anonymous grievance and whistle-blower channels). We have implemented machine-learning models that learn from incidents and predict which facilities are likely to be non-transparent and which auditors are more susceptible to integrity challenges – and structure our audits to mitigate that.  We score the quality of shared audit reports on various criteria and use targeted spot check visits to validate assessments and deep dive into high-risk areas.

All in all, this article serves as a reminder that in an evolving global commercial landscape, actions need to be considered along with their long-term ramifications. If anything, the action of a few bad actors should not negate the progress that has been made thus far by the many.  At the same time, the social responsibility stakeholders need to see where the trends seem to be leading and encourage a pragmatic course correction while accelerating the adoption of new innovations to address the weaknesses in the emerging model.

Read the SCMP article here or here.

These blogs are written by ELEVATE staff members or associates and the views and opinions expressed are not necessarily those of ELEVATE.