Ethical sourcing
Elsevier Food International Vol.10, No.4, November 2007Vincent Hentzepeter
Retailers increasingly recognise the strategic benefits of acting as a responsible corporate citizen. Reputation risks are high when retailers source products from suppliers that use child labour or neglect other human and social workers’ rights.
Companies operating in a socially responsible way, need to be keen on business practices within their own organisation and in the countries and companies they work with. This is, or should be, a top priority, because corporate reputation is at stake. One important aspect is ethical sourcing, which establishes a company’s responsibility for labour and human rights practices within its supply chain. “Although it may be part of a company’s wider corporate responsibility strategy, by itself ethical sourcing says nothing about a company’s environmental performance, governance or community engagement,” says the Ethical Trading Initiative (ETI) on its website www.eti.org. UK-based ETI is an alliance of companies (including all leading British retailers), non-governmental organisations and trade unions. Ethical sourcing is also different from fair trade, ETI says. “Ethical sourcing tries to ensure that decent minimum labour standards are met in the production of a company’s products. By contrast, fair trade is primarily concerned with the trading relationship, especially those involving small producers in the South. Fair trade ensures that producers are paid a decent price (…). Many consumers will always be prepared to buy special fair trade products, while expecting that mainstream products are safely and decently produced.”
A common code of conduct
So much for a definition. Ethical sourcing is about labour and human rights conditions and has decency as a common denominator with the broader concept of Corporate Social Responsibility (CSR). The two most commonly used codes of conduct for ethical sourcing are ETI’s Base Code and SA8000, the social accountability system developed by Social Accountability International (SAI). Based in New York, SAI is ETI’s US peer. Both organisations, however, aim for the same: decent working conditions throughout the supply chain worldwide. As SAI puts it: “SA8000 is a way for retailers, brand companies, suppliers and other organisations to maintain just and decent working conditions throughout the supply chain.”
“In food the main codes include the ETI Base Code for UK companies and EUREP GAP – which includes labour standards amongst a raft of other standards – for Europe”, says Man-Kwun Chan, ETI’s Head of Communications and Research. “The ETI Base Code also refers to garments and other manufacturing, as does SA8000 which is more written for the manufacturing sector. There are significant differences between codes, but they tend to refer to a common set of issues converging in the standards of the International Labour Organisation (ILO).
First convened in February last year, the Multi-Stakeholder Organisations Collaborative Project aims at uniting leading code of conduct organisations in a programme of collaborative work. This brings together six American and European organisations:
Clean Clothes Campaign
Ethical Trading Initiative
Fair Labour Association
FairWear foundation
Social Accountability International
Worker Rights Consortium
Over a two-and-a-half year period, this initiative wants to create a replicable model for collaborative work and to identify the most efficient and effective methods of code enforcement. According to SAI “(…) this project will lay the groundwork for potential agreement on a common code, upward harmonisation of monitoring systems and the creation of formal structures that will facilitate long-term cooperation among monitoring groups, global brands and local actors.”
Companies that are leading in fighting socially irresponsible suppliers implement aggressive supplier screening and development programmes. Suppliers are required to comply with certain codes of conduct as developed by the organisations represented in the collaborative project, suppliers are audited to ensure compliance and leading retailers provide them with training to improve social performance.
Ethical sourcing in practice
“Overall food retailers do not pay enough attention to ethical sourcing”, says Chan. “At ETI we would like to see more quantity and quality of ethical sourcing activity. Key criteria to assess a company’s ethical sourcing performance are:
• Whether or not the company adopts all the principles of the ETI Base Code
• Extent of top management commitment to ethical trade
• Human and financial resources allocated to ethical trade
• Communication within the company and supply base about ethical trade
• The extent and quality of monitoring activity (audits of suppliers’ working conditions)
• The ability to detect non-compliances with the ETI Base Code in their monitoring activity
• The ability to implement corrective actions where non-compliances are found
• The extent to which the company invests in training and building the capacity of suppliers, trade unions and/or NGO’s in supplier countries enabling them to identify and rectify labour problems
In order to do well on these criteria, we believe that a company needs to plan long term to improve labour conditions in their supply chain year on year and work in partnership with their suppliers over time to improve conditions.
In practice, it is difficult for a socially responsible company to assess its suppliers. Finnish retailer Kesko implemented a handbook on social quality control and encourages its suppliers to adopt the SA8000 standard. “Kesko has acknowledged that social quality control of suppliers has been a greater challenge than anticipated,” reports Innovest Strategic Value Advisors. Innovest analyses the financial and strategic performance of companies and focuses primarily on non-traditional risk and value drivers such as environment, strategic governance, human capital, labour relations, stakeholder capital and emerging markets strategy. According to Innovest, the Finnish market leader does not have the sheer size to demand its suppliers to comply with the SA8000 standards. Kesko asks its suppliers to provide basic information and answer questions on child labour, work safety problems and other related social issues. Kesko’s buyers visit the supplier to present Kesko’s principles and the SA8000 standard. Kesko, however, acknowledged that its efforts to social quality control of its suppliers generated lower results than expected. In 2001, 220 companies responded to Kesko’s questionnaire and 11 of its suppliers have a SA8000 certification.
If size matters to compel suppliers to source decently, French retail giant Carrefour should be in a position to enforce this. Carrefour is committed to upholding and enforcing the basic workers’ rights as laid down by the ILO. In its 2002 Sustainable Development Report, Carrefour says that it began conducting social audits among its suppliers in 1995. In 2002, 24 sites were audited in China, 44 in India and 49 in Bangladesh. “Corrective action was taken to improve working conditions, working hours and wages in each factory,” Carrefour reports. “In Bangladesh, suppliers are improving their practices under the combined pressure of retailers and the government.”
Since 2000, Carrefour has conducted 258 audits. Three per cent of these audits led to an immediate termination of the supply contract. Seven per cent of the audited companies performed well and did not urge Carrefour to corrective actions. A vast majority of 51 per cent, however, did require corrective actions plus follow-up audits, while 39 per cent of the audits resulted in corrective actions without the need to an immediate follow-up audit.
Transparency in reporting
Another French retailer, Groupe Casino, says in its 2002 Sustainable Development Report that it has been pursuing a programme of action at its purchasing centre to promote and verify respect for human rights among its suppliers in developing countries. Casino says that in 2001 and 2002 it conducted social audits on production sites of non-food products that had already been identified as sensitive (in China, Indonesia, Bangladesh, India, Vietnam, Thailand, Mauritius, Turkey and Morocco). For 2003, Casino set a target of 50 social audits. Regarding the outcome, Casino reports that “Corrective actions were defined in collaboration with the managers of the factories concerned, and these are subject to periodical follow-up.” Some hundred of Casino’s buying and marketing managers were trained in ‘social ethics awareness-raising sessions’ and they received an ‘ethical passport’ and a visual assessment grid which enables them to foresee potential risks with respect to the criteria of requirements of Casino’s Supplier Ethical Charter.
For Innovest, this is not enough. Referring to Casino’s mention of corrective actions that were taken, Innovest’s analysts say that “it is extremely disappointing that Casino has not been transparent regarding the outcome of the audits, nor the corrective actions that are required.” Innovest qualifies Casino’s reporting on human rights protection as “poor”. “There is an ethics charter aimed at respecting human rights, however, this is not communicated externally nor is it clear how successful it has been. Failure to address these issues comprehensively and transparently may signal to investors that the group is not addressing the full spectrum of non-financial risks.”
Sainsbury’s is clearly a leader in ethical sourcing and displays its Code of Conduct for Socially Responsible Sourcing via its corporate website. In its 2002 annual Report on Socially Responsible Sourcing, Sainsbury’s says it has trained all its buyers and quality managers in socially responsible sourcing. Sainsbury’s Quality Assurance Managers categorise its suppliers as high, medium or low risk. In 2002, Sainsbury’s had 262 high or medium risk suppliers, because they source from high or medium risk countries. Of these, 155 received an external audit in 2001 or 2002. Four hundred and sixty-two low risk suppliers conducted a self-assessment.
Between idealism and pragmatism
Full social audits are a costly business. “There is no great risk in progressing faster than our competitors as long as we keep the right balance between idealism and pragmatism," said Carrefour’s chief executive Daniel Bernard in Carrefour’s 2002 Sustainable Development Report. This also holds true for Sainsbury’s, who next to full social audits also works with one-day audits by BVQI, an external and independent certification body. “These audits are a compromise of cost versus a full social audit. They involve one auditor only (…),” Sainsbury’s reports. In 2002, 43 of these one-day audits were carried out, resulting in five delistings of suppliers. An additional 56 audits were conducted by the external auditing company Intertek Testing Services (ITS). Thirteen suppliers were compliant while ITS registered 78 significant non-compliances by 43 suppliers, which are to be followed up by Sainsbury’s.
Innovest’s Intangible Value Assessment (IVA) rating methodology assesses the relative performance of 27 companies within the global food and drug retailing industry on over 80 different aspects of corporate governance, human capital, stakeholder capital, emerging market strategy – especially important when it comes to ethical sourcing – products and services. Table 1 illustrates the IVA ratings for these 27 companies, dividing them into three tiers. In general, one can say that companies that perform better in Innovest’s IVA rating also pay more attention to ethical sourcing. As Innovest puts it: “Companies with above-average IVA ratings reflect an outstanding capacity to develop a suitable corporate governance structure to manage social issues, manage stakeholder relations, implement effective strategies for operations in emerging markets, create an adequate working environment in domestic and overseas operations and improve human rights in the workplace.”
Carrefour: Results of social audits since 2000
| Disengagement | 3% |
| Excellent performance with no corrective actions | 7% |
| Corrective actions with follow-up audits required | 51% |
| Corrective actions without follow-up audits | 39% |
638 Social charters have been signed
83,864 workers were concerned in these audits in 2002
Source: Carrefour Sustainable Development Report 2002
ETI Base Code
Employment is freely chosen
Freedom of association and the right to collective bargaining are respected
Working conditions are safe and hygienic
Child labour shall not be used
Living wages are paid
Working hours are not excessive
No discrimination is practised
Regular employment is provided
No harsh or inhumane treatment is allowed
Source: Ethical Trade Initiative
SA8000 Elements
No child labour
No forced labour
Health & safety
Freedom of association
Freedom from discrimination
Disciplinary practices restricted
Reasonable work hours
Compensation to meet basic needs
Management system
Source: Social Accountability International – www.sa8000.org
.jpg)
