Legislation pending in New York has the potential to transform the fashion world. Should the Fashion Act pass, retailers and manufacturers will soon find themselves required to map the sources of at least half of their materials and products and disclose the environmental and social impacts involved in bringing the latest trends to SoHo storefronts.
Because the law would apply to any fashion company with more than $100 million in global revenue that also sells goods in New York, the Fashion Sustainability and Social Accountability Act is poised to have ripple effects felt well beyond Fifth Avenue. Large fashion companies could face new detailed reporting obligations that may prompt them to fundamentally rethink their supply chains and dramatically reshape their operations.
The Fashion Act would be the first sustainability law of its kind to target the fashion industry on such a wide scale. By imposing new reporting obligations on much of the industry, it aims to bring greater transparency to the environmental and social impacts behind the stylish clothing and accessories modeled on the runway.
The Fashion Act gives companies one year to map their supply chains and 18 months to disclose the impacts on their websites, but many companies may find it challenging to meet that ambitious timeline. Although the legislature isn’t scheduled to vote on the Fashion Act until later this spring, companies should consider preparing now. Here’s why.
Stringent Disclosure Requirements
Even for fashion companies that have embraced sustainability, the Fashion Act’s extensive disclosure requirements are daunting. For example, companies will need to:
- Map the source of at least 50 percent of their materials and products by volume across all tiers of production.
- Create a social and environmental sustainability report.
- Disclose their policies on responsible business conduct.
- Identify and assess risks in their activities and supply chains.
- Publish corrective action plans and measures to track implementation.
- Set quantitative baseline and reduction targets on energy and greenhouse gas emissions, water and chemical management.
- Independently verify greenhouse gas reporting.
- Disclose the annual volume of material they produce, broken down by material type.
- Report on the use of recycled materials.
- Report on the median wages of workers of prioritized suppliers and how this compares with local wages.
- Disclose an approach for incentivizing supplier performance on workers’ rights.
- Create timelines and benchmarks for preventing and improving environmental and social impacts.
- Submit an annual compliance report.
If the Fashion Act passes, companies will need to clearly disclose the environmental and social impacts involved in each step of their manufacturing and purchasing process, and make the information available online. Brands that don’t comply will face stiff fines, equal to 2 percent of their annual revenue. The New York attorney general is authorized to enforce the law, and consumers will also have a private right of action to compel the AG to investigate.
In addition to mapping out a strategy for compliance, companies should also begin considering how they will respond to the discovery of any supply chain issues that pose reputational risk, such as issues that might draw the ire of consumers or other key stakeholders. All it takes is one weak link in the supply chain to blow up a company’s image.
For example, what happens if a company realizes one of its suppliers actually sources cotton from Xinjiang, China, where a ban has been imposed by the U.S. on imports of cotton due to regional human rights abuses? Or how would an Italian shoe company respond if forced to disclose their leather isn’t truly local, but rather is sourced from Thailand, Vietnam or Cambodia?
Companies should thus plan sooner rather than later. Addressing the Fashion Act’s reporting requirements will not only take time in and of itself, but will also force companies to address issues they may have in the supply chain before they are disclosed to the public (and thus before any potential reputational fallout from such disclosure, which is the whole point of this legislative exercise).
Trend Toward Sustainability
The Fashion Act is part of a larger trend in which companies across many industries are embracing sustainable capitalism and prioritizing a commitment to environmental, social and governance, or ESG, considerations. Unlike fashion fads that come and go every year, this trend shows no sign of waning.
ESG issues have been bubbling below the surface for a while now, and regulation is starting to catch up. No industry has been untouched by this latest wave of rulemaking.
In many cases, state governments are driving these changes. More than a decade ago, California began requiring retailers and manufacturers doing business there to disclose efforts to eradicate slavery and human trafficking from their direct supply chain through the California Transparency in Supply Chains Act. New York’s Fashion Act would go even further by reaching into environmental impacts.
Other examples of recent regulatory activity affecting the industry include the California Garment Worker Protection Act, making California the first state to require hourly wages for garment workers; the Uyghur Forced Labor Prevention Act, banning cotton and other products from the Chinese region of Xinjiang made under forced labor; the French act of law against waste and for a circular economy, creating new obligations for textile companies to encourage recycling; the EU Proposed Directive on Corporate Sustainability Due Diligence, outlining companies’ duties to identify and account for adverse human rights and environmental impacts in their operations and across their supply chains, and the long-anticipated SEC’s proposed rules on climate change disclosure, requiring public companies to disclose their greenhouse gas emissions and the risks they face from climate change.
Important Considerations for Large Fashion Retailers and Manufacturers
What can fashion companies do to prepare for compliance with the Fashion Act or the next new law seeking to promote sustainability?
Here are some ideas for brands to consider:
- Create a holistic approach to ESG by integrating it into your corporate governance structure.
- Appoint a person or team to oversee compliance. While it is important for ESG to be embedded throughout an entire organization, having a small, central team solely focused on ESG can allow you to be more nimble and proactive in your strategy and integration.
- Gather information about the environmental and social impacts of your company, making sure the data is pressure-tested for accuracy.
- Work with your vast ecosystem of suppliers to begin mapping all sources of materials and products, and consider whether to shift production to regions affording more transparency and control.
- Focus on “predicting the present,” or anticipating potential ESG issues before they arise, including the public reaction to potential disclosures.
Should it pass, the Fashion Act will be an industry game-changer — requiring retailers and fashion companies to fundamentally rethink how they manage their businesses. Retailers that take charge and embed ESG principles across the enterprise to overhaul their supply chains and disclose and address the issues laid out in this legislation will be set up for success with customers, regulators and other stakeholders for a long time to come. Those that fail to proactively do so may be in for a bumpy ride going forward.
Andrew G. Gordon is a partner in the litigation department at Paul, Weiss, Rifkind, Wharton & Garrison LLP. Madhuri Pavamani is the director of the Sustainability & ESG practice at Paul, Weiss, Rifkind, Wharton & Garrison LLP.
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