GREEN IS THE NEW BLACK: Groundbreaking Fashion Act to Hold Brands Accountable

#businesslaw #corporategovernance #fashionlaw #fashionindustry #ESG #sustainabledevelopmentgoals #sustainability

Amidst the increasing climate risks, Environmental, Social, and Governance (ESG) related subjects have been making the headlines, and the tide has been shifting regarding ESG policy making. Governments across various jurisdictions are racing to impose stricter mandatory requirements, and businesses are trying to comply and stay one step ahead to spare retaliation risks. Nonetheless, for several years, fashion giants, like "Kering," the parent of luxury houses including Bottega, Gucci, Alexander McQueen, Yves Saint Laurent, and Balenciaga, have promoted sustainable luxury fashion.

Still, it is not enough, and environmental activists have long targeted the industry, as the fashion industry is mostly unregulated and cause advert effects on the environment and communities. According to the World Economic Forum, the fashion industry contributes up to 10% of global carbon emissions and ranks second in global water consumption [1].

Once operating as textile dyeing and finishing plants, many facilities have landed on the Superfund National Priorities List [2]. Lawmakers in New York are landing sustainability to the runway to green the fashion industry, introducing the New York State Senate and Assembly of the Fashion Sustainability and Social Accountability Act ("Fashion Act") in October 2021 [3]. If passed, the Act would be the first to attempt imposing sustainability-related obligations on the world's largest fashion brands. The adoption of the Fashion Act would impose strict requirements on fashion companies, including enhancing their supply chain and environmental disclosures, meeting set impact targets, and obtaining third-party assurance of reported information. Holding major brands accountable for their social and environmental impacts was long-awaited by human rights activists and environmental advocates, who hailed the Fashion Act. However, it is important to elaborate on the Fashion Act's implications on the Fashion Industry to understand how it could change the fashion industry's future toward a more sustainable industry. This article will identify the Fashion Act's scope of application and the main requirements imposed on the targeted fashion companies.

1.????SCOPE OF APPLICATION OF THE FASHION ACT.

The Fashion Act applies to companies meeting the following three accumulative requirements:

-??????????Fashion manufacturer or Fashion retail seller,

-??????????Doing business in New York, and generating, and

-??????????Annual worldwide gross receipts exceeding $100 million.

a.???Fashion Manufacturer or Fashion Retail Seller Definition Under the Fashion Act.

For the purpose of the Fashion Act, "fashion manufacturer" would be identified as a business entity with a principal business activity listed on its state business tax return as manufacturing activities in the state of New York and which primarily manufactures footwear and articles wearing apparel. The Fashion Act applies to the "fashion retail seller" that would be defined in this case as a business entity listing retail trade in the state of New York on its business tax return as its principal business activity and which primarily sells footwear and articles wearing apparel. Determining the principal business of activity is essential to identify the applicability of the Act to the fashion manufacturers and fashion retail sellers. New York Fashion Act drafter has taken an analogous approach to that taken by the California Transparency in Supply Chains Act policymaker [4]. The latter applied to entities that reported their principal business activities as retail sellers or manufacturers for that Act in the Californian tax return. Despite the clarity in defining the activities and entities, the Fashion Act broadly defined "articles of wearing apparel" and "footwear." The latter was defined as "any covering worn or intended to be worn on the foot, while the former was defined as "any costume or article of clothing worn or intended to be worn by individuals."

b.???Doing Business Requirement.

For the purposes of the Fashion Act, "doing business in New York" is generally defined as actively engaging in any transaction with the intent of obtaining financial or pecuniary advantage or profit. The Fashion Act established a jurisdictional nexus related to business activities rather than the place of incorporation of the enterprise or the latter headquarter. Such a nexus would affect a sizable percentage of the fashion sector falling under the scope of the Fashion Act.

c.????Financial Threshold.

The Fashion Act sets a financial threshold of annual worldwide gross receipts exceeding $100 million "gross receipt". "Gross receipts" refers to the gross sales amounts, properties exchange, services performed, or the property or capital use, including royalties, rent, dividends, and interest, in transactions generating business income and in which the gain, loss, or income is would be recognized, or recognized based on the transaction's occurred in the U.S. Further, when making the "gross receipt," costs of sold products would not be deducted from gross revenues, but unusual occurrences, such as earnings from stock sales, tax refunds, and litigation settlements, would be excluded.

To recap, the Fashion Act would apply to global apparel and footwear companies doing business in New York with more than $100 million in revenue. It applies to luxury fashion brands, such as Prada, Gucci, Hermes, and Louis Vuitton, and fast-fashion brands, such as Shein.

Once the Fashion Act comes into force, fashion retail sellers and manufacturers fulfilling the scope of the application's requirements will be legally bound to substantive compliance requirements and reporting.

2.????SUBSTANTIVE COMPLIANCE REQUIREMENTS AND REPORTING.

The Fashion Act's drafters have imposed mandatory minimum disclosure requirements on Fashion Retail Manufacturers and Sellers so that once put into force, they would be disclosing their social and environmental due diligence processes, policies, and outcomes. Such elements included in the mandatory disclosure requirements would reveal potential or significant real advert impacts of a social and environmental nature and targets and plans to mitigate such impacts or prevent the potential risks. The Fashion Act substantive compliance requirements mainly target the supply chain mapping and disclosure as well as disclosure on the impacts mentioned above and the subject Fashion Retail Manufacturers and Sellers due diligence.

a.???Supply Chain Mapping and Disclosure.

Subject companies will be subject to supplier mapping throughout all stages of production, from raw materials to final production, using good faith and risk-free efforts. At least 50% of suppliers by volume across all production levels. To that end, the business in question must make good faith attempts to identify and document all its prioritized suppliers, as well as the supply chains they are a part of.

b.???Due Diligence and Socio-Environmental Impacts Disclosures.

Social and environmental sustainability reports must be prepared for the required disclosure element. Externally relevant information on due diligence policies, methods, and actions would have to be disclosed in order to prevent, identify, mitigate, and hold responsible for possible negative repercussions.

As outlined in the OECD Guidelines for Multinational Enterprises (OECD MNE), the OECD Due Diligence Guidance for Responsible Business Conduct (OECD RBC), and the United Nations Guiding Principles on Business and Human Rights, "due diligence" refers to the process companies should use to identify, prevent and mitigate adverse impacts in their supply chain, own operations, and other business relationships.

In accordance with the International Labour Organization Declaration on Fundamental Principles and Rights at Work, the UN Guiding Principles, the OECD MNE Guidelines, and the OECD RBC Guidance, the following would be required:

• a link to applicable policies on ethical business activity on the website of the fashion retailer or manufacturer;
• information on the steps taken to incorporate responsible business practices into policies and management systems;
• the fashion retailer or manufacturer discovered major risks in the context of its own operations and commercial relationships, such as supplier chain.
• the substantial negative consequences on identified, prioritized, and assess risks in the context of its own operations and commercial contacts, such as supply chains;
• the criterion for prioritizing;
• the steps taken to avoid or reduce such risks, such as corrective action plans, must be noted if available, including projected dates, objectives, and benchmarks for progress, as well as their outcomes;
• metrics for tracking implementation and performance; and
• the provision of or participation in any remedy by a fashion retailer or a fashion manufacturer.

Within 18 months of the policies' implementation, processes, and outcomes, retailers and fashion manufacturers must also submit impact disclosure on prioritized detrimental environmental and social consequences. This disclosure must include:

• On energy and greenhouse gas emissions, water, and chemical management, reporting would be required to include absolute figures that conform to the Greenhouse Gas Protocol's Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol's Corporate Value Chain (Scope 3) Accounting and Reporting Standard. The reporting of GHG emissions would have to be verified by an impartial party.
• Annual volume produced, including breakdowns by material type: the amount of production that is displaced by recycled materials as compared to growth targets; the median wages of workers of prioritized suppliers; the approach for incentivizing supplier performance; and the amount of material that is displaced by recycled materials as compared to growth targets.
• The organization in question would have to provide any information on KPIs or performance incentives usage. Incentives, including contract renewals, price premiums, and longer-term contracts, would have to be described to reward suppliers and promote good performance.
• Set goals for effect reduction and tracking the results of due diligence, including, if possible, expected dates and performance standards.

The World Resources Institute's Apparel and Footwear Sector Science-Based Objectives Guidance mandates that climate change targets be set at a level encompassing all aspects of the apparel and footwear industry's manufacturing process. Thus, retailers and manufacturers in the fashion industry would have to satisfy yearly compliance goals and report their progress.

3.????PROCEDURAL REQUIREMENTS.

Except in the event of prioritized adverse environmental and social consequences, a fashion retail seller or manufacturer would have to publish the required disclosure on its website within twelve months after implementing its environmental and social due diligence, methods, outcomes, and policies. A clear and easily understood link to the disclaimer would be necessary on the website's homepage. If the fashion retailer or producer does not have a website, it must give the relevant disclosure within 30 days of receiving a consumer request for the information.

4.????ENFORCEMENT.

The Attorney General would be required to publish a report regarding compliance with the Act. The report would include a list of fashion retail sellers and manufacturers whose non-compliance is known.

If a fashion retail a seller or a manufacturer is not in compliance with the Act three months after receiving a notice of non-compliance from the Attorney General, the fashion retail seller or manufacturer might be penalized up to 2 percent of annual revenues of?$450 million or more.??The Act stipulates that levied fines must be put into a community benefit fund for environmental protection and justice initiatives. Furthermore, under the Act, private citizens would be able to:

• file a civil action against any person alleged to have violated the Act or an order by the Attorney General.
• require the Attorney General to investigate a company's compliance with the Act, to enforce compliance with the Act, or to apply the Act's restrictions, or
• proceed against the Attorney General if he or she is accused of failing to execute a statutory act or responsibility.

5.????THE FASHION ACT'S CURRENT STATUS AND CRITICS.

The Act is now in committee in the New York State Assembly and Senate. Given the potentially onerous nature of certain of the Act's proposed provisions, there is strong resistance to the Act in its current form in some places.

? Source: https://www.nysenate.gov/legislation/bills/2021/S7428

?However, major figures and institutions in the fashion industry and environmental campaigners are supporting the Act, including designer Stella McCartney, the New Standard Institute, and the Natural Resources Defense Council, all of whom are members of the Act on Fashion Coalition [5].

There are also requests to enhance the Act. on January 14, a coalition of twenty labor and human rights advocates and organizations, led by Remake and including the Business & Human Rights Resource Centre, Human Rights Watch, and the International Corporate Accountability Roundtable, sent an open letter to Senator Alessandra Biaggi and Assemblywoman Anna Kelles (D), the bill's Assembly sponsor, advocating for a more robust Act [6]. The coalition requested various amendments to strengthen the Act, including the following:

• Labor data disclosure needs to be expanded and strengthened.
• Obligation to conduct due diligence. According to the coalition, the law as written does not require firms to do due diligence but rather merely requires them to report on their due diligence methods.
• Penalties for harm caused or contributed to by or linked to a brand or retailer, as well as failure to meet targets set by brands and retailers.
• In accordance with the recently passed California Garment Worker Protection Act, a joint liability clause holds both brands/retailers and manufacturers accountable for wage theft in their supply chain and minimum wage violations [7].

The Remake coalition's proposed due diligence requirement and liability for adverse human rights and environmental impacts are intended to move the Act closer to the mandatory human rights due diligence model in place or proposed in some European jurisdictions, including that proposed at the EU level. In its letter, the Remake group also strongly requested lawmakers to seek additional stakeholder feedback when changing the bill from their coalition and beyond, particularly from affected communities and labor rights and environmental organizations, including unions in the United States and abroad.

Given the strong requests for revisions on both sides, to weaken or enhance the Act, it is almost clear that the law will be altered if allowed to proceed.

CONCLUSION.

The escalated extreme weather events can no longer be ignored. Their adverse effects put vulnerable populations at risk, take the lesser-vulnerable ones by surprise, and cause hazards aggravated by human activities. The environmental crisis is mission-critical, compelling corporations to comply with the associated stringent legal and social obligations. Consequently, Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) ?are shifting corporate culture across industries, including the fashion industry. However, a corporate culture takes time to crystallize, and meanwhile, advocates will continue demanding improved standards in governance and greater accountability. Such demands will span jurisdictions and industries, and the question will remain: how can lawmakers balance the competing interests while ensuring economic growth? ?

References:

[1] Morgan McFall-Johsnsen, These facts show how unsustainable the fashion industry is, 31 January 2020. Accessed on 12 June 2022. https://www.weforum.org/agenda/2020/01/fashion-industry-carbon-unsustainable-environment-pollution/

[2] EPA, Superfund: National Priorities List (NPL), United States Environmental Protection Agency, 11 March 2022. Accessed on 13 June 2022. ?https://www.epa.gov/superfund/superfund-national priorities-list-npl

[3] The New York State Senate Bill S7428 - 2021-2022 Legislative Session. Accessed on 13 June 2022. https://www.nysenate.gov/legislation/bills/2021/S7428?intent=support

[4] The California Transparency in Supply Chains Act. https://oag.ca.gov/SB657

[5] The Act on Fashion Coalition Official Site. Accessed on 12 June 2022. https://www.thefashionact.org/

[6] Remake, Labor and Sustainability Orgs Propose to Strengthen New York’s Fashion Act, 19 January 2022. Accessed on 12 June 2022. https://remake.world/stories/the-fashion-sustainability-and-social-accountability-act-proposed-amendments-letter/

[7] California Garment Worker Protection Act. https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220SB62

• Highlighted photo belongs to the Author: Malak Trabelsi Loeb
• Pictures added from Pixabay

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