Responsible Sourcing – An Australian perspective | KPMG | AU

Responsible Sourcing – An Australian perspective

Responsible Sourcing – An Australian perspective

What is the Australian context for responsible sourcing? This was the key question posed at KPMG’s and Sedex’s 2017 Responsible Sourcing Conference in Sydney. To explore this topic, Richard Boele, Partner, Human Rights & Social Impact, KPMG, was joined by Mans Carlsson-Sweeny, Head of ESG Research, Ausbil Investment Management; Jaana Quaintance-James, Ethical Sourcing Manager, David Jones; and Robert Price, Director of Regional Services and Young Workers, Fair Work Ombudsman.

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Putting supply chains in order

Many investors are using a company’s treatment of ethical issues as a measure of how it deals with issues more generally, said Mans Carlsson-Sweeny of Ausbil Investment Management.

“A CEO once told me he wasn’t worried about their supply chain because they use the same factories as H&M (clothing retailer, Hennes & Mauritz AB). But if the CEO doesn’t research their own production line, then what else don’t they bother with? It’s disrespectful towards your brand, which is your key asset.”

Jaana Quaintance-James cites department store David Jones an example of the importance of management buy-in. David Jones had received an ‘F’ for ethical sourcing in 2014 from the Baptist World Aid Ethical Fashion Guide. After its sale to South African-based Woolworths, responsible sourcing was deemed a serious risk management issue that needed action. The most recent Guide gave David Jones a B+.

Quaintance-James pointed out that another issue is the public’s attitude. David Jones can’t afford to ignore ethical sourcing, however consumer research says the Australian public won’t pay more for ethical products. It is one of the reasons she doesn’t believe outsiders can sustainably drive cultural change within a business. It has to come from the people involved in the supply chain, starting from the top.

Fixing unethical franchise models

The Fair Work Ombudsman is seeing evidence that some of the recent franchise worker pay issues come from businesses applying an overseas culture in Australia, according to Robert Price, Director of Regional Services and Young Workers.

Price is adamant that culture drives the real operating model that affects working environments for franchisees, so potential franchisees need to understand it. The Ombudsman uses social media posts and reviews by staff to understand how ethical a particular franchise’s approach to managing workers may be.

Carlsson-Sweeny added that Ausbil promotes the premise that if a company has a poor ESG (environment, social and governance) profile, they might be valued at a discount.

“After all, a business model that is reliant on underpaid workers is not sustainable,” he said.

Price also noted that the recent rise in unethical practice cases have seen the Ombudsman step beyond its primary role of ensuring legal compliance to determining the drivers of non-compliance.

Harvesting agriculture’s reputation

Australian agricultural hand-harvest supply chains have been exposed for their exploitation of workers.

Carlsson-Sweeny believes that the observed rise in exploitative practices has been driven by a shortage of regional base-skill workers, coupled with increased price pressure.

Price said the Fair Work Ombudsman is currently surveying consumer opinion on the topic. Like other ethical sourcing issues, Price believes the result will reinforce what they already know: Australian consumers care more about ‘Australian made’ produce and animal welfare issues than worker rights.

“People do care, but they won’t change their purchasing to accommodate better wages and conditions for agricultural workers at home,” he said.

Price added that production cost versus retail price had to be watched carefully. He noted that when strawberries or milk are inexpensive, we can only hope people are being paid properly because the maths doesn’t point to it.

Jonathan Ivelaw-Chapman, CEO, Sedex, said the UK public have been educated about pricing by a campaign illustrating what farmers need to charge to cover their costs and receive a modest profit. He suggested that a similar awareness raising initiative could help in Australia.

Furthermore, he believes that a common problem for businesses is not having a holistic understanding of the issues involved.

“It requires investment in technology, processes and time that many firms aren’t prepared for,” he said.

Environment taking a back seat

Carlsson-Sweeny acknowledged that the environment seems to have dropped off as an issue in the West. However, he thought that fast fashion is at an inflection point regarding environmental and workers’ rights issues.

Textiles can be sewn anywhere, but most are made in China. To combat the surge in heavily polluting textile factories, China introduced its Comprehensive Water Pollution Control Plan in 2015. It has already had a major impact, with polluting factories shutting down and moving offshore.

“The problem is that any cost inflation needs to be absorbed. If environmental cost rises are absorbed by the manufacturer, there is less chance of a living wage for workers,” he said.

Sedex’s Ivelaw-Chapman added that the Chinese Government is aware of the ethical growing issues around tertiary outsourcing from China. He also recommended that organisations honestly appraise the cut-throat retail environment, and consider how much pressure they can expect from shareholders, suppliers and customers to ensure environmental issues remain top of mind in today’s business models.

David Jones’ Quaintance-Jones added that while the environment had fallen off its radar in the past, Baptist World Aid is adding environmental metrics into its next report and this will result in a shift in company engagement.

Negotiating better outcomes

Both Quaintance-James and Carlsson-Sweeny think it’s important for Australia to learn from other Western countries.

“We’re pretty similar, so look for lessons and hold yourself accountable to international standards,” said Quaintance-James.

Carlsson-Sweeny gave the example of a company that negotiated improved worker terms by offering to free up the supplier’s capital in return. He acknowledged that vertically integrated brands have more leverage in negotiations and advised companies to consolidate their supply chain to increase their influence.

However, the real starting point for all businesses is to thoroughly map out a supply chain and prioritise where the most significant risks are, starting with home brands.

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