Due Diligence in Cotton Supply Chains Is a Real Challenge

Rashad Abelson, legal expert at the OECD Centre for Responsible Business Conduct, has been closely examining supply chain issues. For him, responsible business conduct (RBC) begins at home. It is important to have an RBC policy and embed it into company management systems.

There’s a way to go about things. Due diligence, he argues, is an ongoing non-linear process, and should be focused on progressive improvement over time.

In the modern economy, some large manufacturers might be working with thousands or even tens of thousands of first tier suppliers. At the second and third tiers, the numbers grow phenomenally. Suppliers (up and down the chain) also change often for various reasons.

These, says Abelson, make mapping supply chains extremely challenging, especially when one is the farthest downstream point and wants information on the farthest upstream point.

To overcome these, two things are recommended: identify “choke points” and collaborate with other stakeholders to engage with these choke points.

Abelson explains: “Choke points are key areas for transformation in a supply chain. These are stages in the chain that include relatively few actors who handle a significant amount of the commodity or raw material and have greater visibility on the upstream side of the supply chain. Not all choke points need to meet these criteria, and there can be more than one choke point in the supply chain.”

In the cotton supply chain, there are a few points in the supply chain that meet these criteria: commodity traders and yarn manufacturing / spinning are potential choke points.

The simplest way to do due diligence would be this: the farthest downstream point up to the commodity trader can identify the commodity traders, and then commodity traders in turn can identify where they source their cotton from. This can give downstream players a rough idea of the potential high-risk areas their cotton might be coming from.

Once there is agreement on a choke point, the whole supply chain approach can be put in place to gather information from responsible supply chain players. This includes contractual requirements that suppliers identify choke points in the supply chain, asking suppliers to only source from choke points that source responsibly themselves, and working with industry bodies to share due diligence information.

That’s also where the current problem lies: there is no general agreement in industry about what these choke points are.

Abelson talks about best practice in other sectors which mostly is to collaborate in identifying a common choke point and setting up common due diligence protocols. For instance, it could be an information disclosure form that the choke point can fill out and distribute to all its business relationships. This is normally done through industry bodies and certification schemes as also engagement with other stakeholder groups like civil society organisations and trade unions.

There’s an example from the minerals industry: once those choke points are identified and commonly accepted audit protocols are put in place, those can lead to significant uptake in responsible sourcing practices across the supply chain and significantly more efficiencies following acceptance of even one single responsible sourcing audit.

But, as Abelson pointed out, industry is yet to agree on what choke points are.

The entire subject becomes  an issue of farm-fibre-fashion policy engagement through due diligence, and in today’s world, the demand for sustainability comes from various quarters, most notably consumers, policymakers, and civil society organisations (CSOs).

Ayan Banerjee, who is with Solidaridad Asia, believes it is important to have an integrated approach “when we talk about cotton farmers at one end of the spectrum as the primary producers, and consumers at the other end.”

He goes on to elaborate: “Consumers, CSOs and policymakers are asking for more—beyond the bare minimum for companies in their procurement approaches and strategies. Heavy lifting is expected of the brands because that’s what you know from a consumer and public policy perspective. In this age of information overload, it is hard for brands now to say that we do not know or understand either the sources of the cotton or we don’t know or understand the kind of circumstances under which the production has been done. The general levels of responsibility across the supply chain have to go up, and this responsibility could be capped in so far as the approach to SDGs (UN Sustainable Development Goals) are concerned, but the spectrum of responsibility will expand and it has already been seen to be spanning across the supply chain. Therefore, the responsibility of the due diligence should factor the farm to fibre and finally the fashion that consumers end up engaging with.”

The OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector, says Banerjee, provides the elements of guidelines for responsible supply chains. The value—which is established or demonstrated—has two sides. One is the economic value, and the other is the ethical aspect. The way to meet such kind of requirements of sustainability will have to germinate by embracing public policy.

And still, responsibility has to go beyond risk mitigation. There are two approaches that brands and companies and large companies in particular could take, says Banerjee. The first is to de-risk the procurement system which means that one creates a kind of label—a certain geography, landscape or product mixes—as high risk and hedge one’s position by reducing procurement from those areas, essentially labelling them as legally difficult to engage with.

The alternative way, he insists, is that one could engage in a much more sustainability-centric engagement, which essentially means that one has to work with multiple stakeholders, local governments and CSOs in the spirit of the SDG  17 partnerships and also through means of collective action. Brands, so far, are not in this enough (since there is a common agenda for sustainability).

Civil society, says Banerjee, can help in the development of these supply chains. So, the question therefore is what the business case is, and why would civil society want to engage.

Talking about risk mitigation, Banerjee says purging is risky for socio-economic development. The cotton communities would be severely and adversely impacted on multiple grounds—be it climate change, gender or social inclusion, decent work, access to fair value, etc. A capital flight would become inevitable, affecting landscapes much more.

There is, of course, a business case for brand engagement in sustainability. One approach is that the engagement is a slightly long term one, with a gradual transition towards sustainable practices on the ground from the farmer onwards and into the forward sections of the supply chain. Overnight changes may not happen, but a lack of engagement will prevent capacity building. On the other hand, from a business practice angle, engaging in sustainable supply chain enhances the SRM (or, supplier relationship management) because now companies, brands and larger institutions can hedge their business risks by sourcing from a diversified pool of sustainable providers, sustainable suppliers, and to that extent future-proof their supply chains.

Therefore, as Banerjee argues, due diligence processes—in so far as mandatory frameworks are concerned—are beneficial and helpful. To say the least.