Boohoo has found itself at the center of a headline-making scandal in connection with allegations that laborers in its supply chain are working in “cramped high-density conditions,” dominated by extreme temperatures and poor air quality, while being paid well below the national living wage. The allegations, as first revealed by way of an undercover investigation and subsequent report by the Sunday Times, have prompted pushback from British regulators, consumers, and investors, alike, with at least some, including one of its largest shareholders, Standard Life Aberdeen, which has sold two thirds of its holdings in the company – opting to distance themselves from the burgeoning fast fashion group.
The attention that the Manchester-headquartered company – which owns its marquee Boohoo brand, PrettyLittleThing, and Nasty Gal, among other fast fashion players – has received as a result of the media report of striking wage and labor violations highlights a “larger momentum” by corporations and investors that are “assessing their supply chains and portfolios for compliance with human rights standards and related risks,” according to Akin Gump Strauss Hauer & Feld LLP attorneys Isabel Foster, Chiara Klaui, Jasper Helder, Daniel Lund and Cassandra Padget.
This growing focus, they say, should serve as “a reminder” to companies and investors about “the importance of conducting human rights and modern slavery risk assessments, and “proactively dealing with any risks in advance and in the aftermath of investment decisions.” To be exact, these efforts “should be part of a corporate due diligence and risk mitigation strategy that encompasses wider environmental, social and governance (“ESG”) factors.”
Attention to non-financial ESG elements is proving increasingly compelling as the number of “retail and institutional investors that apply [them] to at least a quarter of their portfolios” continues to grow, according to Deloitte, with the number of companies adopting responsible investment strategies jumping from 48 percent in 2017 to 75 percent in 2019. However, firms that invest in accordance with ESG integration efforts and thus, evaluate ESG-related risks alongside more traditional measures, are not the only ones that should be cognizant of ESG-related risks.
Companies and investors, alike, should be considering these factors, especially the “S” in ESG – which consists of equality, diversity and inclusion, disciplinary issues, and health and safety concerns – in light of enduring wage and labor issues that could give rise to legal obligations that go beyond the immediate companies, themselves, and in some cases, extend to their investors.
Foster, Klaui, Helder, Lund and Padget emphasize the importance of ESG consideration for companies and investors, asserting that “the acquisition of assets derived (in whole or in part) from criminal conduct creates risks for acquirers and investors alike under the U.K.’s Proceeds of Crime Act 2002, as amended (“POCA”),” noting that “even where the criminality threshold under POCA is not met, suspicions of problems or potentially criminal conduct should trigger further internal due diligence and risk assessments.”
Looking beyond POCA, which provides law enforcement with the authority to confiscate the revenues generated by criminal activity, including in connection with gross human rights abuses or violations, they state that “the U.K. government’s and the European Union’s commitment to the deterrence of and accountability for human rights abuses is on the rise.” This is demonstrated, in part, by the U.K. government’s July 2020 implementation of its new Global Human Rights sanctions regime, which is aimed at targeting individuals, as well as corporate entities.
As the Foreign & Commonwealth Office and Hon. Dominic Raab MP asserted earlier this month that the “ground-breaking global regime means the UK has new powers to stop those involved in serious human rights abuses and violations from entering the country, channelling money through UK banks, or profiting from our economy.”
Just before that, in April 2020, on the heels of the European Commission’s study on due diligence requirements through the supply chain, European Union Commissioner for Justice Didier Reynders announced that the Commission will introduce legislation in 2021 to make human rights due diligence mandatory for EU companies. Commissioner Reynders indicated that the anticipated scope of the impending new legislation will encompass the entire supply chain and all corporate-related risks, including human rights, social and environmental ones. At this stage, “it is not clear how the potential scope of corporate liability for failure to carry out appropriate due diligence,” according to Allens’ attorneys Rachel Nicolson, Dora Banyasz, Emily Turnbull, and Hamish McAvaney, but “it does appear that the EU is moving towards to a general corporate duty to protect human rights.”
Significantly, the EU legislation is expected to include provisions for corporate liability, and is not only expected to apply to companies that are headquartered in the EU but will also likely extend to foreign companies conducting business within the EU.
These developments, among others, “indicate that both the U.K. and EU are becoming increasingly serious about implementing ESG legislation that focuses on the role of corporate actors and holds them accountable,” per Foster, Klaui, Helder, Lund and Padget, who assert that it is “critical from a commercial, legal and reputational standpoint for companies to conduct thorough and regular diligence and monitoring on their supply chains to assess risk, identify possible non-compliance and determine where improvements can be made. This applies not only to goods produced in a corporation’s own manufacturing sites but also to their counterparties, subcontractors, suppliers and the suppliers of their suppliers, all the way down the supply chain.”