ESG: Fashion in Focus – The Fashion Sustainability and Social Accountability Act

The fashion industry often faces scrutiny from stakeholders to improve due diligence in supply chains.  A landmark proposed bill in New York, drafted last October and presented for the first time to a legislative committee on January 5 2022, is seeking to drive accountability and transparency in the supply chains of fashion companies. The Fashion Sustainability and Social Accountability Act (the “Act“) historic in its scope and nature, would require fashion retail sellers and manufacturers to disclose their environmental and social impacts, and to set out targets to reduce those impacts.

Which companies will fall within scope of the Act?

Not all retail brands will be subject to the legislation. Only clothing and footwear companies operating in New York, with global revenues that exceed $100 million would be subject to provisions, ensuring that the focus remains on the biggest names in fashion, whose environmental and social impact is no doubt the greatest.

What will companies be required to do?

• Map supply chain – Companies will need to map at least 50% of their supply chain across all stages of production, from raw material to final production, identifying real or potential adverse environmental and social impacts within the supply chain, such as water and chemical management use, fair wages and greenhouse gas emissions.
• Set targets – Companies must set targets to prevent and improve their environmental and social impacts, including specific targets on how much the Company will reduce its greenhouse gas emissions, conforming with the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard. See the Standard here.
• Disclosures – Companies will be required to make certain disclosures such as reporting on:
  • Amount of material produced annually and how much of this is made up of recycled material;
  • The wages of workers and how this compares with local minimum and living wages; and
  • The Company’s approach for incentivising supplier performance on worker’s rights.
• Publish disclosures – Disclosures made by Companies will need to be made publicly available, for example publishing the information on the brands’ website.
• Timing – Companies will be given 12 months to adhere to the mapping provisions, and 18 months for impact disclosures.

Are there any penalties for non-compliance?

Failure to comply with the Act could result in fines of up to 2% of annual revenue. There is also provision under the draft legislation requiring fines to be deposited into a Community Benefit Fund established by the Act. The Fund would focus on environmental benefit projects that directly and verifiably benefit environmental justice communities.

The Attorney General would also be required to publish an annual report identifying companies who are failing to comply with the Act, with citizens able to file civil actions against non-complying companies.

What next?

On 23 February 2022, the European Commission published its much-anticipated draft corporate sustainability and due diligence directive (see our update on the proposed scope of the draft directive here). There are also an increasing number of jurisdictions who have either introduced their own environmental and human rights due diligence laws or are making moves towards doing so –  including Germany and the Netherlands.  The European Commission previously committed to introducing its own human rights and environmental due diligence law (although the tabling of the law has been delayed), and is moving towards tightening rules on climate reporting and disclosure, including in new taxonomy legislation and a comprehensive corporate sustainability reporting directive.

New York’s proposed law may indicate an increased appetite in the US to follow Europe’s regulatory trend to legislate for increased corporate transparency and accountability around sustainability efforts and impact. California to date has been the leading US state in this regard, following the passage of the California Transparency in Supply Chains Act addressing modern slavery in 2010. The New York bill takes a different approach, targeting one specific industry and focusing more directly on the manufacturing end of the supply chain.

The proposed Act is still going through the legislative process and is sponsored by State Senator Alessandra Biaggi and State Assemblywoman Dr. Anna Kelles, see here. Backed by multiple environmental and human rights advocacy groups and fashion designers, the bill was developed following an approach to Biaggi by the New Standard Institute, a non-profit geared toward sustainability in the fashion industry. If passed, the bill has wide-reaching potential to encourage fashion companies to introduce more sustainable business practices in response to the requirement to map and disclose 50% of their supply chain; the increased transparency will allow greater scrutiny by stakeholders which may, in turn, inform consumer habits.

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