Understanding the ‘Social’ in ESG and the Challenges of Implementation Within Supply Chains

Supply chain management is increasingly focusing on environmental, social and governance (ESG) aspects. Nowadays, businesses and investors alike must know not only where but also by whom products are manufactured.

This post explores the “social” component of ESG, shedding light on the intricacies of social compliance in manufacturing, and emphasizing the need for changes in the current system.

What is Social Compliance?

Social compliance refers to the adherence of manufacturing practices to ethical, legal, and societal standards. It encompasses a range of factors, including labour conditions, human rights, workplace safety, and the overall well-being of workers. Essentially, it seeks to ensure that the social impact of manufacturing aligns with ethical and responsible principles.

So, What Does This Actually Mean?

First, the word “compliance” can have mixed meanings. Legal compliance is straightforward, as each country has its own labour laws, and it’s important to check if your suppliers are conforming to them. Examples of this include laws around statutory holidays, child labour, overtime, minimum wage, and age requirements. These are all aspects of HR administration and apply to every company in China.

However, ethical and societal compliance is adherence to standards beyond the explicit requirements of local labour laws. Such standards have been developed as part of programs by industry associations, key examples being BSCI by Amfori and SMETA by Sedex.

Above and Beyond the Legal Requirements

Let’s take factory dormitories as an example. There is no clear requirement within Chinese labour law about the provision of dormitories and their standards. However, most companies agree that overcrowding a dormitory with many workers is unethical. Therefore, the initiatives mentioned earlier may include requirements for the maximum number of workers per dormitory.

Worker safety and welfare is another key area of focus in social compliance audits, providing holistic monitoring where the crossover of labour laws and industry safety regulations may leave gaps. For example, consider fire safety: although there are specific regulations around fire safety for factories – and there is much talk of providing a safe working environment in Chinese labour law – adherence to these practices can be hard for buyers to assess. Social compliance audits include specific assessment areas to determine whether factories are meeting these regulations, ensuring worker safety. This approach helps to eliminate any grey areas regarding what should be done to maintain social compliance.

What Are the Challenges?

Challenge 1: The Box-Ticking Approach

One of the key challenges in China is that factories often view social compliance audits as yearly box-ticking exercises to satisfy foreign buyers’ requirements. Therefore, they focus more on passing the test than on providing holistic improvements to worker welfare.

Moreover, workers’ needs can vary massively in China, influenced by location, industry, and demographics. As a result, the budget allocated for audits could often be more effectively spent on targeted improvements for workers on site.

Challenge 2: Reneging on Improvements

In our experience, some improvements made to pass audits are often reversed shortly thereafter. The programs governing ethical and societal compliance are not nationally recognized or accredited, unlike certifications such as the ISO 9001. This means that compliance with these initiatives must be continuously assessed. Many brands incur additional costs beyond the audits to ensure factories continuously implement practices that score them a pass.

This means that only companies with considerable budgets can monitor consistent adherence to standards.

Challenge 3: No Mechanism for Whistleblowing

During social compliance audits, auditors interview workers to verify if they are following the factory’s policies. For example, if the factory states that they adhere to overtime regulations, the response from the workers on their average working hours may contradict this.

However, only a small random sample of workers are interviewed during audits. Although the interviewee responses are not revealed to the factory, their identities will be known to the factory management. Therefore, it does not provide a safe environment for the workers to speak out about non-compliant practices or serious problems such as workplace harassment and bullying.

Challenge 4: Who Pays?

As mentioned above, achieving social compliance comes with costs. Companies may incur expenses related to enhanced monitoring, audits, and implementing necessary improvements. Major brands, previously keen to showcase their corporate social responsibility (CSR) credentials, are now facing budget constraints due to rising interest rates and inflation. This may be on top of extra environmental initiatives that have started to become mandatory. This has led to many brands putting the onus of compliance onto their suppliers and using new EU regulations to reinforce this. Factories often find it challenging to absorb additional compliance costs due to already tight factory margins and the prospect of increasing wages in China.

Innovative Solutions

Fortunately, industry leaders are responding to these challenges. By focusing on the economic benefits of heightened worker welfare, businesses such as Kno Global, using their reporting software, are working with factories to improve worker retention and transparency on worker conditions at the same time.

For example, in China, growing economic prospects have presented new employment options for workers, such as becoming delivery drivers for companies like Meituan, which is popular due to its flexibility. This is leading to a mixed supply of labour, with increased worker turnover in factories proving costly. Therefore, to attract and retain workers, factories need to understand the needs and requirements of their workers. The push and pull factors can be unique in each factory environment. Therefore, using Kno Global’s reporting software is an effective way to tailor questions to each specific factory setting.

Removing the Audit Stigma

Overcoming audit fatigue is crucial for improving transparency within the supply chain. The Social & Labor Convergence Program (SLCP), a non-profit organisation, brings together brands, manufacturers, sourcing agents, and solution providers across multiple industries to improve data-sharing and realistic benchmarking. The signatories to the SLCP agreement have developed the “Converged Assessment Framework,” complete with guidance, tools, and verification technology, putting the power and responsibility into the hands of factories.

Although challenges remain, there is a proactive movement towards better self-management of worker welfare within the industry. Moving away from box-ticking and exam-style audits is crucial for transforming the perception of social compliance into one with real incentives and economic benefits. This “win-win” model is likely to appeal to manufacturers throughout China.

If you would like to know more about Kinyu’s involvement with worker safety, welfare, and our cooperation with Kno Global, feel free to reach out here or download a case study!