In a step that would significantly elevate obligations to map supply chains, disclose information identified, and impose financial penalties for companies who fail to comply, the New York State Senate this month unveiled the “Fashion Sustainability and Social Accountability Act” (“the Act”). The Act, if enacted, will require every fashion retail seller and manufacturer that does business in New York and has over USD 100 million in annual worldwide gross receipts to make a number of sustainability and social disclosures. Notably, compared to existing disclosure laws (like the California Transparency in Supply Chains Act) and even related bills introduced in Congress to date, the Act’s disclosure requirements are significantly more detailed and carry potentially large financial penalties as well as a private right of action.
Under the Act, fashion retailers and manufacturers will be required to take the following steps and make the following comprehensive disclosures:
- First, the Act will require that fashion retailers and manufacturers use “good faith efforts” and a “risk-based approach” to conduct supply chain mapping and make a related disclosure. Specifically, the Act requires companies to map at least 50% of their suppliers across all tiers of production, from raw material to final production, ranked by volume. The names of the mapped suppliers should be subsequently disclosed.
- Second, fashion retailers and manufacturers will have to make an “impact and due diligence disclosure,” including a social and environmental sustainability report focused on externally relevant information on due diligence policies, processes and activities conducted to identify, prevent, mitigate and account for potential adverse impacts. The disclosure will have to include the following information:
- a link on the retailer’s or manufacturer’s website to relevant policies on responsible business conduct;
- information on measures taken to embed responsible business conduct into policies and management systems;
- the retailer’s or manufacturer’s identified areas of significant risks in the context of its own activities and business relationships such as supply chains;
- the significant adverse impacts on risks identified, prioritized and assessed in the context of its own activities and business relationships such as supply chains;
- the prioritization criteria;
- the actions taken to prevent or mitigate those risks, such as corrective action plans, to be cited where available, including estimated timelines, targets, and benchmarks for improvement and their outcomes;
- measures to track implementation and results; and
- the retailer’s or manufacturer’s provision of or cooperation in any remediation.
- Third, the Act will require fashion retailers and manufacturers to make an impact disclosure on prioritized adverse environmental and social impacts, including:
- a quantitative baseline and reduction targets on energy and greenhouse gas emissions, water, chemical management (greenhouse gas reporting will also need to be independently verified);
- annual volume of material produced, including breakdown by material type which shall be independently verified;
- how much production has been displaced with recycled materials as compared to growth targets which shall be independently verified;
- the median wages of workers of prioritized suppliers and how this compares with local minimum wage and living wages; and
- the company’s approach for incentivizing supplier performance on workers’ rights (including any key performance indicators used).
- Finally, the Act will require fashion retailers and manufacturers to disclose targets used for impact reductions and for tracking due diligence implementation and results.
The law will be enforced by the New York Attorney General or its designated administrator; however, a private right of action is also envisioned. In addition, the Attorney General or its designated administrator will annually publish a report on compliance with the Act, which will list fashion retailers and manufacturers known to be out of compliance.
Of potential significance, violations of the Act could lead to civil liability and result in a fine of up to 2% of annual revenues, provided they exceed USD 450 million.
The Act is still in the early stages of review and its chances of passage are not yet clear. However, the law is backed by a coalition of nonprofits focused on fashion and sustainability, including the New Standard Institute, the Natural Resources Defense Council and the New York City Environmental Justice Alliance, as well as the designer Stella McCartney. The Act’s co-sponsor, NY State Senator Alessandra Biaggi, stated that she is aiming to bring it to a vote in late spring after state budget negotiations are complete.
If the Act is passed, if would be the most significant U.S. legislation relating to supply chain mapping and ESG disclosures to date. Supply chain mapping across supplier tiers could be challenging for companies that do not have processes in place to track and identify supply chain structures. While only a NY state law, the obligations would apply to global activities of those companies impacted and inaccurate disclosures could result in liability both under the Act and under a variety of state and federal unfair business practices legislation. The Act illustrates the broader push towards supply chain transparency and corporate accountability, and multinational corporations across industries are likely to become subject to a myriad of sustainability and social compliance related disclosure regimes at the state and federal level (including anticipated upcoming SEC ESG disclosure requirements) that will require implementation of supply chain mapping and due diligence exercises. Companies in the fashion industry should be thinking now about processes required to comply with the potential NY law, but corporates in other industries should also be examining supplier due diligence processes to ensure they are prepared to comply with anticipated future legislation at the federal and state levels.