Financing the future

How to incentivise garment suppliers to improve labor and environmental standards, by Olaf Schmidt, of the IFC

Author: Olaf Schmidt, IFC
July 13, 2015

According to the ILO, the garment and textile industry employs 60 million people around the world. Investment in the sector has been a priority for IFC and other development finance institutions as it provides formal jobs for low-skilled workers, furthering the goal of reducing poverty. Moreover, since many of the workers are young women with few opportunities to earn their own income and become independent, creating jobs in the sector can also improve gender equality.

To achieve these goals, however, investments must combine financial sustainability and profitability with strong social and environmental standards. This can be a challenge in countries where laws and governance are weak, which are also usually the places where poverty is widespread and investment and jobs are scarce. It is particularly challenging in the garment industry, where intense competition leads some suppliers to disregard basic safety standards and worker rights.

Recent factory disasters, such as the Tazreen fire and the Rana Plaza collapse that together took the lives of 1,200 people, have prompted the IFC to identify innovative ways to improve the garment sector in developing countries. While traditional audits and supervision are important to ensure environmental and social compliance, we must move to the next stage and create the financial incentives for suppliers to upgrade their processes and factories. To demonstrate that this is possible, IFC partnered with Levi Strauss – one of the largest apparel companies and a leader on environmental and social standards in its supply chain – to roll out a new kind of supplier financing product.

Using our $500m Global Trade Supplier Finance Program we are providing short-term finance to emerging-market suppliers. The key is to offer lower interest rates to suppliers who score better on Levi Strauss’ sophisticated evaluation system for labour, health, safety, and environmental performance. The program works on a sliding scale – as suppliers improve their environmental and social performance, they are rewarded with lower interest rates, reducing the cost of their working capital. In short: the higher the supplier’s score, the more they will save. Through this innovative partnership, Levi’s suppliers have access to cheaper capital than they could otherwise obtain in their home country. Moreover, the benefits go beyond monetary savings. Suppliers can differentiate themselves from competitors through positive environmental and social scores. This is a win-win solution for all parties, including international buyers, who want to improve safety and working conditions in their supply chains.

IFC has also been spearheading other partnerships to make positive changes in the textile and garment sector. In 2007, we launched the Better Work Program with ILO to improve labour standard compliance in global supply chains, both to protect workers’ rights and to help enterprises become more competitive. The program, which is currently active in eight countries, focuses on scalable and sustainable solutions that build cooperation between governments, employer and worker organisations, and international buyers.

In Bangladesh, where the garment and textile sector accounts for 80 percent of export earnings and employs 4.2 million workers in 4,500 factories, we launched the program following eighteen months of collaboration with the government to improve national labor laws and develop the national “Framework for Continuous Improvement.”  The objectives are to provide assessments of factory compliance with national law and international core labor standards, and to report the findings in a transparent manner, as well as to provide advisory support for factories to make improvements.

These kinds of partnership between governments, employers, unions, buyers, and other industry stakeholders can bring about sustainable change in the garment sector by helping factories improve working conditions, and foster factory-level capacity for worker-management relations. We hope that other major international apparel brands will follow the lead of Levi Strauss and other countries will emulate the example of Bangladesh and sign on to the Better Work Program.  It’s the right thing to do and also makes good business sense.

Olaf Schmidt is Global Sector Lead of Retail, Real Estate & Hotel Investments at IFC, the private sector arm of the World Bank Group.