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The hidden truth behind Zara’s secret supply chain - Investors demand transparency!

zara supply chain transparency, financial news

Investors are increasingly pressuring Inditex, the parent company of Zara, to make its entire list of suppliers public. This move is aimed at enabling a more thorough assessment of potential risks in the supply chain.

Inditex is notably distinct among large clothing retailers for its reluctance to disclose its sourcing factories. This lack of transparency has drawn attention from both regulators and investors, who are advocating for greater openness and detailed reporting from corporations.

In the realm of clothing retail, there is a growing focus on ethical practices, particularly concerning labor issues. Retailers are being scrutinized to ensure their supply chains are free from forced labor and that garment workers receive fair wages.

This ethical scrutiny has extended to Shein, a Chinese fashion company, which has been examined by U.S. lawmakers for potential supply chain risks as it gears up for an initial public offering in the United States.

Meanwhile, in the European Union, there has been a delay in finalizing legislation that would obligate large companies to disclose any environmental damage or child labor in their supply chains. Companies failing to comply with these regulations could face significant fines, up to 5% of their revenue.

Several leading fashion brands and retailers, such as Adidas, H&M, Hugo Boss, M&S, Nike, Primark, and Puma, have already taken steps to increase transparency by publishing detailed lists of their suppliers, including specific factory names and locations. However, Inditex only releases the number of suppliers in its 12 principal countries, omitting details about individual factories. This approach has led Reuters to inquire with Inditex shareholders about their desires for enhanced disclosure from the company.

MN, a Dutch asset management company overseeing pension fund assets in the Netherlands, has stressed the importance of having access to a comprehensive list of Inditex's suppliers, including their geographical locations. This information is critical for MN's due diligence and to confirm Inditex's assertions regarding data availability.

MN also spearheads the Platform Living Wage Financials (PLWF), a group of 20 institutional investors managing assets worth 6.58 trillion euros. This coalition is dedicated to advocating for better pay for workers in the garment and footwear industries.

Despite its commitment to maintaining high standards in its supply chain, Inditex, which is heavily owned by its founder Amancio Ortega and his daughter Sandra Ortega, has not yet complied with investor demands to publish its full supplier list.

The five Inditex investors who responded to Reuters hold a stake in the company valued at around $2 billion, in contrast to the company's total valuation of about $140 billion. None of these investors are considering divesting from Inditex at this time.

In a contrasting case, MN advised its clients in December to divest from the off-price retail chain TJX, which owns Homesense and TK Maxx. This decision was made following over three years of engagement with TJX, which showed minimal improvement in human rights due diligence in their global supply chain. TJX has responded by stating that they have fortified their vendor code of conduct and expanded their factory auditing program in recent years.

Inditex has an existing agreement with IndustriALL, a global trade union federation, to provide its complete list of suppliers. However, IndustriALL and other entities are calling for broader disclosures from all companies, including Inditex.

Know The Chain, an initiative aimed at addressing forced labor in supply chains, has given Inditex a lower overall score in its 2023 assessment compared to 2021. They encourage Inditex to improve its supply chain transparency by sharing a full list of its direct suppliers as we read in Reuters.

There is a concern among investors that publishing its factory list could intensify competition for suppliers with Inditex’s rivals. Swetha Ramachandran from Artemis Investment Management and Grace Su from Clearbridge Investments, both shareholders, are seeking more comprehensive supply chain data.

This information is crucial for understanding the resilience of Inditex’s supply chain and its position in regards to environmental, social, and governance (ESG) factors. Schroders and Cardano, other shareholders of Inditex, emphasize the importance of transparency, particularly in the context of apparel manufacturing sites.

Their stance is that improved disclosure can significantly influence investment decisions. Norway's sovereign wealth fund, with a substantial stake in Inditex, engages with the company on topics of supply chain risk management, human rights, and transparency, highlighting the ongoing challenges in these areas, including traceability and reporting.



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