World Bank Group’s IFC and Levi Strauss incentivize responsible garment suppliers

RBC ForumOlaf Schmidt, Global Sector Lead of Retail, Real Estate & Hotel Investments at IFC, a member of the World Bank Group. IFC is the largest global development institution focused exclusively on the private sector in emerging markets. Working with private enterprises in about 100 countries, IFC uses its capital, expertise, and influence to help eliminate extreme poverty and boost shared prosperity.

The garment and textile industry employs 60 million people around the world, according to estimates of the International Labor Organization (ILO). Many of them are young women with few opportunities to earn their own income and be independent. IFC has been investing in the garment industry because it provides formal jobs for low-skilled workers, thus contributing to the World Bank Group’s twin goals of ending extreme poverty and boosting shared prosperity.

To achieve these goals, investments must be sustainable in terms of financial profitability and have a strong environmental and social performance. This can be a challenge in places where laws and governance are weak, which are exactly those places where poverty is widespread and investment and jobs are most needed. It is particularly a challenge in the garment industry, where intense competition leads some suppliers to disregard basic safety standards and worker rights.

Recent factory disasters, like the Tazreen fire and the Rana Plaza collapse that together took the lives of 1,200 people, have prompted us to identify innovative ways – beyond our existing engagements – in which we could further support the garment sector in emerging markets. While we realize that audits and supervision are important to ensure environmental and social compliance, we think that there is a real need to assist suppliers in emerging markets on two main fronts, namely providing them with affordable sources of financing, which can be invested in factory upgrades; and creating the right financial incentives to encourage them to make such investments.

In an effort to address these gaps, we partnered with Levi Strauss and Co (LS&Co) – one of the world’s largest brand name apparel companies as well as an industry leader in promoting suppliers’ environmental and social compliance – to roll out a new kind of supplier financing product.

For the very first time, we are offering a direct financial incentive to improve environmental and social standards in the ready-made garment industry through IFC’s $500 million Global Trade Supplier Finance program. This program provides short-term finance to emerging-market suppliers and small- and mid-sized exporters. IFC offers lower interest rates to suppliers who score better under LS&Co’s sophisticated evaluation system for labor, health, safety, and environmental performance. Specifically, the program will work on a sliding scale. As suppliers improve their environmental and social performance against LS&Co’s evaluation system, they will be rewarded with lower interest rates on this working capital type product provided by IFC. In a nutshell, the higher the supplier’s evaluation score, the more they will save.

Through this innovative partnership, LS&Co’s suppliers have access to cheaper capital than they would otherwise in their home country. And the benefits for suppliers go beyond monetary savings. In fact, suppliers can differentiate themselves from competitors through positive environmental and social scores. This partnership with LS&Co represents a win-win solution for all parties involved, including international buyers who have been under increasing pressure to improve safety and working conditions in their supply chains.

Scale is crucial for IFC to realize its goals for development. We hope that other major international apparel brands will follow the lead of LS&Co, and work with us to offer reduced cost financing as a reward to suppliers with top standards compliance.

In addition to this innovative partnership with LS&Co, IFC has been spearheading a number of partnerships to make positive transformational changes in the textile and garment sector’s supply chain. For example, in 2007, IFC and ILO Launched the Better Work Program, which seeks to improve labor standards compliance in global supply chains, both to protect workers’ rights and to help enterprises become more competitive. The program, which is currently active in 8 countries, focuses on scalable and sustainable solutions that build cooperation between governments, employers and workers’ organizations and international buyers.

Specifically in Bangladesh – where the garment and textile sector accounts for 80 percent of total export earnings and employs 4.2 million workers in more than 4,500 factories – IFC and ILO launched the Better Work program in November 2013. The objective of the program is to provide assessments of factory compliance with national law and international core labor standards, publish transparent public reporting on findings, and provide advisory support for factories to make necessary improvements. The program was launched following an18-month collaboration with the government to implement changes to the national labor law and develop the government’s Framework for Continuous Improvement. This partnership between government, employers, unions, buyers, and other industry stakeholders will focus on promoting sustainable change in the sector by helping factories address working conditions, and to build factory-level capacity for labor administration and worker-management relations.

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Rethinking due diligence practices in the apparel supply chain by Jennifer Schappert of the OECD’s Responsible Business Conduct Unit (@J_Schappert)

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