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The Fair Labor Association: A Useful Tool For Investors

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Last week, the Fair Labor Association (FLA) marked its 20th year of protecting worker rights around the world with the voluntary cooperation of major corporations. The FLA model brings major apparel and agriculture companies to the table with universities and civil society activists. Companies commit to abiding by the FLA code, which is based on international human rights standards developed by the International Labor Organization and the UN.

I was closely involved in the early years of the FLA and now chair its board. More than 60 major apparel companies, representing brands such as Adidas, Calvin Klein, Nike and Uniqlo, have joined the organization. They participate in a rigorous accreditation process in which the FLA evaluates whether the companies have adequate systems in place to protect workers’ rights.  Additionally, factories producing their goods are independently monitored with the results made public. The companies then work alongside the FLA to remedy the problems that are routinely discovered. A comparable model is in the works for agriculture with companies like Nestle, Olam and Syngenta.

It’s important to view the FLA’s ambitious accreditation program in a broader context. In recent years, a growing number of investors have sought to identify companies with strong environmental and human rights records, looking to invest in industry leaders. Responding to this demand, certain rating agencies now assess what are called environmental, social and governance (ESG) metrics. While efforts to measure and apply these metrics are beginning to gain steam, especially among millennials and women, there are significant challenges ahead, especially in addressing social or human rights issues in a meaningful way.

The good news is that ESG investing is moving into the mainstream. Morningstar estimates that “socially conscious” ETF’s and mutual funds managed $1.2 trillion as of the end of 2018. Though this is less than 2% of assets under management, it is a strong foundation upon which to build.  UBS predicts that investments in ESG funds in the U.S. are likely to increase by 58% over the next five years. And perhaps most dramatically, data collected by Greenwich Associates reveals that 60% of institutional funds and insurance companies expect to have more than 50% of their assets managed with ESG criteria within five years.

There are, however, three significant challenges that limit the effectiveness of ESG investing. First, it makes little sense to lump corporate governance in with environmental and social issues. Governance issues are well defined and widely accepted. Mixing these issues with environmental and human rights concerns invites confusion. Second, progress in implementing meaningful environmental or social reforms will require expenditures of significant time and money. This reality flies in the face of the short-term investment model that many Wall Street firms embrace. Numerous studies have shown that companies with strong ESG programs are able to achieve comparable returns over the longer term, but they can’t do it in three months. It is high time for American investors to embrace a longer-term horizon to give environmental and social initiatives time to succeed.

The biggest set of challenges relate to the S, or social component, of ESG.  There has been a lack of rigor in defining S, and this has resulted in a wide range of topics coming under the S rubric. Because these issues are so daunting, many try to define S in terms of corporate charitable giving that is unrelated to core business activities. Others are content to measure company promises rather than actual performance.  However well-intentioned, these half-measures fail to meet the need. Even where the S topics are clear, such as on workers-rights issues, these subjects are hard to measure and harder still to address. Thus, it’s not surprising that companies and investors have been hesitant to tackle this agenda and ratings agencies have failed to adopt or apply meaningful metrics or assessment standards.

It is in this very challenging context that the FLA undertakes its accreditation program. And while its process needs to continue to evolve, and to focus ever-greater attention on performance, the leading companies that are being put through their paces and achieve FLA accreditation, deserve public recognition for doing so.  They also are entitled to preferred standing with investors and ultimately with consumers. In a world where multinational companies are criticized for contributing to the growing inequality in our societies, the S agenda is destined to become more visible and the demands on companies and investors more urgent.  Investor support for the Fair Labor Association accreditation model is a practical place to start.