ESG Advocacy through MSMEs in South Asia Can Deliver Labor-Business Symbiosis

11.11.2021 | Nora Wheelehan, Tasneem Tamanna Amin

The ongoing COVID-19 pandemic has reoriented international and private sector attention toward the lack of regulation and compliance that harmed international workers embedded within global supply chains.

Consecutive, deadly South Asian industrial incidents and violations of workers rights are stark reminders of the destructive consequences of negligence and insufficient worker safeguards.

As vital members of the world’s economy, South Asian small and medium enterprises (SMEs) are well equipped to address the region’s labor rights concerns. A key step is through implementing Environmental, Social, and Governance (ESG) regulations that will engender democracy and development while protecting all private sector stakeholders.

Bangladesh

As the world’s second-largest garment exporter, the Bangladeshi economy and its 50 million citizens depend on the nation’s thriving garment sector, yet thousands of Bangladeshi factory workers have died in fires and other industrial disasters. The most notable example is the 2013 Rana Plaza complex collapse, which killed and injured thousands of workers, mostly women. The disaster led to labor code amendments, $30 million in compensation by major international retailers, and international factory safety agreements, including the legally-binding Accord on Fire and Building Safety. However, tragedies persist despite such interventions, with the latest on July 8, 2021: a fire at the Bangladeshi Hashem Food and Beverage factory killed 52 people and injured 30 more because the factory illegally padlocked the only two stairways and prevented employees from escaping.

Pakistan

Pakistan is another prominent South Asian nation that heavily relies on the textile and garment sectors, which account for 30% of the Pakistani workforce. Employees face dangerous working conditions, demonstrated by the same day 2012 factory fires in a textile factory in Karachi and shoe factory in Lahore, killing almost 300 people combined and injuring hundreds more. Similar to Bangladesh, the revised labor regulations, financial compensation, and international agreements resulted in minimal changes, verdicts regarded as a “mockery of justice,” and continued, preventable disasters.

In the wake of COVID-19, there is heightened focus on ESG matters such as how companies treat their employees, manage their supply chains, plan for business continuity, and manage governance.

The pandemic highlighted another distressing consequence of absent regulation and compliance for South Asian laborers: wage theft. The Asia Floor Wage Alliance’s (AFWA) July 2021 report surveyed over 2,000 garment workers in South Asia and concluded that workers experienced an average of 25% of wage theft, a 187% increase in debt, a 23% loss in workdays, and 85% of workers were pushed below the international poverty line.

The perilous stories of South Asian workers are tied to limited private sector growth, as demonstrated in Bangladesh, which lost US$6 billion in exports in 2020 when international retailers canceled and suspended orders, despite delivering massive shareholder dividends and company profits. International brands forced Bangladeshi factory owners to cover the costs, creating a significant divide between major brands and the Bangladeshi business community. Although the international campaign “PayUp” secured US$22 billion from corporations, the majority of the funds went to factories to repay debts, while most workers have yet to receive their stolen wages. The lack of ESG regulations harms both businesses and workers, and greater resources should be deployed to improve the situation for all.

Extent of ESG and Anti-Corruption Legislation and Compliance

In the wake of COVID-19, there is heightened focus on ESG matters such as how companies treat their employees, manage their supply chains, plan for business continuity, and manage governance. In July 2020, JP Morgan credited the pandemic with reorienting businesses to focus on strategies that consider ESG performance in addition to financial metrics. A KPMG survey shows that 96% of CEOs are concerned with emphasizing the social component of ESG.

Authorities are paying greater attention to other compliance aspects with the increasingly evident need for robust anti-corruption controls, both in multinationals’ own operations and extending to their suppliers, distributors, and agents in emerging markets. Enforcement laws including the U.S. Foreign Corrupt Practices Act (FCPA), primarily involving third-party violations, clearly signal to the global business community that corruption and non-compliance are no longer acceptable components of conducting business.

ESG accountability and responsible supply chains are closely linked since the most significant ESG impacts are found in the supply chain, not direct operations.

Recent compliance trends are moving human rights, labor, and environmental standards from the voluntarily reported corporate social responsibility (CSR) sphere to legally binding regulations, best illustrated by 23 countries passing legislation mandating public companies to include ESG factors in annual reports and California’s law on supply chain transparency requiring firms publicly disclose their anti-forced labor policies and procedures.

Incentives for Businesses to Comply with Regulations

ESG standards are increasingly essential for SMEs seeking to join the global supply chain as these standards become priorities for leading multinational companies as demonstrated by Deloitte’s 10th Annual Chief Procurement Officer (CPO) Survey. CSR saw the greatest increase of any priority among CPOs (22% increase over 2019), and ESG is regularly discussed at the board level incorporating responsible supply chain management.

ESG accountability and responsible supply chains are closely linked since the most significant ESG impacts are found in the supply chain, not direct operations. Even in the absence of legal enforcement, companies’ exposure to questionable behavior can lead to reputational damage. Businesses failing to comply with national and international CSR and ESG standards face the risk of legal sanctions, supply chain exclusion, and barriers preventing long-term sustainability, contributing to a reputational decline and perpetuating the ostracism cycle.

Thus, SMEs are increasingly incentivized to advocate for more explicit ESG regulations and greater resources within countries, enabling SME regulation compliance and benefiting workers and firms. The aforementioned challenges Bangladeshi and Pakistani firms and employees face underscores South Asian SMEs’ risks and interest in advocating for better resources for both domestic and international compliance.

Private Sector’s Role in Advocacy and Global Supply Chains

According to the ILO, SMEs employ 70% of employment worldwide and generate the majority of new job creation. SMEs are powerful agents of change. However, on average, SMEs appear less prepared for emerging ESG issues with less sophisticated ESG management systems, the limited ability to monitor and report complex performance indicators, and insufficient resources to publish hefty CSR literature every year. Moreover, although global supply chains provide unprecedented opportunities for business growth, they are also a significant source of compliance risks.

The best risk-management strategy for SMEs is through ESG integration in their business frameworks. ESG regulations would support private sector development, greater anti-corruption compliance, and ensure labor rights issues are addressed appropriately, ensuring long term sustainability for vibrant and growing economies.

SMEs are influential democratic actors, especially in countries with few regulations where they can leverage their positions to advocate for crucial legislation, as seen in CIPE’s work in the Philippines. In South Asian nations where government-led efforts without private sector involvement resulted in ineffective policy implementation, SMEs can utilize similar strategies to advocate and raise awareness for compliance on ESG and corruption regulations to advance the current environment for all firms and workers.