FTSE4Good Raises the Bar With New Supply Chain Labor Standards Criteria

Launched last week, the new criteria allow companies already in FTSE4Good indexes limited time to implement policies, systems, and eventually reporting on supply chain labor standards.

FTSE4Good, the London-based socially responsible investing (SRI) index provider, takes a pragmatic approach to improving corporate social responsibility (CSR) by setting the bar for inclusion in its indexes at a rigorous but achievable level, then incrementally raising the bar. Last week, FTSE4Good raised the bar by launching a new set of criteria covering supply chain labor standards based on the four International Labour Organization (ILO) Core Conventions, which address equality and discrimination, forced labor, child labor, and worker representation.

"Voluntary initiatives such as the FTSE4Good supply chain labor standards criteria are complementary to the ILO Declaration of Fundamental Principles and Rights at Work: they help the development of the Decent Work Agenda," said Lord Brett, director of the ILO. Adopted in 1998, the Declaration on Fundamental Principles and Rights at Work cover freedom of association and the right to collective bargaining, the elimination of forced and compulsory labor and workplace discrimination, and the abolition of child labor. The Decent Work Agenda, which integrates economic and social objectives, was launched in 2000.

The FTSE4Good Advisory Committee developed the criteria after conducting an 18-month in-depth consultation of corporations, fund managers, non-government organizations (NGOs), and private investors. More than four-fifths (82 percent) of these consulted stakeholders agreed with FTSE’s suggested approach to adopt more stringent criteria for supply chain labor standards in companies.

The criteria take a relatively conservative, gradualist approach. For example, the criteria only apply to so-called "first-tier" suppliers, or those with whom companies have a direct commercial relationship and thus have most influence.

"Although research shows that labor standards are of greatest concern beyond the first-tier suppliers, engaging with these first tier suppliers remains a key challenge for many companies," FTSE4Good states in its criteria.

In other words, FTSE4Good is biting off what it can chew for the time being, addressing known, solvable problems. In the future, FTSE4Good will consider adding more teeth to the criteria, for example applying the criteria down the supply chain to the source or adding audit requirements.

As is, FTSE4Good determines companies covered by the criteria based on a "Risk Relativity Assessment" that takes into account three considerations: products they produce, countries they operate in, and the degree of exposure to high risk products sourced from high risk countries. Sectors automatically covered by the criteria include clothing and footwear, leisure equipment, food processors, discount stores and warehouses, and food and drug retailers, among others. Future sectors automatically covered may include electronics, telecommunications, and information technology.

Countries covered include those not defined by the World Bank Country Classification as "high income" or "other high income/middle income" countries as of September 1, 2004. The third consideration of the Risk Relativity Assessment sets its threshold at more than one-third of total company revenue (or more than £100 million sales revenue) from high-risk products sourced from high-risk countries.

FTSE4Good has created a graduated implementation system for companies already in its indexes, allowing them time to get up to speed. The minimum criteria calls for having supply chain labor standard policies or systems covering the four ILO Core Conventions in place by July 1, 2005. The final criteria, which cover additional areas such as health and safety, calls for having both policies and systems in place by July 1, 2006. FTSE4Good, which offers indexes covering US, UK, European, Japanese, and Global markets, reviews company compliance with its criteria in March and September each year.

Companies that are members of the UK-based Ethical Trading Initiative (ETI) or the US-based Fair Labor Association (FLA), or are audited by Social Accountability International (SAI) SA8000 standard, are automatically considered compliant with minimum criteria. The criteria additionally call for comprehensive public reporting on policies and systems by January 1, 2007.

"All high risk companies now wishing to join the index for the first time will be required to meet the policy, systems, and reporting criteria in full," according to FTSE4Good.

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