Fair labor transparency can limit business risk, boost productivity

New legislation is prompting businesses to improve supply chain protocols

Canada’s Supply Chain Act, which took effect this year, mandates that businesses with operations, sales and distribution in Canada report on the measures they have taken to prevent and reduce the risk of forced labor and child labor at every step in the supply chain.

The new legislation is the latest response to growing demand for supply chain transparency from governments, consumers, investors and other stakeholders. Businesses large and small face mounting pressure to address labor challenges—a critical component of the supply chain—and ensure fair labor standards not only in their own firms but also throughout their supply chains.

Fair labor practice encompasses multiple considerations, including fair wages, safe working conditions, nondiscrimination, and an absence of forced labor and child labor. Supply chain transparency requires companies to have insight into their suppliers’ activities. When companies communicate this insight internally and externally, it translates to supply chain visibility.

Heightened supply chain transparency means that businesses must pay attention to the treatment not only of their own workers, but also of their suppliers’ workers, regardless of geographic location. In addition to reducing harmful labor violations, fair labor practice can help mitigate a wide array of risks, from supply chain disruptions to compliance. It can also help improve a company’s reputation, productivity and competitiveness. 

Labor in supply chains

Decades of globalization have resulted in long and complex global supply chains that allow companies to cut costs and tap into competitive advantages from specialization. But those gains also bring a downside: increased complexity can render supply chains opaque with intricate links that risk breaking down.

A series of disruptions, including the COVID-19 pandemic, the Russia-Ukraine war and other geopolitical conflicts, have laid bare the vulnerabilities of global supply chains. Disruptions upstream can have far-reaching consequences for business operations downstream.

While few would argue the importance of employing good labor standards in their own company, ensuring that high standards are upheld throughout the supply chain is much more challenging. Businesses do not always have insight into their suppliers’ activities, and different regions and countries have different labor challenges.

The COVID-19 pandemic brought to light labor shortages due to an aging workforce. Even many developing economies are seeing demographic shifts that lead to workers demanding better working conditions. This means that companies around the world must not only adhere to good labor practice but also go above and beyond in order to attract and retain talent. A workforce that is treated well and paid fairly is more productive and has lower turnover, which translates to financial gains and reliability for the suppliers as well as for businesses downstream.

Climate change brings additional labor challenges. As drought and extreme heat waves become more frequent, workplace accidents rise. If a company’s suppliers do not employ appropriate measures to protect their workforce, they could see lower labor productivity, and workers can encounter heat exhaustion and workplace accidents. Consider California, where recent complaints against unfair treatment of migrant farm workers in extreme heat conditions have led to investigations by regulatory agencies.

The reputational harm from labor violations is longstanding. Various businesses found to source products made by Uyghur forced labor in the Chinese region of Xinjiang following a 2022 report by the United Nations still contend with reputational taint. The heightened public awareness over labor abuses has led to a willingness by consumers to pay more for products from companies with greater supply chain transparency and visibility.

A changing regulatory landscape

Canada’s Supply Chain Act, dubbed Canada’s Modern Slavery Act, is the latest in a series of regulations responding to the demand for fair labor compliance. It follows modern slavery acts enacted in Australia and the UK, as well as the California Transparency in Supply Chains Act.

Before the Canadian legislation, businesses that produced, purchased or sold goods in Canada only had to be concerned about the treatment of their own workers. Now, any noncompliance along the entire supply chain can result in nontrivial fines. Enforcement includes reporting requirements and possible on-site searches.

For upstream suppliers that operate outside Canada but sell to Canadian businesses, this law means they could lose business to competition if they do not practice good labor standards.

Internationally, organizations like the Fair Labor Association, Ethical Trading Initiative and Global Reporting Initiative provide frameworks for evaluating and improving labor practices.

And there are more regulations in the pipeline. Canada has introduced a bill to prohibit the importation of goods made in Xinjiang by forced Uyghur labor. This follows the United States’ Uyghur Forced Labor Prevention Act, which has led to the detainment of billions of dollars’ worth of goods made by forced labor at U.S. ports.

Meanwhile, the proposed New York Fashion Act aims to hold fashion companies accountable for their labor practices by requiring transparency and ethical standards in their supply chains. Recent reporting regulations enacted by the U.S. Securities and Exchange Commission on emissions suggest that similar mandates for labor practices in the United States could follow.

The takeaway

Fair labor practice throughout the supply chain is a critical component of a company’s environmental, social and governance performance. It is also essential for risk management. The future of fair labor practice and supply chain transparency is likely to be shaped by increasing regulatory requirements and technological advancements.

Technology can help increase visibility, monitoring and traceability, and reduce the cost—and thus increase the return on investment—of gaining supply chain transparency. With more information, companies are able to make better decisions about suppliers.

Companies that proactively adopt ethical labor standards and transparency measures will be better positioned to maintain a competitive edge in an ever-evolving consumer preference and regulatory landscape.