New York State Fashion Act Proves That ESG Is Haute Couture

The Fashion Act is expected to be voted on in late spring and, presumably, will go into effect immediately upon its enactment. If passed, it would be the first U.S. law of its kind specifically targeted toward the fashion industry. The Fashion Act applies ESG principles regarding the assessment of supply chains and operations to fashion manufacturing and retailing. In this sense, the Fashion Act would make explicit and mandatory the types of measures that certain regulated businesses may be implementing, anyway.

Reporting and Disclosure Requirements

The key substantive requirements of the Fashion Act require regulated businesses to:

• Publish a due diligence disclosure on the company websites that contains the business’ environmental and due diligence policies, as well as the supply chain mapping discussed in the next bullet. This disclosure must be published within 12 months of the adoption of the relevant policies and must describe the areas of significant risks identified through the supply chain mapping. It is implied but not explicated that regulated businesses must promptly develop such policies if they have not already done so.
• Implement a “risk-based” approach to mapping their supply chains from raw material procurement to final product manufacture and delivery. Cognizant of the practical difficulties of doing so, the Fashion Act requires the implementation of “good faith efforts.” On the other hand, the Fashion Act would deem any business that fails to chart out at least 50 percent of its suppliers across all tiers of production to be non-compliant.
• Release an impact report within 18 months of the policy adoption date referenced in the first bullet that identifies quantitative targets and/or practices for reducing energy and greenhouse gas emissions, improving water quality and chemical management systems, and increasing the use of recycled materials in product manufacture. Climate change targets must align with the guidance published by the World Resources Institute. Additionally, this report must establish non-environmental social targets, such as median wages for workers and the company’s approach for incentivizing supplier performance on workers’ rights.
• Meet the targets and implement the measures identified in the previous bullet and file annual compliance reports assessing performance against these benchmarks. To the extent that performance falls short of these goals, regulated businesses must undertake corrective action to improve performance.

Enforcement

The Fashion Act invests the New York State Attorney General with civil enforcement authority, allowing the office to bring civil proceedings for an injunction, monetary damages, or performance of a statutory duty. It also requires the Attorney General to publish an annual report identifying businesses that have failed to comply with the Act’s requirements. The bill authorizes the New York State Attorney General to maintain a public list of companies that have not complied with the public disclosure requirement.

The bill additionally provides for the specialized treatment of regulated companies earning revenues of $450 million or higher (namely, the assessment of fines of up to two percent of annual revenue for such companies who remain out of compliance for longer than three months after notification of non-compliance). The fines would be deposited in an environmental justice fund to be administered by the New York State Department of Environmental Conservation.

The proposed legislation also allows private citizens to file suit against a company in violation of the act or to compel the Attorney General to investigate or enforce an entity’s compliance.

Other Legal Considerations

Beyond the risk of enforcement for failure to comply with the Fashion Act’s requirements, regulated entities stand to uncover evidence of potential non-compliance with legal requirements as part of the information that they must gather and evaluate. At minimum, it seems foreseeable that such assessments could identify practices and operations, which, if more thoroughly explored, could yield evidence of non-compliance or environmental impacts capable of inducing liabilities. This could necessitate potentially significant judgments regarding how to follow up and address information brought to light as part of the internal assessment.

Accordingly, regulated businesses may wish to consider approaching the supply chain and environmental impact analyses required under the Fashion Act as they would an internal investigation or compliance audit, by taking steps to maximize the degree of privilege that they might assert over the internal evaluation. To optimize the benefits of such an approach, consideration should be given to the laws regarding privilege in the individual jurisdictions in which specific activities occur.

Practical steps that may be taken in this connection include having the evaluation conducted under the supervision and at the direction of legal counsel, with any consultants performing their tasks for the purpose of assisting counsel in rendering legal advice. Such an approach could help protect from disclosure of any communications regarding findings of the evaluation under the attorney-client privilege. The attorney work product and, depending on the jurisdiction, self-evaluative privileges may apply as well, though proper invocation of the former usually requires a genuine threat of litigation. Furthermore, to the extent that an assessment involves detailed analysis of operations conducted in states with environmental audit-privilege laws, regulated entities may wish to consider the potential benefits of following the procedures necessary to invoke the legal protections afforded by such statutes and regulations. Individual stages of the supply chain may occur in different places, so different audit rules of various jurisdictions may be implicated and will need to be considered.

Finally, a benefit of approaching the supply chain and environmental impacts analysis along these lines is that doing so stands to make available to regulated entities the protections that the EPA and many states agencies afford under environmental audit policies. The general principle underlying these policies is that entities that systematically investigate their operations and self-disclose and correct identified environmental violations are entitled to a measure of liability relief, provided that certain conditions are met. 

Conclusion

The Fashion Act stands to convert ESG principles into binding and enforceable legal requirements for major fashion companies. It essentially requires companies to examine the environmental aspects of their operations which, in turn, could result in the identification of potential liabilities besides those arising strictly from non-compliance with the new law. Companies can take practical measures to maximize privilege and minimize potential liabilities they may identify while complying with the requirements of the proposed legislation, in the event that it becomes law. Pillsbury attorneys are experienced in helping companies conduct such internal evaluations, including environmental audits.