Will 2022 Be the Year of Supply Chain Ethics?
The Fashion Sustainability and Social Accountability Act in the Context of ESG
On January 7, 2022, New York State Senator Alessandra Biaggi and Assemblywoman Anna R. Kelles introduced the Fashion Sustainability and Social Accountability Act, A8352/S7428 (“Fashion Act”). The Fashion Act’s purpose is to promote sustainability and accountability regarding the environmental and social impacts of large fashion companies. The Fashion Act defines the latter as fashion retail sellers and fashion manufacturers of “wearing apparel or footwear” with annual worldwide gross revenues of $100 million or more doing business in New York. Given New York’s status as a worldwide hub for the fashion industry, the geographical nexus requirement of the Fashion Act hardly limits its applicability, which stands to cover many household brands and retailers.
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:
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.
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.