KnowTheChain_InsightsBriefing_v3.0

KnowTheChain INSIGHTS BRIEF • SEPTEMBER 30, 2015

Insights Brief

Five Years of the California

Transparency in Supply Chains Act

September 30, 2015

KnowTheChain INSIGHTS BRIEF • SEPTEMBER 30, 2015

When SB 657 went into effect in 2012, it was the ﬁ rst law

of its kind. Today, new public policy approaches are gaining

momentum with new supply chain transparency laws and

regulations emerging in the United States, United Kingdom, and

the European Union. Corporations are under mounting pressure

from consumers, investors, the media, and governments to

operate more transparently and responsibly.

ABOUT THE CALIFORNIA

TRANSPARENCY IN SUPPLY

CHAINS ACT (SB 657)

Over the years, the responsibility for working conditions within corporate supply chains has not

been fully understood and therefore has been largely ignored by the public. However, a pioneering

law out of California fundamentally changed that.

In September 2010, the California Transparency in Supply Chains Act (SB 657) was signed into

law requiring retail sellers and manufacturers that do business in California and have over $100

million in gross annual receipts to publicly disclose their efforts to eradicate slavery and human

traﬃ cking from their supply chains.

The explicit goal of the law is to provide consumers with new information to enable them to make

more educated purchasing decisions. The underlying hope is that the simple act of disclosure

will compel corporations and consumers to truly engage in this human rights issue.

Five years after the law’s signing, KnowTheChain has identiﬁ ed key lessons from SB 657’s

introduction and enactment, as well as ways to improve future laws. The Insights Brief was

created by KnowTheChain prior to its expansion in the fall of 2015. It is based on a set of 500

companies that KnowTheChain identiﬁ ed as being affected by SB 657 using a methodology

developed upon the initial launch of KnowTheChain in 2013.

KnowTheChain INSIGHTS BRIEF • SEPTEMBER 30, 2015

Recommendation

Public reporting and information sharing gives consumers and investors a

choice in what practices—and businesses—they want to support. SB 657 limited

its own ability to create an environment of true transparency by not requiring

that a list of companies subject to the law be publicly available. KnowTheChain

recommends that the California’s Attorney General’s oﬃ ce, as well as future

legislative and regulatory efforts, address this transparency barrier.

Companies should also proactively understand and address the risks within

their supply chains and publicly disclose these efforts. Even if a company is not

currently subject to this law, scrambling to meet the expectations of a changing

disclosure environment is not a sustainable corporate strategy.

ACHIEVING TRANSPARENCY

Our goods are often produced far from where

they are bought, successively changing hands

along complex and opaque supply chains. SB 657

represents an important step towards greater

corporate and consumer awareness of slavery in

supply chains. By requiring companies to publicly

disclose their efforts to eradicate slavery and

human traﬃ cking from their supplier networks,

the law seeks to shine a spotlight on the deep

corners of corporate supply chains where the most

egregious labor abuses occur.

Despite this goal, SB 657 does not require that the names of the companies

subject to the law be made public, leaving both consumers and corporations

unaware of which businesses are subject to the law. This lack of information

hinders the law’s ability to achieve true transparency and disseminate

information at the scale it had originally intended.

As a result, little to no information is available on the overall corporate response. When

the law went into effect, guidance for how to comply was not provided to corporations

impacted by the law.

Because of this inaction by the California Attorney General, who is charged with the

law’s enforcement, KnowTheChain developed a research methodology that allowed us to

identify 500 companies that we believed were required to comply. Of these companies,

only 31percent had a disclosure statement available that was in compliance with all the

requirements of the law

19%

KnowTheChain was

only able to identify

of the companies

required to comply.

KnowTheChain INSIGHTS BRIEF • SEPTEMBER 30, 2015

Global businesses have a unique opportunity to contribute to

the eradication of forced labor within their supply chains. SB

657 embeds this opportunity into a regulatory framework.

Although a disclosure statement alone does not measure a company’s level of engagement on these

issues, it does provide a standardized platform through which a corporation can share its actions.

Companies subject to SB 657 were required to comply on January 1, 2012. Unfortunately, the

California Attorney General did not provide guidance on how to comply until April 2015. Lack of

direction has made companies unclear on how they should interpret and implement the requirements

of the law. In our research, we found a signiﬁ cant number of inconsistencies between the law’s

requirements and what was actually being publicly displayed. Moreover, although KnowTheChain

identiﬁ ed approximately 500 companies subject to the law, the California Attorney General’s guidance

was sent to an estimated 2,600 companies. This list of companies has still not been disclosed.

SB 657 requires that a disclosure statement include the extent to which a company engages in the

following ﬁ ve categories: veriﬁ cation, auditing, certiﬁ cation, internal accountability, and training.

Recommendation

There is an obvious lack of understanding of which companies are subject to the law and what they need to

do to oﬃ cially comply. Impacted companies were not given the timely guidance necessary to ensure they

accurately met all legal expectations. Rather than focus on the substance of their statements, corporations

have devoted time and resources to forming their own interpretations of the law.

The California Attorney General issued a resource guide recently that can help corporations draft and modify

their statements. In order to comply, disclosure statements need to address all ﬁ ve issue areas identiﬁ ed by

the law. Statements should also be easily accessible from a company’s homepage. KnowTheChain has also

identiﬁ ed resources that companies may ﬁ nd helpful if they would like to fulﬁ ll the spirit, in addition to the

letter, of the law.

Future transparency laws should require enforcement agencies to release clear and timely guidance

prior to the law taking effect. This guidance should also highlight ways that companies can go above the

requirements of the law. This guidance should be provided to companies when they are informed that they

are required to comply.

INCONSISTENT DISCLOSURE

10 percent of corporations did provide information on their websites about how they manage forced

labor abuses within their supply chains. However, this information was not speciﬁ cally located within

a disclosure statement.

47%

of the original 500 companies

identiﬁ ed by KnowTheChain

did not disclose suﬃ cient

information in all ﬁ ve categories.

Covered 5 of 5

Failed to Cover

Covered 0 of 5

Covered 1 of 5

Covered 2 of 5

Covered 3 of 5

Covered 4 of 5

53%

47%

20%

10%

0% 25% 50% 75% 100%

Company Coverage of 5 Categories Required in the Law

The law also requires that statements

be made available on the homepage

of each company’s website, thereby

ensuring the information is not only

available, but also accessible. We found

that only 46 percent of disclosure

statements were linked from the

homepage of a company’s site.

KnowTheChain INSIGHTS BRIEF • SEPTEMBER 30, 2015

SB 657’s disclosure requirement was intended to

standardize how businesses disclose their

responsible supply chain management practices.

The goal was to allow consumers to compare

comparably-structured statements.

However, impacted companies are selected based on their California State Tax

Classiﬁ cation and not the similarity of their supply chains. In other words, if two companies

have identical supply chains, but different tax classiﬁ cations, one would be subject to the

law, while the other one is not. This criteria is not based on a company’s assumed risks and

creates an uneven playing ﬁ eld for competitors.

Furthermore, the SB 657 reporting requirement does not specify how often a businesses

needs to update their statement. If a company posts a statement once and never revisits

it again, they would be nonetheless in compliance with the law. This one-time reporting

requirement ignores the dynamic nature of supply chains and the environments in which

they operate.

Recommendation

SB 657 and future legislative transparency laws should take the realities of the business

landscape into consideration. Companies with similar supply chains share similar risks and

therefore also share a responsibility to comply.

Furthermore, as business decisions and sourcing strategies adapt to competition and markets,

so should disclosure statements. Reporting laws should require annual ﬁ lings rather than

one-time disclosure statements.

By aligning statement requirements with how businesses manage their supply chains,

companies will be better-positioned to disclose and respond to risks within their supply chains.

LEGISLATIVE LIMITATIONS

SB 657 impacts companies based on their state tax ﬁ ling (e.g., “retail

seller” or “Manufacturer”). This creates an uneven playing ﬁ eld where

some companies are held to a higher standard than their competitors.

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KnowTheChain INSIGHTS BRIEF • SEPTEMBER 30, 2015

CONCLUSION

SB 657 introduced a new legal requirement and by doing

so has made companies more responsible for labor abuses

within their supply chains. The law provides a great deal

for legal counsels to decipher, brand managers to grapple

with, investors to consider, and executives to manage.

Whether these conversations have focused on the logistics

of evaluating newer suppliers, ﬁ guring out who exactly was in

charge of auditing, or pushing the boundaries for what each

company can do to ensure their product production is not

supporting forced labor abuses, each discussion is valuable.

Five years after the passing of SB 657, its legacy is that the

conversation is growing.

Since its enactment in 2012, multiple laws inspired by SB 657 have either been introduced or

passed. This trend towards increased reporting and transparency is not only inﬂ uencing what legal

requirements exist for companies, as it pertains to management of their supply chains, but also

impacting how multinationals think about their supply chain management more broadly.

Following SB 657 compliance has given KnowTheChain some insights into what is needed to create

an environment of transparency. Laws need to be coupled with clear guidance, and regulations

must work to never create imbalanced requirements for competing companies. Companies need

KnowTheChain is a resource for businesses and investors who need to

understand and address forced labor abuses within their supply chains.

Contact Info

[email protected]

knowthechain.org

clear resources and support for their efforts. Consumers and stakeholders need to know how

they can participate and how they can lend their voices, purchases, or investments to support the

business practices that align with their values.

KnowTheChain will continue to work with companies to improve their supply chains management

practices and with governments to think through the holistic processes necessary to make this

transparency shift a cohesive reality.

A project of Humanity United

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KnowTheChain INSIGHTS BRIEF • SEPTEMBER 30, 2015

Based on KnowTheChain’s methodology, the companies

included in the KnowTheChain dataset appeared at that time

to meet all three criteria outlined in the law:

Retailer seller or manufacturer

Annual worldwide gross receipts that exceed $100 million

Doing business in California

The Insights Brief was created by KnowTheChain prior to its expansion in

the fall of 2015. It is based on a set of 500 companies that KnowTheChain

identiﬁ ed as being affected by SB 657 using a methodology developed upon

the initial launch of KnowTheChain in 2013.

METHODOLOGY

Identifying Dataset

Three channels were used to identify these companies. First, a research team

from the Coalition to Abolish Slavery and Traﬃ cking, Not For Sale, and Verité

used the Hoovers D&B database and relied on criteria developed by an outside

law ﬁ rm specializing in corporate and ﬁ nancial law to identify companies that

meet the law’s criteria. The team then researched each company and identiﬁ ed

a number of disclosure statements. All companies with posted disclosure

statements identiﬁ ed through this process were included on

KnowTheChain’s site.

Second, using the S&P Capital IQ database, Sustainalytics and Humanity United identiﬁ ed a second

group of companies that also meet all three criteria in the law. This dataset was cross-referenced

with the ﬁ ndings of the original research team. Companies that appeared in both datasets were also

included on our site.

Third, in conducting additional due diligence to develop and populate the website, the KnowTheChain

team identiﬁ ed a small number of additional companies with posted disclosure statements. These

companies are also included on KnowTheChain. Using this ﬁ nal dataset, compiled through the

process outlined above, the KnowTheChain team conducted an additional round of research to

ensure all disclosure statements were appropriately captured. Using a standard search methodology,

the team searched each company website for information outlining the procedures, if any, a

company had established regarding human traﬃ cking in their supply chains.

In the evaluation process, companies were given the beneﬁ t of the doubt. If they disclosed

information within a speciﬁ c SB 657 statement that generally talked about management practices,

but it did not explicitly mention human traﬃ cking or slavery, they were determined to disclose

suﬃ cient information to meet the requirement. However, if information for a company was found

outside of a disclosure statement the information had to explicitly reference that such practices

related to addressing forced labor, human traﬃ cking, or slavery.

KnowTheChain recognizes that its dataset does not fully reﬂ ect all the companies subject to SB 657

and may reﬂ ect some companies not subject to SB 657. With the public information available, it is

not feasible to deﬁ nitively determine all of the companies that are subject to the law.

Research for this insights brief was prepared in part through the

support of Concordia. Concordia’s mission is to identify new avenues

of collaboration for governments, businesses, and nonproﬁ ts

through issue-based campaigns, year round programming, and

the Partnership Index. Concordia promotes effective public-private

collaboration to create a more prosperous and sustainable future.