New York Proposes Groundbreaking Fashion Sustainability Legislation - Corporate Governance

In January, the New York State Assembly and Senate introduced identical bills seeking to impose broad environmental, social and governance (ESG) mandates on the global fashion industry. If passed, the Fashion Sustainability and Social Accountability Act (the Fashion Act) would make New York the first state in the country to require fashion retail sellers and manufacturers to publish extensive disclosures about their supply chains and their "environmental and social due diligence policies, processes and outcomes, including significant real or potential adverse environmental and social impacts," and to set binding targets to reduce those impacts. Notably, the Fashion Act provides for enforcement by the New York attorney general and creates a private right of action for individuals to commence civil actions for noncompliance.

This alert summarizes the key provisions of the proposed bill.

What companies will be subject to the Fashion Act?

The Fashion Act applies to "fashion retail sellers" and "fashion manufacturers" that do business in New York State and have annual global gross revenues that exceed $100 million. Fashion retail sellers and manufacturers are defined as business entities that primarily sell articles of wearing apparel or footwear and list "retail trade" or "manufacturing" as their principal activity on their state tax return. "Doing business" in the state is broadly defined as "actively engaging in any transaction for the purpose of financial or pecuniary gain" within the state of New York.

What will be required?

The Fashion Act imposes four broad disclosure requirements: (i) a supply chain map, (ii) a social and environmental sustainability report, (iii) impact disclosures concerning certain "prioritized" environmental and social impacts, and (iv) annual reports tracking progress toward risk and impact reduction.

The bill mandates that companies prominently post these disclosures on the company's website.

Supply Chain Mapping:

Covered businesses would be required to map at least 50% of their supply chain by volume across all stages of production, "from raw material to final production."
The Supply Chain Map should include suppliers and supply chains associated with certain prioritized risk areas identified in the entity's Social and Environmental Sustainability Report (described below), including the names of the relevant suppliers.

Social and Environmental Sustainability Report:

The Social and Environmental Sustainability Report (Sustainability Report) includes several enumerated components identifying business risks and measures taken to embed "responsible business conduct" into policies and management, according to principles set forth by the United Nations, the International Labor Organization, and the Organisation for Economic Co-operation and Development.
The Sustainability Report should identify the company's "areas of significant risks in the context of its own business activities and business relationships such as supply chains." Identified risks may include, for example, sectoral risk factors (e.g., products and their supply chains, services, and other activities), geography-related risk factors (e.g., governance and rule-of-law, conflict, pervasive human rights or environmental adverse impacts) and enterprise-specific risk factors (e.g., known instances of corruption, misconduct).
The Sustainability Report should identify actions taken by the company to mitigate the identified risks, including estimated timelines, targets and benchmarks for improvement, as well as the outcomes of improvement efforts. Companies should also include a description of measures used to track the completeness and efficacy of efforts to identify, prevent or mitigate the impact of business activity on risks.
The Sustainability Report should identify, prioritize and assess the extent to which the company's own business activity has impacted or could impact the severity of the identified risks, and the criteria for prioritization.
The Sustainability Report should describe any "provision of or co-operation in any remediation" following the discovery of an actual adverse impact.

Prioritized Adverse Impact Disclosures:

In addition to the Sustainability Report, the Fashion Act requires fashion companies to disclose "prioritized adverse environmental and social impacts," including five specifically enumerated impacts.
The first impact disclosure is greenhouse gas (GHG) reporting. The GHG reporting must be "independently verified" and stated in "absolute figures" such that it conforms with the reporting standards promulgated by the World Resources Institute. GHG reporting should also include a "quantitative baseline" of current energy usage, GHG emissions, water usage and chemical management, as well as reduction targets.
The second impact disclosure requires a statement of the "annual volume of material produced, including breakdown by material type." This information should be independently verified.
The third impact disclosure requires a statement of "how much production has been displaced with recycled materials as compared with growth targets," which should also be independently verified.
The fourth impact disclosure requires the identification of the "median wages of workers of prioritized suppliers" and the comparison of these wages with local minimum and living wages.
The fifth impact disclosure requires the company to identify its "approach for incentivizing supplier performance on workers' rights." This should "state any key performance indicators or performance incentives used; and describe the incentives used to reward suppliers and encourage good performance." Examples may include contract renewals, price premiums and the offer of longer-term contracts.

Annual Progress Reports:

Companies will be required to report annually on their compliance with "due diligence targets" and state a goal for the reduction of adverse impacts.
Due diligence targets should include absolute climate change targets in line with guidance provided in the apparel and footwear sector science-based targets, promulgated by the World Resources Institute.

What are the penalties for noncompliance?

The Fashion Act creates a multifaceted enforcement mechanism, including a right of action for the New York attorney general and a private right of action.

The NY attorney general is charged with enforcing the Fashion Act and is empowered to seek monetary damages, injunctions or civil performance of a statutory duty.
The attorney general is also required to publish an annual list of companies that are not in compliance.
Companies notified of noncompliance would have three months to become compliant before facing fines of up to 2% of their annual revenues that are $450 million or more. Fines are to be deposited into a community benefit fund administered for environmental projects.
The Fashion Act also creates a private right of action for consumers. Any private citizen may commence a civil action for alleged violations of the Fashion Act, including an action to compel the attorney general to investigate a company's compliance.

What's next?

According to published reports, the Fashion Act has a broad array of supporters, especially among nonprofits, and its backers hope to bring the bill to a vote in the coming months. If ultimately passed, the act would require companies to work quickly, providing only 18 months to comply with the act's prioritized adverse impact disclosures and 12 months to comply with the remaining disclosure requirements. These legal obligations would constitute landmark legislation, perhaps foreshadowing similarly robust ESG regulation in other industries. Accordingly, companies would be wise to keep watch as the Fashion Act progresses.

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