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On Sale Now: Cheap Fashions at a Very High Price
By Holly Testa, Director, Shareowner Engagement

The recent garment factory collapse in Bangladesh which took the lives of over 1,100 workers in April may be the most horrific disaster ever recorded at a garment factory, but it is by no means an isolated incident. It is instead, perhaps, an inevitable outcome for an industry when the end consumer has come to expect ever lower prices—and cheap labor is the primary method for delivering on this expectation.

Many major clothing manufacturers actually produce little of their end product. Their label may be on it, but the actual production is “outsourced” to a wide array of factories in developing countries desperate to attract businesses who can supply jobs for large impoverished workforces.

The outsourcing trend shows up in our clothing prices—as overall consumer prices have gone up over the past 20 years, clothing prices have been stagnant.

Outsourcing may mean lower costs of production, but it also leads to significant loss of control over much of the process on which company reputations, and profits, depend. Retailers have very little control over their supply chain. In fact, industry leaders, such as Wal-Mart and Sears, whose brand labels were found in the wake of the Tarzeen factory fire in Bangladesh, claimed that the clothing was being made at that factory without their knowledge.

Many institutional investors, including First Affirmative, believe that companies must take responsibility for their supply chains. Led by the Interfaith Center on Corporate Responsibility (ICCR), 170 investors representing more than $1 trillion in assets under management have called for the implementation of "systemic reforms that will ensure worker safety and welfare, and to adopt zero tolerance policies on global supply chain abuses."

Investors are asking companies for several immediate actions, including joining the Accord on Fire and Building Safety. This accord joins together the International Labor Organization, companies, non-governmental organizations and trade unions to implement plans with measurable goals to address all aspects of fire and building safety. Forty companies have already joined, but so far only three U.S. companies, Abercrombie & Finch, Gap, and PVH (parent to Calvin Klein and Tommy Hilfiger), have agreed to sign. At least 14 major North American retailers have declined.

Mention of specific companies or securities should not be considered a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: July 8, 2013