The complex supply chains of companies and the role of digital product passports

Armani made headlines earlier this month when an Italian court revealed it was embroiled in a labor dispute after at least one of its suppliers used subcontractors who flouted national labor laws. In a court order released on April 5, the Milan court stated that one of Armani’s suppliers, Manifatture Lombarde, “used subcontractors in the Milan area who employed undocumented migrants for the production of Armani bags, leather goods and other accessories.” these individuals are subjected to “particularly unfavorable working conditions,” including being required to work a greater number of hours than officially declared by the company, and being paid a wage of between €2 and €3 ($3.25) per hour. (Reuters reported that not one but two of Armani’s suppliers, Manifatture Lombarde And Alviero Martini is suspected of outsourcing the production of Armani accessories to external companies without Armani’s knowledge or consent.)

“In an April 3 ruling, the court appointed a consultant for one year to work with managers (at Giorgio Armani Operations) to improve supplier relations,” the AFP reported. The court’s order – which follows a years-long effort by Milan’s public prosecutor’s office to investigate the outsourcing of production by major groups in the fashion and other industries to subcontractors who allegedly exploit workers – sheds light on the increasing attention from regulators on the operation of clothing brands’ supply chains. (This attention is likely to increase further in the coming years in light of ESG-focused calls for greater transparency across corporate value chains.)

While fast fashion companies have traditionally been at the center of production-related disputes, the Armani case shows that both the mass market and high fashion levels face difficulties when it comes to keeping an eye on their complex and often murky supply chains. .

Supply chains and the ESPR

One element worth addressing here is the looming role of legislation in the European Union that aims to bring transparency to the products offered in the clothing and textile segment. As part of a reworking of the existing Ecodesign Directive 2009/125/EC, the EU has proposed (and provisionally approved) the Ecodesign for Sustainable Products Regulation (“ESPR”). The ESPR – a provisional agreement adopted in December 2023 and adopted in April 2024 – ‘follows the same approach as the current Ecodesign Directive, which has been delivering efficiency gains for energy-related products in the EU for more than a decade’. according to the European Commission.

ESPR in a nutshell: The ESPR proposal “will apply to the widest possible range of products and will use the successful ‘Ecodesign approach’ to set product-level requirements that promote not only energy efficiency, but also circularity and overall reduction of environmental and climate impacts.” With the aim of ensuring the design of ‘more environmentally sustainable and circular products’, the ESPR will subject companies placing clothing products on the EU market to requirements regarding a product’s durability, reusability, upgradability and repairability, and the presence of substances that hinder circularity.

> Pproducts covered by ESPR: The legislation will allow rules to be established for any physical good placed on the market or put into use, including intermediate products. Only a few sectors will be exempt, including food, animal feed, living organisms, certain motor vehicles and medical products.

> Implementation of the ESPR rules: The ESPR creates a framework that allows for the adoption of rules at product level in a second phase, through delegated acts, per product or, if applicable, for groups of products. The European Commission has stated that it intends to prioritize the introduction of requirements for certain product groups that it considers to have a high impact. These include textiles, iron, steel, aluminum, furniture, tires, paints and chemicals, as well as certain energy-related products and electronics.

> Passports for digital products: The ESPR introduces a requirement for companies to use digital product passports to provide information about products’ sustainability credentials via QR code to consumers, regulators and other companies in the supply chain. (More on this below.)

> Unsold goods: The ESPR also specifically prohibits the destruction of unsold clothing, associated accessories and footwear from two years after the entry into force of the legislation (six years for medium-sized enterprises). The Commission says that in the future it “may add additional categories to the list of unsold products subject to a destruction ban.”

The state of the ESPR: The EU Parliament voted on and adopted the legislation at a plenary meeting on April 23, 2024, with 455 votes in favor, 99 against and 54 abstentions. The European Council must now formally adopt the ESPR before it can be turned into law.

The introduction of digital product passports

A particularly notable side effect of the proposed ESPR is the mandatory introduction of digital product passports (“DPPs”), which will, at least in theory, bring greater transparency when it comes to companies’ products and their supply chains.

In addition to providing consumers with better access to information on the content, reparability and recyclability of specific clothing products, the European Commission says the DPP program “should also help public authorities to better carry out checks and controls,” which is likely to bring benefits in terms of monitoring and tracking the supply chain.

With the ESPR and related requirements around DPP adoption expected to impact most businesses in the coming years, apparel industry entities should start paying attention now, if they are not already doing so. However, businesses currently face significant uncertainty as many critical elements of the upcoming DPP requirement remain open, including the scope and process for implementation. For example, while the European Commission plans to roll out the implementation of the DPP mandate by product group, no framework has yet been released on how it will prioritize the different product groups beyond the initial list of “priority” products.

Take early action

The lack of certainty makes it difficult for companies to determine exactly how and when the ESPR – and in particular the DPP-specific rules – will apply to them. Nevertheless, the World Business Council for Sustainable Development says companies “can benefit from taking early action now to influence regulation, improve compliance and resilience, unlock investment synergies and increase transparency.”

Among the key actions that the World Business Council for Sustainable Development recommends for relevant entities looking to make a leap into ESPR preparation are…

(1) Start assessing the company’s current data availability, identify gaps and collect missing data using the proposed ESPR, Battery Regulation, International and European Standards and Circular Economy Standards as a framework;

(2) Ensure that your organization across all departments can adapt to the upcoming DPP implementation (this includes enabling transparency while maintaining confidentiality; for example, companies should determine how to share enough information to ensure circularity of improve products while ensuring the continued protection of intellectual property rights and commercial interests); And

(3) Plan changes to the technical setup of the business to enable implementation of the DPP mandate (this includes choosing a DPP data storage option).

TLDRLife cycle assessment software provider Ecochain notes that while the ESPR will set Ecodesign criteria for as many products as possible, it will be implemented in the coming years for “only a limited number of energy-intensive products.” As such, the first step for companies should be to determine whether – and which – of their products fall within the realm of “priority” products. These include: iron, steel, aluminum, textiles (particularly clothing and shoes), furniture, tires, detergents, paints, lubricants and chemicals.