If provided by the financial institution, the Early Warning System Team writes a short summary describing the purported development objective of the project and project components. Review the complete project documentation for a detailed description.
PROJECT DESCRIPTION
This project is proposed under the Global Trade Supplier Finance program ("GTSF" or the "Program") approved by the IFC Board in September 2010. Under GTSF, IFC provides short-term financing to suppliers ("Suppliers") in emerging markets selling to large companies ("Buyers") on open account terms. Under this project, IFC will provide financing to Suppliers to Industrial de Diseno Textil S.A., ("Inditex" or the "Group") based in multiple emerging market countries. IFC's investments will be in the form of funded or unfunded participations with commercial banks or directly through independent supply chain finance platforms.Inditex which was formally established in 1985, is a fashion distribution group, with more than 6,000 retail stores in 82 countries. Inditex operates the Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterque brands, and sources garments, shoes and accessories from more than 1,400 suppliers in over 40 countries. Inditex also has its own manufacturing facilities based in Arteixo, Spain.
OVERVIEW OF IFC'S SCOPE OF REVIEW
In the GTSF project structure, IFC expects Buyers to have management systems and processes to develop the necessary assurance of good Environmental and Social ("E&S") performance among their Suppliers. IFC's review therefore focuses on the Buyers' management systems and procurement practices applicable to the E&S practices among their Suppliers, usually as a component of the Buyer's approach to Corporate Social Responsibility ("CSR").In the proposed investment, IFC's due diligence involved review of Inditex's Annual Reports, including the most recently published 2012 Annual Report, which contain considerable detail on the CSR assurance program, and review of other publically available material such as Inditex's Code of Conduct for Manufacturers and Suppliers ("the Code").IFC followed this document review with a visit to Inditex's headquarters in Arteixo, Spain, to meet Inditex's Director of CSR and other CSR staff, and with Inditex's Environment Manager, to better understand the structure of Inditex's supply chain in emerging markets and to discuss implementation of the Supplier CSR assurance program. IFC further reviewed internal Inditex documents, including audit documentation samples, the CSR audit methodology, checklists and the audit evaluation methodology, the Inditex Environmental Code of Conduct for Manufacturers and Suppliers (the "Green Code"), the Master Plan for Water Management in the Supply Chain and documents describing Inditex's implementation approach including through technical assistance provided to the supplier chain, sample Corrective Action Plan Audit Reports ("CAPARs") sample initial and follow-up audit reports, and Inditex's global database in which all audit reports are stored.
IDENTIFIED APPLICABLE PERFORMANCE STANDARDS**
While all Performance Standards are applicable to this investment, IFC's environmental and social due diligence indicates that the investment will have impacts which must be managed in a manner consistent with the following Performance Standards.PS 1 - Assessment and Management of Environmental and Social Risks and ImpactsPS 2 - Labor and working conditionsPS 3 - Resource Efficiency and Pollution PreventionPS 4 - Community Health, Safety and SecurityIf IFC's investment proceeds, IFC will periodically review the the project's ongoing compliance with the Performance Standards
ENVIRONMENTAL AND SOCIAL CATEGORIZATION AND RATIONALE
The environmental and social impacts which are expected to occur among Inditex's suppliers are those related primarily to apparel manufacturing, with some leather processing. The most significant of these impacts are related to safe (including fire safety) and fair employment conditions, product safety, emissions to air and water, hazardous materials management and use of energy and water.These are all impacts that may readily be managed through readily available mitigation measures. This is therefore an environmental and social Category B project.Development of greenfield factories, which is rare but possible among Inditex's suppliers could create impacts related to PS5 (Land Acquisition and Involuntary Resettlement), PS6 (Biodiversity Conservation and Sustainable Management of Living Natural Resources); PS7 (Indigenous Peoples) or PS8 (Cultural Heritage). These PSs are not considered further in this review because financing will be provided only to established suppliers with a history of E&S performance that can be evaluated by Inditex's supplier CSR program.
**Information on IFC's Policy and Performance Standards on Environmental and Social Sustainability can be found at
www.ifc.org/sustainability
ENVIRONMENTAL AND SOCIAL MITIGATION MEASURES
IFC's appraisal considered the environmental and social management planning process and documentation for the project and gaps, if any, between these and IFC's requirements. Where necessary, corrective measures, intended to close these gaps within a reasonable period of time, are summarized in the paragraphs that follow and (if applicable) in an agreed Environmental and Social Action Plan (ESAP). Through the implementation of these measures, the project is expected to be designed and operated in accordance with Performance Standards objectives.
PS 1: ASSESSMENT AND MANAGEMENT OF ENVIRONMENTAL AND SOCIAL RISKS AND IMPACTS
Social and Environmental Management SystemInditex has a comprehensive and extensive CSR assurance system. Inditex evaluates the CSR performance and compliance of its suppliers with the Inditex Code of Conduct for Manufacturers and Suppliers ("the Code"). This code was first adopted in February 2001, and was revised in 2007, and most recently in July 2012. IFC has reviewed this CSR assurance system in order to determine its suitability for bringing about and maintaining Performance Standards compliance in Inditex's suppliers. Inditex's CSR management system has historically given considerable emphasis to issues that in IFC terms are the Performance Standard 2 (Labor and Working Conditions) provisions with particular emphasis on control of forced labor and child labor and full and prompt remuneration of appropriate salaries. However the 2012 Code revisions have considerably strengthened Inditex's approach to other issues contemplated by the Performance Standards.According to their level of Code compliance, Suppliers are assessed on a scale of A to CAP defined as follows: A, compliant with the Code, minimal risk; B, minor Code breach, low risk; C, in breach of some sensitive aspect of the Code, medium risk or CAP, Supplier subject to a Corrective Action Plan (CAP). IFC's financing support will be offered only to suppliers with an Inditex evaluation of A or B.Inditex's CSR assurance system has been designed to ensure suppliers' compliance with the Inditex Code of Conduct for Manufacturers and Suppliers.This Code which is disclosed on Inditex's web site
at:http://www.inditex.com/en/corporate_responsibility/social_dimension/code_of_conduct_for_manufacturers_and_suppliershas provisions which may be considered under 15 categories as follows: (1) No forced labor; (2) No child labor; (3) No discrimination; (4) Respect for freedom of association and collective bargaining; (5) No harsh or inhumane treatment; (6) Safe and hygienic working conditions; (7) Wages are paid; (8) Working hours are not excessive; (9) Regular employment; (10) Traceability of Production; (11) Health and Safety of Products; (12) Environmental Awareness; (13) Cultural Awareness; (14) Confidentiality of Information; and (15) Code Implementation.Social and Environmental AssessmentInditex's auditors are instructed to review all necessary permits, including environmental permits, fire certificates, etc. Review of sample audit reports shows that this is done.Management Program.Inditex has a well-defined social auditing program which is described in its Tested to Wear Audit Methodology for External Manufacturers and Suppliers, other internal instructions and in the 2012 Annual Report.When a supplier starts a relationship with Inditex informs the supplier about the Code, requiring that the potential supplier agrees to be bound by the Code and requesting that an on-line self-assessment questionnaire be completed. The completed questionnaire is reviewed by Inditex as a "pre-assessment", and a pre-assessment audit will be undertaken by Inditex's CSR team or a consultant. Suppliers are then required to sign the Inditex Minimum Requirements, that is a commitment to observe Inditex's standards including the product safety standards Clear to Wear and Safe to Wear, and to observe the Code and are provisionally approved to supply to Inditex.All suppliers that form part of Inditex's supply chain are subject to CSR audit which will be of duration 1 to 3 days according to the size of the supplier. The audit includes interviews with staff, union representatives and company management, record review and visual inspection of the site. Supplier compliance with each of the fifteen elements of the Code is evaluated, being assigned a mark from 1 (significant breach of Code) to 4 (no evidence of a breach). These evaluations are weighted and the overall A to CAP assessment calculated.At the conclusion of the audit a written report is prepared and shared with and countersigned by the supplier's representative. Unless the supplier scores 4 (compliance) on every single Code aspect, one or more corrective actions, with a due date, will be defined, and the written product is the Corrective Action Plan Audit Report (CAPAR). The overall assessment (A to CAP) defines the maximum time that will be allowed to elapse before a repeat audit - this varies from 24 months for A to 6 months for a CAP supplier. If a Supplier decides not to implement the CAP, or does not rectify the most serious Code non-compliances, the relationship with Inditex suspended.Inditex's 2012 Annual Report shows the evolution of supplier performance in the course of the commercial relationship with Inditex. For suppliers of less than one year, around 64% are categorized A or B; for those with a three-year or longer relationship, over 85% were A or B. In 2012, Inditex sourced more than 91% of its products from Category A or B suppliers.Organizational CapacityInditex has put in place considerable organizational capacity which effectively ensures assurance of Code implementation. It has a team reporting to a Director of CSR, which is responsible for Code implementation. Of this team, 12 are based at Inditex headquarters in Spain, while the others are based in the rest of Inditex's "cluster" offices located in Portugal, Morocco (also servicing Egypt, Tunisia, other African countries), Turkey (also servicing Turkmenistan, Bulgaria, Romania and other eastern European countries), China (also servicing South Korea, Hong Kong and Singapore); Bangladesh (also servicing Pakistan); India (also supporting Vietnam, Cambodia, Indonesia, Thailand and the remainder of Asia), Brazil and Argentina.This core team, which is responsible for conducting supplier audits, program design and quality assurance and administration, also has oversight of a cadre of external auditors. The internal and external teams comprised morethan 2,700 professionals as reported in the 2012 Annual Report. In addition, a group of 43 internal and 1,144 external assessors undertakes safety analysis of Inditex's products, in particular laboratory analysis of chemical content.In 2012 this group undertook more than 3,500 audits of Inditex's suppliers.TrainingInditex has put in place a program of training its in-country auditors, on a train the trainer basis. Four external auditing companies are now used, and within these, senior auditors supervise and mentor less experienced staff. In 2012 Inditex instituted its own training process whereby all external auditors receive the same training, with the intent to improve the quality and consistency of audits. 113 external auditors were trained during 2012.Community EngagementInditex's Social Council has among its responsibilities oversight of implementation of the Code. However communities potentially affected by the activities of an Inditex supplier may not be aware of the presence and role of the Social Council. Inditex amended in July 2012 the Code to require external manufacturers and suppliers to develop community communication and grievance mechanisms and to report on these to Inditex and to publicize information about the role of and contact details for the Social Council.MonitoringInditex monitors supplier implementation of the CAPAR though follow-up audits which are conducted according to the frequency determined by the overall risk assessment.ReportingAll audit reports, including the CAPARs are uploaded to a global internet site by the auditors, and reviewed by HQ CSR staff. Supporting material can be uploaded, or more commonly is held in a paper file in the country office.
PS 2: LABOR AND WORKING CONDITIONS
Working Conditions and the Management of Worker Relationships.Issues covered by these elements of Performance Standard 2 are at the core of Inditex's Code.All Inditex suppliers are required to adopt the provisions of the Code. Such commitment forms the basis of a PS2-compliant human resources policy, even if such a policy had not previously been adopted by the supplier. The Code's requirements relating to the working relationship, working conditions and terms of employment, workers' organization and non-discrimination and equal opportunity are aligned with PS2's requirements in these areas. The Inditex audit methodology reviews "regularity" of employment, which includes analysis of retrenchment if it occurs. The audit methodology also includes review of employee grievance mechanisms.Protecting the WorkforceAvoidance of forced and child labor are key objectives of the Inditex Code and are assigned very high priority in supplier evaluation. If detected, each of these issues alone would cause a CAP evaluation of a supplier who would be subject to a Corrective Action Plan, and immediate corrective action is required.Occupational Health and SafetyInditex's supply audits do make evaluation of OHS. Audit priorities in these areas are provision of safe drinking water, and hygienic facilities, safe and clean dormitories where applicable, control of fire risk and chemical hazards and use of personal protective equipment. Inditex's CSR methodology and practices are subject to ongoing review and update in the context of Inditex's continuous improvement program. Taking into account this principle, several projects and updates were carried out during 2012, and are described in the 2012 Annual Report, and others and will be further developed in future years.In addition to the 2012 revisions to the Code of Conduct, and the strengthening of the auditing through training, as already described, Inditex signed the Accord on Fire and Building Safety in Bangladesh. This program has the objective to improve health and safety conditions in supply chain in Bangladesh (See page 73 of the 2012 Inditex Annual Report). More information about the Accord can be found in IndustriALL
webpagehttp://www.industriall-union.org/global-brands-pull-together-on-bangladesh-safety-deal. Furthermore, Inditex is carrying out during 2013 a program that includes visits specifically to evaluate OHS conditions. Apart from that Inditex has developed and enforce suppliers' compliance with health and safety Code regulation. (See pages 76 to 81 of the 2012 Inditex Annual Report).Non-Employee Workers and Supply ChainThe Code requires all Inditex's external manufacturers and suppliers to extend Code provision to subcontractors and the supply chain.
PS 3: RESOURCE EFFICIENCY AND POLLUTION PREVENTION
The Code includes provision for environmental awareness, and this was further strengthened in the 2012 revision of the Code, and new auditing methodologies have been created to support the code revisions.Inditex has launched a Master Plan for Water Management in the Supply Chain, with the intent to achieve zero discharge of hazardous chemicals across the value chain by 2020 in support of Inditex's Clear To Wear Objectives (see below). The project methodology, facilities' results, observations and recommendations, and related information is published athttp://www.wateractionplan.comand validated by the University of A Coruna who acts as a third party quality control.Inditex's Guidelines on the chemical use in the manufacturing process establish restrictions and prohibitions on the use of the chemical products to ensure compliance with the most demanding standards and limits under the existing international legislation. To ensure suppliers' compliance with these requirements, Inditex conducts audits and training sessions across the garment Suppliers' production facilities. In addition, Inditex provides expert Technical Assistance Visits to Mills and other facilities (dyeing, printing, laundries and/or other specific areas where chemicals are involved) that supply fabric to the garment Supplier. The first of these audits involves awareness raising and basic data collection and ends with recommendations to the fabric producer, the second checks progress, while the third again checks progress and evaluates and grades fabric supplier performance A (Full Compliance), B (Acceptable Compliance), D ( Marginal Compliance) and CAP (Supplier Subject to Corrective Action Plan). The garment Supplier's rating calculation takes account of the factories it uses for producing orders.MonitoringSeveral visits are performed to factories and facilities involved in the manufacturing process (dyeing, printing, washing and/or other processes wherein chemicals are used) to improve the knowledge and understanding of the requirements of the zero discharge commitment and to assess compliance with such requirements within the supply chain of the product supplier.Capacity buildingTo increase the knowledge and understanding of the production facilities on the Inditex Chemical Standards Inditex provides training and advice to the facility's Environmental, Health and Safety (EHS) responsible. In 2013, Inditex is working with 100 facilities from the Global South including China, that will receive corrective action plan, if any, and a thorough training in the field of chemicals and water management
PS 4: COMMUNITY HEALTH, SAFETY AND SECURITY
Product safety issues are addressed by two Inditex standards, Clear to Wear and Safe to Wear.Clear to Wear (CTW) is a proprietary Inditex product health standard which governs chemicals content of products. CTW is applied to chemicals and compounds whose use is restricted by legislation, and sets maximum product content for specified metals, pesticides, allergenic dyestuffs, phthalates, fire retardants and other organic compounds. Further details are provided in the 2012 Annual Report. An extensive program of laboratory testing provides assurance of CTW compliance.Safe to Wear (STW) relates to product safety. STW includes controls on metallic contamination of clothing (e.g. broken needles), and also includes restrictions on laces and cords, flammability and sharp surfaces in children's clothing.Manufacturing-derived impacts related to PS4 are not expected to be widely encountered. Significant adverse community impacts arising from textile products manufacturing are unlikely.
