Mature Markets Are Better Equipped to Keep Up with Demands for Ethical Compliance
A growing number of companies worldwide are incorporating ethical standards into their operations, with 70% of businesses reporting taking at least one environmental, social, and governance (ESG) factor into consideration in their sourcing decisions. However, although businesses are working to improve their ESG due diligence, overseas sourcing may be causing them to keep a closer eye on their compliance standards.
The Rising Importance of Supplier Compliance
Recent data from QIMA, drawn from a survey of over 800 businesses with international supply chains, underscores the increasing emphasis on ESG compliance. Nearly two-thirds of respondents from US- and EU-based businesses indicated that supplier compliance has grown in importance over the past year. This increase comes with a rise in ESG legislation and consumer expectations.
While the demand for ethical sourcing in supply chains grows, many overseas suppliers are struggling to keep up with compliance standards. Data from QIMA’s 2023 audits revealed that one-quarter of the inspected factories necessitated urgent remediation efforts.
Figure 1. Evolution of factory rankings assigned by ethical audits. Global averages of ethical audits revealing an urgent need for improvement have increased from 18% to 25% since 2019.
Regional Disparities in Ethical Compliance
Audit data further reveals a correlation between the maturity of a sourcing region and its ability to meet ethical compliance standards. In China, critical Health & Safety violations were recorded in 11% of audited factories. In stark contrast, India exhibited a much higher rate of violations at 29%. Such disparities highlight the struggles of developing nations in keeping pace with the stringent demands for ethical compliance imposed by international markets, and may be contributing to a growing trend of nearshoring.
Figure 2. Percentage of 2023 audits where critical violations were discovered. Audit data from 2023 shows India consistently receiving higher percentages of critical violations in ethical compliance categories, as compared to China- and Vietnam-based factories.
Key Figures
QIMA auditing data reveals:
Ethical compliance is on the rise: A growing percentage of global factories are compliant with ethical standards, with only 38% meeting compliance standards in 2019 and 52% meeting compliance standards in 2023.
A growing number of factories face an urgent need for improvement: Despite the rise in compliance, more factories are experiencing critical conditions, with 18% in 2019 and 25% in 2023.
Factories in India experience critical ethical violations: Auditing data revealed Indian factories received significantly more critical violations than those in Vietnam or China, particularly in the categories of Health and Safety and Working Hours and Wages.
Read the full report: Q1 2024 Barometer
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