Risk analysis explained

What is a risk analysis and why is it needed?

Risk analysis helps companies to identify, assess and prioritize business risks and enables them to implement effective prevention, mitigation and remediation activities. Risks are typically assessed from two perspectives, the probability of occurrence and the degree of impact if a risk materializes. After identifying and assessing the various types of business risks, companies can effectively prioritize and decide on appropriate actions.

The implementation of holistic risk management practices gains increasing significance in light of the rise of several legal initiatives such as

These require companies to regularly conduct risk analyses and implement mitigation activities in order to continuously improve the social and environmental conditions in their supply chains. Companies that are not fulfilling the standards set in those laws will be imposed with heavy sanctions by the regulatory bodies.

What is our methodology?

retraced works with a unified scoring system, that provides three different risk scores that each rank from 1 (low) to 5 (extreme):

  • The country gross risk shows the individual sector risk of a particular country and is based on official indices published by renowned sources.
  • The company net risk shows the individual risk of each of your suppliers. The company net risk is the sum of the supplier’s gross country risk and all mitigation activities, that have an impact on the particular sector risk.

  • The country net risk shows the average of all of your suppliers’ company net risks from a particular country.

Our risk analysis is based on the OECD Due Diligence Guidance, which is a methodology that establishes a common understanding of due diligence in the garment & footwear industry. The OECD identifies the following eleven sector risks:

1. Child labour

Child labour is defined as any kind of work performed by persons under the age of 15 that harms the physical and mental development of children and adolescents or prevents them from attending school.

Data source(s)

Global Child Forum & Unicef, Children’s Rights and Business Atlas

Scoring logic for country gross risks

Index metric: Proportion of children aged 5-14 years engaged in child labour in %

Statistical distribution: Mean: 16.91%, Median: 12.5%, Min: 0.3%, Max: 55,8%, STDEV: 13,76

retraced scoring*: 1 = 0% | 2 = below 3% | 3 = below 6% | 4 = below 9% | 5 = 9% and above

* Many developed countries do not collect data on child labour (since it is mostly non-existent in those countries). The missing data of the developed countries leads to a high median of 12.5%, which is why we decided to not base our scoring logic on the statistical distribution for this risk sector.

2. Sexual harassment and sexual and gender-based violence (SGBV) in the workplace

Sexual and gender-based violence (SGBV) refers to any act that is perpetrated against a person's will and is based on gender norms and unequal power relationships. This refers to any physical, emotional or psychological and sexual violence, and denial of resources or access to services. It includes circumstances when victims have reasonable grounds to believe that their objection would disadvantage them in connection with employment, including recruitment or promotion, or when it creates a hostile working environment. Violence includes threats of violence and coercion. SGBV inflicts harm on women, girls, men and boys and is a severe violation of several human rights.

Data source(s)

Primary: World Economic Forum, Global Gender Gap Report*

Additional information**: UN Women, Lifetime Physical and/or Sexual Intimate Partner Violence, Lifetime Non-Partner Sexual Violence

*Due to the absence of high-quality indices that measure the risk of sexual harassment & gender-based violence, we chose to base our scoring on a report that is related to the topic (Global Gender Gap Report).

**The data collection for these sources is not standardized across countries. This leads to questionable results, which is why we decided not to include them in our risk calculation.

Scoring logic for country gross risks

Index metric: Overall global gender gap score

Stat. distribution: Mean: 0.7, Median: 0.71, Min: 0.44, Max: 0.89, STDEV: 0.07

retraced scoring: 1 = 0.8 or above | 2 = below 0.8 | 3 = below 0.75 | 4 = below 0.65 | 5 = below 0.6

3. Forced labour

The ILO states that forced labour is every "work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily". Therefore, any situation in which a person is coerced to work through the use of violence or intimidation, or by more subtle means such as manipulated debt, retention of identity papers or threats of denunciation to immigration authorities must be understood as forced labour.

Data source(s)

Walk Free Initiative, Global Slavery Index

Scoring logic for country gross risks

Index metric: Estimated Prevalence (per 1000)

Stat. distribution: Mean: 6.54, Median: 4.2, Min: 0.3, Max: 104.6, STDEV: 11.36

retraced scoring: 1 = below 2 | 2 = below 4 | 3 = below 6 | 4 = below 8 | 5 = 8 and above

4. Working time

This risk factor covers excessive hours of work and the need to protect workers’ health and safety by limiting working hours and providing adequate periods for rest and recuperation, including weekly rest and paid annual leave. The ILO states that a standard working week in industry should not normally exceed 48 hours, spread over six working days, excluding overtime. Including overtime, workers should not have to work more than 60 hours in a seven-day period. 

Data source(s)

International Labour Organization, ILO Department of Statistics | ILOSTAT

Scoring logic for country gross risks

Index metrics (equally weighted): 

1) Share of employees working more than 48 hours per week in %

Stat. distribution: Mean: 20.24%, Median: 17.0%, Min: 1.1%, Max: 97.0%, STDEV: 15.09

retraced scoring: 1 = below 6% | 2 = below 12% | 3 = below 18% | 4 = below 25% | 5 = 25% and above

2) Mean weekly hours actually worked per employed person

Stat. distribution: Mean: 38.9, Median: 38.75, Min: 21.9, Max: 49.8, STDEV: 4.68

retraced scoring: 1 = below 36 | 2 = below 38 | 3 = below 40 | 4 = below 42 | 5 = 42 and above

5. Occupational health and safety

People in the textile and fashion industry often work in unsafe and cramped conditions. This is associated with increased risks for health hazards and accidents. Especially, when safety and labour standards are not met, workers lack the necessary protective equipment and (have to) work long hours. Therefore, occupational health and safety is concerned with three main objectives:

  1. Maintaining and promoting workers' health and working capacity.
  2. Improving the working environment and work itself to become conducive to safety and health.
  3. Developing organizations and their cultures in a direction which supports health and safety at work.

Data source(s)

Primary: International Labour Organization, ILO Department of Statistics | ILOSTAT

Additional information*: Incidence rate of non-fatal occupational injuries (per 100'000 in reference group), Inspectors per 10'000 employed persons

* Sources are just for reference and were not included in our calculation

6. Trade unions and collective bargaining

Workers should be ensured the right to freedom of association and collective bargaining, both of which are fundamental principles and a reflection of human dignity. Freedom of association refers to the right of an employee to join or create an organisation such as a trade union of their choice. This also includes the freedom not to be forced to join a group. Collective bargaining agreement is defined by the ILO as all negotiations which take place between a workers’ organisation and a group of employers on determining working conditions and terms of employment, and/or regulating relations between employers or their organisations and a workers’ organisation.

Data source(s)

International Trade Union Confederation (ITUC), Global Rights Index

Scoring logic for country gross risks

Index metric: Global Rights Index score (ranks from 1 to 5+)

Stat. distribution: Mean: 3.51, Median: 4.0, Min: 1.0, Max: 5.0, STDEV: 1.29

retraced scoring: 1 = 1 | 2 = 2 | 3 = 3 | 4 = 4 | 5 = 5 and 5+

7. Wages

In the risk area of wages, two factors must be taken into account: First, compliance with national law. Since wage laws do not require a living wage in all countries, the OECD guidelines on fair payment should also be taken into account. A wage is considered a living wage if it covers the living costs of workers and their dependent family members and allows for adequate reserves for emergency situations. According to the ILO, this wage must be achieved in a standard working week of no more than 48 hours.

Data source(s)

Primary: International Labour Organization, ILO Department of Statistics | ILOSTAT*; Global Living Wage Coalition; Clean Clothes Campaign

Additional information*: Monthly minimum wage in local currency, KAITZ Index

* Sources are just for reference and were not included in our calculation

Scoring logic for country gross risks

Index metric*: Average wage / Living wage 

retraced logic: 1 = 2.5 or above | 2 = below 2.5 | 3 = below 2 | 4 = below 1.5 | 5 = below 1

* Metric is based on wages data from primary sources

8. Hazardous chemicals

Hazardous chemicals carry both environmental and health risks. To substitute hazardous chemicals, two common lists of banned hazardous substances are used: an exclusion list for input management and a final exclusion list for quality control of the final product. (residue) Furthermore, responsible chemical management includes controlling of critical process parameters, proper storage and handling.

Data source(s)

Yale Center for Environmental Law & Policy, Environmental Performance Index - Environmental Health

Scoring logic for country gross risks

Index metric: EPI Score (ranks from 0 to 100)

Stat. distribution: Mean: 54.64, Median: 49.2, Min: 26.7, Max: 99.3, STDEV: 20.99

retraced scoring*: 1 = 90 or above | 2 = below 90 | 3 = below 80 | 4 = below 60 | 5 = below 30

* With all EPI scores we chose not to follow the statistical distribution, since it would have not reflected our understanding of an appropriate grading.

9. Water

There are several risks associated with water consumption and water pollution. A holistic perspective considers several aspects including freshwater availability, water quality (degree of water pollution) and water accessibility (sufficiency of infrastructure and affordability of water). The OECD indicates that the risk of water pollution in the garment and footwear sector is higher in cotton growing and wet-processing. 

Data source(s)

Yale Center for Environmental Law & Policy, Environmental Performance Index - Wastewater treatment

Scoring logic for country gross risks


Index metric*: EPI Score (ranks from 0 to 100)

Stat. distribution: Mean: 29.53, Median: 9.4, Min: 0.1, Max: 100.0, STDEV: 34.45

retraced scoring**: 1 = 90 or above | 2 = below 90 | 3 = below 80 | 4 = below 60 | 5 = below 30

* Score of 100 indicates that a country has 100% of its population connected to a sewer system and 100% of household wastewater is treated

** With all EPI scores we chose not to follow the statistical distribution, since it would have not reflected our understanding of appropriate grading.

10. Greenhouse gas emissions

Greenhouse gases are the atmospheric gases responsible for causing global warming and climate change. The major GHGs are carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O). Less prevalent – but very powerful – greenhouse gases are hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). GHG emissions refers to the release of GHGs into the atmosphere. Material selection and product design, processes, transportation and packaging are significant factors in reducing GHG emissions along a product’s life cycle.

Data source(s)

Yale Center for Environmental Law & Policy, Environmental Performance Index - Climate Change

Scoring logic for country gross risks


Index metric: EPI Score (ranks from 0 to 100)

Stat. distribution: Mean: 49.20, Median: 50.6, Min: 12.1, Max: 95.0, STDEV: 16.5

retraced scoring*: 1 = 90 or above | 2 = below 90 | 3 = below 80 | 4 = below 60 | 5 = below 30

* With all EPI scores we chose not to follow the statistical distribution, since it would have not reflected our understanding of appropriate grading.

11. Bribery and corruption

Bribery and corruption are gateway crimes for many other forms of wrongdoing including: child labour, forced labour, discrimination, violation of health and safety standards and environmental standards. Country factors include operating in a high-risk jurisdiction for bribery and corruption:

  • perceived high levels of corruption in the public and/or private sector
  • absence of effectively implemented anti-bribery legislation, including bribery offences in the criminal law and absence of corporate liability for such offences
  • failure of foreign government, media, local business community and civil society to effectively promote transparent procurement and investment policies.

Data source(s)

Transparency International, Corruption Perception Index

Scoring logic for country gross risks

Index metric: CPI Score (ranks from 0 to 100)

Stat. distribution: Mean: 50.74, Median: 45.0, Min: 30.0, Max: 88.0, STDEV: 16.24

retraced scoring: 1 = 80 or above | 2 = below 80 | 3 = below 60 | 4 = below 40 | 5 = below 20

 

How does the mitigation feature work?

When calculating a company’s net risk, our risk analysis takes into consideration all mitigation activities that a company has submitted to the platform. To simplify the handling, the platform offers a semi-automatic mitigation feature for certificates and audits, which gives an indication on how much a mitigation activity could reduce each risk score. Based on that indication, the company can review additional information from other resources and decide on the final mitigation effect.

Calculation approach

Data source: International Trade Center, ITC Standards Map

Mitigation logic:

  • 417 criteria (categories: social, environment, management & ethics and standard governance) mapped to OECD sector risks
  • Measured how many of these criteria are met by each of the listed certificates and audits
  • If 35% of sector criteria are met, retraced will suggest a mitigation effect of -1
  • If 70% of sector criteria are met, retraced will suggest a mitigation effect of -2

List of certificates & indicated mitigation effects

  • Global Organic Textile Standard (GOTS)

    GOTSCert
  • STeP by Oeko-Tex

    STePCert

  • SA 8000

    SA8000Cert

  • Fairtrade Standard

    FairtradeCert

  • Bluesign System Partner

    BluesignCert

  • Global Recycled Standard (GRS)

    GRSCert

  • Made In Green by Oeko-Tex

    madeingreenCert

  • Worldwide Responsible Accredited Production (WRAP)

    WRAPCert

  • EU Ecolabel

    EUecolabelCert

  • Oeko-Tex Standard 100

    oekotexCert

List of audits & indicated mitigation effects

  • Amfori BSCI

    BSCI audit

  • Fair Labor Association (FLA)

    FLA audit

  • Ethical Trading Initiative (ETI)

    ETI audit

  • Fair Wear Foundation (FWF)

    FWF audit

  • Cotton Made in Africa (CmiA)

    CmiA audit

  • Sedex

    sedex audit

Examples for other resources

  • Working time export from company’s time recording system → could be used by company to mitigate risk sector 4 (working time)

    See the source image
  • Payment export from company's HRM system -> could be used by company to mitigate risk sector 7 (wages)