Performance Counts. Sustainability Progress Report 2011

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1 Performance Counts Sustainability Progress Report 2011

2 Programme Strategy 7 Reporting Approach 8 Direct Suppliers 13 Indirect Suppliers 14 Systems and Guidelines 15 Stakeholder Engagement 17 Management Processes 20 Innovation 20 Design 21 Marketing 22 Development 23 Sourcing 24 Own Operations 27 Sales 29 Communication 30 Human Resources 30 IT 31 Supply Chain 43 Audits and Training 46 Enforcement 52 Environment 54 Employees 56 Community Affairs 61

3 CEO STATEMENT While working towards these strategic goals, we also want to meet society s evolving expectations of business practices. Growing our business brings with it many challenges. Our Strategic Business Plan until 2015 called Route sets out ambitious targets for the growth of the adidas Group. While working towards these strategic goals, we also want to meet society s evolving expectations of business practices. These include our responsibilities towards our employees, the people who make our products, the environment and the communities where we operate. In 2010 we set 2015 social and environmental targets that aim to shape how we will grow and meet our business goals in a sustainable way. Targets are important because they give us a clear orientation and landmarks to reach and they spur us on to go further and achieve more. This report is focused on reporting our efforts to reach the milestones we set ourselves for Progress in 2011 Two milestones highlight the progress we are making in managing social compliance in our supply chain: 1. Our direct suppliers performance is rated through a key performance indicator, or C-rating, on a scale of 1C-5C. In our direct supply chain, which accounts for fourfifths of our sourcing volume, nearly 40% of our direct suppliers and 62% of our strategic tier 1 suppliers were rated as 3C factories or better. So we are on track to meet our 2015 target to see 60% of our direct suppliers reaching at least 3C. 2. We aimed to improve the lowest performing suppliers in our direct supply chain and we had remarkable success: reducing the lowest rated factories (1C) from 19% of our supply chain in 2010 to 8% by the end of In the environmental area, we continued to increase the number of products containing environmentally optimised components. The amount of adidas footwear meeting our baseline environmental criteria more than doubled in 2011 and now accounts for 65% of all adidas athletic footwear. The starting point for delivering our Environmental Strategy 2015 is to have the right systems and guidelines in place. We have met our 2011 milestone to develop a format for these guidelines and we have introduced a new system to record and track our key environmental data covering around 80% of our own operations footprint. 3

4 We cannot reach our goals without engaged employees. Following our global employee engagement survey, we began a comprehensive Results-to-Action process to maintain our top scoring areas and improve upon areas of weakness. We now have action plans in place covering more than 83% of the organisation. Engagement and collaboration Engaging with stakeholders has remained an important element of our sustainability strategy in This engagement helps us to understand issues and be responsive to concerns raised. It also leads to collaborative working. We recognise that many of the issues we face cannot be solved by the adidas Group alone and working with other actors in our industry helps drive lasting change. So for example, the adidas Group acted as the lead party in a supplier-brand caucus formed in 2010 to engage with Indonesia s trade union movement. Its aim was to develop a basic framework for the exercise of trade union rights in the workplace. An agreement was finally reached and signed in Jakarta in June The protocol is recognised as a landmark achievement in Indonesian labour rights. When Greenpeace launched its Detox Campaign calling for an end of discharge of hazardous chemicals in the textile industry, we worked with a coalition of other brands to develop a joint roadmap towards the zero discharge of hazardous chemicals by Preparing for London 2012 the Sustainable Games As the Official Sportswear Partner of the London 2012 Olympic and Paralympic Games, adidas has an important role to play in delivering the Sustainable Games vision. All London 2012 adidas products and services must be sourced and manufactured to environmental, social, and ethical guidelines and standards set by the London Organising Committee of the Olympic and Paralympic Games (LOCOG). Suppliers and factories have been briefed on these standards and regular audits are conducted to ensure that all products are sourced and transported in an ethical manner. Around 90% of all adidas Olympic articles have some sustainable content. In July 2011, we published a complete list of the names and addresses of the factories producing adidas clothes, shoes and equipment for the London 2012 Olympic Games. The list also shows the status of worker or trade union representation and whether there is a Collective Bargaining Agreement in place at the individual facility. Recognition We value feedback from stakeholders on our sustainability strategy and programmes. For the 12th consecutive year, in September 2011, adidas AG was selected to join the Dow Jones Sustainability Indexes (DJSI), which track the performance of leading sustainability-driven companies worldwide. Based on this result, adidas AG was not only rated as SAM Sector Leader 2012 in managing sustainability issues but was also classified as SAM Gold Class in our industry. Furthermore, our company was once again acknowledged to be one of The Global 100 Most Sustainable Corporations in the World. The future There are challenges ahead. The rising costs of limited resources create a commercial and environmental imperative to adopt more sustainable practices. Calls for greater social justice demand business plays a part in tackling poverty and poor living conditions. Addressing these and other concerns requires us to embed our sustainability strategy deeply into our company. I am particularly excited about innovative programmes such as our virtualisation and product excellence projects contributing to a significant reduction in resource use. Their positive impact on both our financial and environmental performance represents a strong alignment between our business and sustainability goals. By focusing our report around our 2011 milestones, we hope we have provided a clear account of the first steps on our five-year journey towards our sustainability targets for There is still much for us to do but we are confident we are on the right track. Please let us know what you think at Thank you. Herbert Hainer Chief Executive Officer adidas Group 4

5 our approach to sustainability 5

6 Our Approach to sustainability We are striving to be the global leader in the sporting goods industry and this demands that we return strong financial results. But leadership is not only about results, it is also about how success is achieved. It is about striking the balance between business needs and social and environmental demands. Balancing these interests requires strong commitment, strategic direction, efficient and careful execution, as well as regular reflection on the progress made. The adidas Group s sustainability strategy is rooted in the Group s values performance, passion, integrity and diversity. It is built on the achievements and learning from previous years. It takes into account changes in the societal landscape, global trends and goes hand-in-hand with our overall business strategy. It reflects the feedback that we have captured from our stakeholders and sets clear targets we are striving to achieve. Overview of our sustainability strategy The five areas of our strategy are: Embedding environmental sustainability in all products, processes and services to significantly improve our environmental impact across our value chain and to positively contribute to our business performance. Effectively managing business risks and social compliance in our supply chain, which is expanding, and becoming more complex with multiple relationships and stretched lines of communication and control. Extending our engagement internally and externally partnering with others to embed new thinking and better ways of collaboration within our business and along our supply chain. Working together to make a difference. Creating the best and most productive workplace in the industry by becoming a champion in talent and succession management, a world-class recruiter and a Top 10 employer in every key market in which we operate. Making a difference in the communities where we operate by supporting programmes that truly meet local needs. governance of our sustainability strategy We are a company that operates globally and outsources most of its production to a multi-tiered supply chain. So it is essential to develop an approach that covers our social and environmental responsibilities both inside and outside the company. In no way can a single corporate unit carry this out. Group Social & Environmental Affairs (SEA) and Group Human Resources (HR) play a critical role in fulfilling our responsibilities in this area. Group Social and Environmental Affairs (SEA) reports into the General Counsel of the adidas Group and is tasked with: Ensuring compliance with the Workplace Standards within the supply chain, and with that being part of the Group s risk and compliance management system. Leading, promoting and managing the development and implementation of environmental strategies across the Group s value chain. Extending and maturing the engagement and collaboration with others to drive changes in the industry. Managing the Community Affairs programme at Group level. Managing the Group s corporate sustainability communication and reporting. 6

7 Programme Strategy How sustainability supports our business strategy In October 2010, we presented the most comprehensive and aligned Strategic Business Plan our Group has ever created: Route Over these five years, we want to achieve qualitative and sustainable growth by building desirable, leading brands in the consumers and customers perception. Consumers nowadays increasingly expect companies to do more than just consider social and environmental issues. They want the products they buy to be the best, helping them be the best they can be. But they also want to buy these products from companies that are at the leading edge in terms of making a difference to the world at large. We know that we can only follow this route if we are fully committed to managing our business operations in a sustainable way. While we have made big strides in laying the foundations for success in previous years, we must continue to drive innovations and to strengthen our systems and processes. We also recognise that while the individual elements of our sustainability strategy are robust and well-managed, we could improve the cross-linkages, which would increase the strategy s effectiveness. The stronger our sustainability strategy, the more it will help us realise our business ambition to be the global leader in the sporting goods industry. There are five elements to our sustainability strategy: Environmental sustainability Social compliance in our supply chain Engaging stakeholders Developing our employees Contributing to local communities. Environmental sustainability Integrating environmental thinking and acting into our daily operations and developing smarter solutions this is what we want our Environmental Strategy to achieve. It aims to substantially improve the Group s environmental footprint by changing our processes across every part of our value chain from innovation and product design via development and manufacturing operations to our own stores and other sales channels. social compliance in the supply chain Workers in our suppliers factories play a central role in our programme. It was concern for their welfare and rights that led us to write our Workplace Standards and to establish a compliance management system covering all brands of the adidas Group. Our supply chain is large, multi-tiered and varied. We have a detailed approach to managing relationships with our suppliers and we continue to develop ways for engaging suppliers who are part of our direct and indirect supply chain. engaging stakeholders As a company we do not operate in isolation and we seek feedback from internal and external stakeholders by carefully listening, responding and engaging with them. Our engagements are with people in the company as well as externally including governments, civil society, investors, analysts, customers, and industry alliances. We engage internally with employees and managers to develop appropriate and innovative ways of embedding sustainability thinking and processes within our organisation. Externally we look for innovative forms of partnerships and collaboration that drive change in the industry. developing our employees Our people are crucial to our success. We strive to create a working environment that promotes team spirit, passion, engagement and achievement. We promote a performance culture based on strong leadership and therefore link employee compensation to Group and individual achievements. We aim to continuously develop our employees with opportunities for career progression, while upholding a culture that celebrates diversity and encourages global mobility. 7

8 We also know how important it is to continue to attract and recruit new people to the adidas Group. In this so-called war for talent, it is important that we become a world-class recruiter, and this ambition has led us to launch innovative programmes to raise our profile with potential employees. We aim to create a stimulating and attractive work environment as we strive to be a Top 10 employer of choice in the key markets in which we operate. contributing to local communities As a multinational enterprise, the adidas Group is represented in many countries around the world and its business operations impact people s lives in those communities. While there are many possible ways to get involved in aid or community programmes, the challenge is to know the local needs of the communities. We therefore have chosen a largely decentralised and brand-oriented model for community involvement recognising that people in the subsidiaries best understand the needs and cultural sensitivities of their local communities. Brand programmes are managed under the Adi Dassler Fund, the Reebok Corporate Responsibility Programme and the TaylorMadeadidas Golf Charity Programme. At Group level we continue to support our suppliers communities as we make contributions to organisations that promote sustainable development practices within the industry. Reporting Approach We aim to act responsibly and communicate honestly. We recognise that stakeholders have a legitimate interest in our social and environmental performance and our ambition is always to satisfy that interest with complete and accurate information. reaching milestones the basis of our report Last year the adidas Group launched its five-year business strategy Route We also set targets for 2015 across our sustainability programme with milestones for This year our report is focused on the progress we have made on reaching those 2011 milestones. The title we gave last year s report still holds: Performance counts. It is this focus on performance, and the outcomes of this year s efforts, which is at the heart of our Sustainability Progress Report for To complement this focus on reporting progress in reaching our milestones, we have added content to the sustainability section of our corporate website. This now covers the context for our sustainability programme, our approach to the issues in more detail, and includes case studies where we have put our strategy into practice. We envisage maintaining this two-pronged approach in the remaining years up to 2015, with additional enhancements, as we further develop our sustainability communications strategy. using the gri We recognise that the Global Reporting Initiative (GRI) Guidelines are the international benchmark for sustainability reporting. Since information provided on our corporate website and in our 2011 Sustainability Progress Report is deeply interconnected and built on each other, we apply the GRI 3.1 Guidelines to the total content of both sites. To show how we have complied with the GRI, we are preparing a GRI Content Index, which will be added to our corporate website. For more information about the Global Reporting Initiative, please see We have produced annual reports on our sustainability performance since Each year we reflect on what we can do better, taking on board feedback we have received, reviewing who is reading our reports and visiting our corporate website and reflecting on the fact that more and more people are interested in our social and environmental performance. 8

9 highlights

10 highlights 2011 These highlights from our year represent some of the key steps we have taken in 2011 to be a more sustainable business. In keeping with the ongoing challenges of sustainability, some are milestones we have reached while others describe the early stages of initiatives that will help us meet our targets for 2015 and beyond. reaching out to stakeholders in london In May 2011, we hosted a stakeholder dialogue on the topic Respecting Labour Rights in Global Supply Chains: The Impact of Major Sporting Events. Representatives from UK labour and human rights organisations, the London Organising Committee for the Olympic Games and Paralympic Games (LOCOG) and socially responsible investment analysts attended along with senior staff from the adidas Group. The meeting has helped shape how we work with our suppliers around major sporting events, including the London 2012 Olympic Games. More about this stakeholder engagement on our corporate website. publishing our supplier list for the olympics In July 2011, the adidas Group published a complete list of London 2012 Olympic Games suppliers with the names and addresses of the factories by country. The list also shows the status of worker or trade union representation and whether there is a Collective Bargaining Agreement in place at the individual facility. We took this step as part of our ongoing effort to be transparent about our supply chain. See the list of our suppliers on our corporate website. Keeping our sustainability promises at the olympics As the Official Sportswear Partner of the London 2012 Olympic Games, adidas fulfilled its commitment to provide products with sustainable content for the Games. The volunteer uniforms are an important part of this commitment and 100% of the uniforms contain sustainable content, while the special edition Fluid trainer is our most sustainable shoe. More about meeting Olympics commitments in the Suppliers section of this report. publishing a roadmap to zero discharge In November 2011, the adidas Group, C&A, H&M, Li Ning, Nike, Inc. and Puma released a joint roadmap towards zero discharge of hazardous chemicals (ZDHC) in the supply chain by 2020 for public consultation. It is an ambitious plan, one that sets a new standard of environmental performance for the global apparel and footwear industry. The roadmap includes specific commitments and timelines to realise this shared goal. More about our roadmap to zero discharge on our corporate website. improving the performance of suppliers At the end of 2010, the adidas Group adopted an aggressive policy to improve the lowest performing suppliers in our direct supply chain. In India, close to 80% of our local suppliers had failed to meet or maintain our minimum expected score of 2C under our social compliance KPI system. Focused capacity building by our local compliance team led to a marked turnaround in 2011, with over 80% of our local suppliers now meeting our 2C minimum. Those that have failed to meet our expectations will be phased out in More about improving suppliers performance in the Suppliers section of this report. world of sports iso certification As part of the adidas Group s Green Company programme, in 2011, our site in Indianapolis, USA, and our World of Sports Headquarters location in Herzogenaurach, Germany, were successfully certified in accordance with the ISO standard for environmental management systems. This brought us to ten major adidas Group sites covered by certified environmental management systems by the end of Read more in the Environment section of this report. environmental data tool for both green company and suppliers data In 2011, a new reporting tool was designed and implemented for both our Green Company reporting and our suppliers reporting of environmental performance. The tool will help drive environmental improvements for our own operations and for our suppliers, and will allow us to compare data more easily. More about the new reporting tool in the Environment section of this report. 10

11 piloting the apparel coalition index across many product categories As a founding member of the Sustainable Apparel Coalition, 2011 saw the adidas Group participate in both the development and testing of a cross-industry apparel sustainability measurement tool. Nearly 20 products were piloted from brand adidas, Reebok and Rockport, and these covered all business units and global creation centres. More about this pilot project on our corporate website. lauching the sustainable manufacturing initiative During 2011 the adidas Group launched an ambitious research project to help our suppliers manufacture products while minimising negative environmental impacts that is, sustainable manufacturing. The first phase of the project a partnership with the Royal Melbourne Institute of Technology University in Australia was piloted in Indonesia, with the participation of a cross-section of footwear and apparel suppliers, as well as Tier 2 material suppliers. The results of the pilot exercise will be shared on an open source basis. More about the Sustainability Manufacturing Initiative on our corporate website. responding to revised un human rights principles In September 2011, the adidas Group issued its position on the integration of Human Rights into its business operations. With this step we wanted to inform stakeholders how the Company is responding to the revised OECD Guidelines, the final report published by the UN Special Representative on Business and Human Rights, Professor John Ruggie and State of California s Transparency in Supply Chains Act of dow jones sector leader In September 2011, for the 12th consecutive time, adidas AG has been selected to join the Dow Jones Sustainability Indexes (DJSI), the world s first global sustainability index family tracking the performance of the leading sustainability-driven companies worldwide. In the category Clothing, Accessories & Footwear, adidas AG was rated as industry leader in sustainability issues and corporate responsibility for the eighth time. More about this on our corporate website. women in leadership positions Starting in 2011, the adidas Group has set itself the goal of increasing the number of women in leadership positions. We recognise we have a role to play in supporting employees who are striving to balance family life with a successful career. Therefore, among other initiatives, we have put a strong focus on work-life integration during the remodelling of our headquarters and have planned in parent-child offices and an investment into a childcare centre. More about our efforts to support women in the workplace in the Employee section of this report. employee development programmes We continue to invest in developing our own employees because we believe in internal talent pools and systematic talent and performance promotion. Therefore, in 2011, we have launched two new development programmes: the People Development Programme targets young employees with remarkable potential and the Fit to Lead programme teaches leadership skills to our first-time people managers. More about how we develop our employees on our corporate website. More about our position on human rights on our corporate website. 11

12 suppliers 12

13 suppliers Direct Suppliers target 2015: 80% of strategic tier 1 supplier factories to meet 3c (good) or better under our social compliance Kpi rating and 25% of them to be in the self-governance compliance model Tackle the lowest performers by improving 1C-rated suppliers to a minimum rating of 2C and exit those suppliers that do not meet this grade. In 2011, comprehensive capacity building was designed and implemented for suppliers who were at 1C rating in 2010 across Asia. Target countries included India, Indonesia, Thailand and China. The capacity-building programme has resulted in more than 70% of 1C factories making the required improvements to achieve a 2C rating. Those suppliers who failed to reach a minimum of 2C are to be phased out in LARGELY ACHIEVED During 2011 we improved how we monitor supply chain compliance by customising programme activities with three redefined clusters of the supply chain. These clusters stressed more value-added practices by the fair, good and best compliance performers. The highest performing suppliers implemented self-governance activities, including more sophisticated reporting. Fair, good and best performers participated in the Partnership cluster, focusing on collaboration with multiple buyers in shared factories (such as the Sustainable Compliance Initiative and the Brown Shoe Collaboration), and participating in multi-stakeholder initiatives (such as the Fair Labor Association and Better Work). The poorest performing suppliers are in the Risk Management cluster. The Risk Management cluster includes those factories scoring at 1C or 2C about 61% of our supply chain The Partnership cluster includes 3C factories about 28% of our supply chain The Self-governance cluster is composed of 4C and 5C factories about 11% of our supply chain. The clusters show that we moved closer to our target that by % of strategic Tier 1 suppliers will meet compliance expectations and a minimum performance rating of 3C. Suppliers who are rated 1C (with social compliance KPI scores of 29% or below) are viewed as having systemic problems. Typically they are factories which have inadequate or underdeveloped management systems and are unable to support long-term sustainable compliance with the adidas Group s Workplace Standard. By the end of 2011, 8% of all suppliers were rated as 1C. This is a substantial decrease from 19% in 2010 and has been achieved through a focused effort on capacity-building. We designed a comprehensive capacity-building programme that required suppliers to develop and improve HR and Health, Safety and Environment management systems, as well as strengthen the capabilities of their personnel and organisation. The programme includes classroom training, project assignments and periodic progress reviews. Members of the Social & Environmental Affairs (SEA) team were actively involved in providing consultation to suppliers where needed. In countries like India and Indonesia, the team also engaged and commissioned external experts to deliver tailored training. Progress was then measured and improvements noted for each of the Unit of Measures of our social compliance key performance indicators milestones In 2012, our supplier KPI capacity-building programme will build on our experience and successes from We aim, by the year end, to: Achieve 68% of our strategic Tier 1 suppliers at 3C rating or better, and 15% at 4C rating or better 45% of all direct suppliers to meet 3C rating (good) or better Target newly approved suppliers to help them achieve a minimum 2C rating Provide ongoing training and consultation for existing suppliers to improve their KPI rating to the next level. 13

14 Indirect Suppliers target 2015: scorecards for business units and intermedaries managing our indirect suppliers to achieve an average performance rating of 70% or higher 2012 milestone In 2012, scorecards to be reviewed and updated for 90% of our business units and licensees that have own sourcing arrangements. Drive business entities accountability for their supply chains compliance performance by: Expanding the number of strategic compliance plans (SCP) and report card (RC) assessments. The number of strategic compliance plans has increased by 29% from 31 to 40 and report cards by 13% from 55 to 62. TARGET ACHIEVED Our target is for our Group business units (BU) and licensees, altogether known as our Business Entities (BE), to achieve an average report card score of 70% or higher by By the end of 2010, 55 report cards had been completed and the average score for all the BEs globally was 63%. By the end of 2011, 62 report cards were completed and the average global score improved to 67%. SEA works with the BUs and Licensees to develop their strategic compliance plans (SCP) and report cards (RC). The RC evaluates the Business Entities performance over the previous 12 months in integrating the Group s ethical sourcing policies into their daily operations and throughout their supply chain. Gaps embedding the policies and practices are identified by assessing responses for defined standards and requirements. The final step develops and implements a forward looking strategic action plan. Some of the report cards in 2011 remained desk top exercises and were not updated. The RC assessment includes benchmarks to evaluate the Business Entity s collaboration with the SEA team, the disclosure and accuracy of its supply chain data in the Fair Factories Clearinghouse (FFC), compliance with SEA standards and guidelines, and the effective management of supply chain audits and corrective actions. A final measurement benchmark assesses the overall compliance performance of its global supply chain. The report card score is a cumulative score up to 100%. Low scores indicate serious shortcomings in the Business Entity s management of SEA requirements within their organisation and in the supply chain. The SEA team meets with low-scoring BEs more frequently to support the improvement of compliance processes and management systems. Business entities with high scores, in particular those who already have established a compliance programme and an internal audit team, operate in a self-governance mode. This means that they are allowed to enter the results of their internal audit findings in the FFC database. The SEA team conducts random audits in these factories to confirm the findings and to inform the regular KPI assessments. Drive business entities accountability for their supply chains compliance performance by: Launching an environmental component to the SCP. An environmental component was integrated into the standard strategic compliance planning tool and launched globally for application to all core suppliers. TARGET ACHIEVED (ROLLOUT AND IMPLEMENTATION) FOR APPAREL CORE SUPPLIERS PARTIALLY ACHIEVED (ROLLOUT AND IMPLEMENTATION) FOR EMEA AND AMERICAS CORE SUPPLIERS Factories are required to prepare and keep updated a threeyear strategic compliance plan (SCP) that directs their internal efforts to comply with the adidas Group Workplace Standards, through the development of sound management systems, monitoring processes and training. Recognising the need to align the environmental aspects of the programme into the SEA core tools, we revised the SCP to incorporate an environmental element allowing the factory to address sustainability as a whole. This is in line with the need for suppliers to be transparent in their approach to addressing their overall sustainable practices. With the additional environmental element in the SCP, suppliers are now taking a closer look at their internal environmental programme and initiatives. They are also challenged to look at their activities in a more comprehensive manner considering the interactions between labour, health & safety and environmental issues milestone We will continue to promote the environmental component of the SCP to core suppliers in the EMEA and Americas regions. 14

15 Systems and Guidelines target 2015: establish common industry-wide monitoring platform and tools used to check and measure workplace conditions Furthermore, the SEA team and the FFC have started working with ARTS (Association for Retail Technology Standards) to create an industry-wide solution to interface compliance data between different database platforms. Several other brands, multi-stakeholder initiatives and organisations such as Nike, FLA, GSCP, SEDEX and Better Work are also part of this project. The FFC plays a crucial role in this project and its recognition and visibility within the industry increased in Promote the mainstreaming of the Fair Factories Clearinghouse (FFC) as an industry-wide tool for compliance collaboration and harmonised activities. The SEA team is an industry pioneer in harmonising corrective action plans with other brands using the FFC s data sharing platform. LARGELY ACHIEVED 2012 milestone In 2012, SEA will continue to promote the FFC as an industrywide tool for sharing compliance information and harmonising corrective action plans. We have been using the Fair Factories Clearinghouse (FFC) as the adidas Group s compliance database since In 2008, the FFC created a feature to enable its member companies to share factory audit reports, corrective action plans (CAP) and other related documents. We have shared our audit results in the FFC with all the other members since then. The SEA team has been the leader in sharing the most number of monitoring documents in the FFC and in harmonising CAPs with other brands in shared factories. With the consent of the factory management, the CAPs of the two brands are harmonised into one CAP, which allows the factory to respond to just one CAP instead of two different ones. This saves valuable resources for the factory and for buyers, and creates consistency for everyone. It also reduces the number of audits in a factory as the brands can alternate audit responsibilities between each other and update the harmonised CAP. In 2011, the SEA team asked the FFC to further improve and simplify its collaboration aspect and the FFC subsequently introduced new specifications to its members by end of In order to promote collaboration further, the FFC even introduced a new membership model with both full membership and sharing only membership. In this way companies do not have to be full members to collaborate and harmonise CAPs with other members. The adidas Group strongly supports the FFC data sharing capabilities because we believe that if there are more companies using the FFC to share audits and to harmonise CAPs, the industry as a whole will benefit. In 2011, we introduced the FFC to the Brown Shoe Collaboration companies. The Brown Shoe Collaboration consists of a range of brands within the business and casual footwear segment. Most of them were not FFC members so the FFC provided them with trial memberships for six months to allow them to edit the harmonised CAP in shared factories. We continue promoting the FFC as an industry-wide solution in our interactions with other brands, federations and initiatives including the World Federation of Sporting Goods Industry, Better Work, the Fair Labor Association, the Sustainable Apparel Coalition (SAC) and the Global Social Compliance Programme (GSCP). Integrate the next generation of monitoring tools by benchmarking our tools and practices against those of other brands in key industry alliances, such as the FLA and GSCP. Largely achieved and continuously acted upon. The launching of the Sustainable Compliance Initiative and the Global Social Compliance Programme equivalency process are still works in progress but we continue to mature our tools and methodology in collaboration with these programmes. LARGELY ACHIEVED We leveraged industry and sectoral initiatives such as the Fair Labor Association s Sustainable Compliance Initiative (FLA-SCI), the Fair Factories Clearinghouse (FFC), and the Global Social Compliance Programme (GSCP) to continue calibrating our monitoring methodology, strategic compliance planning tool, and key performance indicators. The FLA s SCI methodology focuses monitoring on all of the stages of the employment life cycle, from recruitment through the termination of employment. The adidas Group actively participated in global testing of the SCI tool in the Americas, Asia Pacific and EMEA. We are also working closely with brands like Nike and Philips van Heusen to identify standards for a commonly used set of monitoring question sets derived from the SCI tool. This will further advance the jointly applied monitoring content and practices with up to 100 shared factories. The SEA Human Resources Management Systems (HRMS) programme was evaluated and harmonised to seamlessly integrate with the SCI methodology. The Fair Wage Assessment project started in 25 factories (4 full assessments and 21 self-assessments in the Philippines, Thailand, and Latin America) and will collect and measure worker compensation practices against 12 wage benchmarks, and identify frameworks that sustainably improve wages. SCI, HRMS and Fair Wage Assessment continue to be thoroughly tested and will be completely integrated into the SEA team s internal coverage and practice by See below for more on the Fair Wage Assessment exercise. 15

16 We use the Fair Factories Clearinghouse (FFC), a shared compliance monitoring platform that enables us to collaborate on activities in factories shared with other buyers, in other words, to more efficiently engage with factories. In 2011, we shared compliance data in the FFC for 913 of our factories. Additionally, we engaged in 18 collaboration activities directly with other brands, and through Better Work. In many of these cases, we developed harmonised remediation plans with other buyers and established consistent messages for factory management. This clearly set expectations for suppliers to fulfil the benchmarks of the partnership compliance model and move to adopt practices for a self-governing compliance model. We have 93 Self-Governance audits conducted by our 4C and 5C-rated suppliers, FLA participating suppliers, and selected licensees. In 2012, we will start applying the Equivalence Process of the Global Social Compliance Programme. This helps companies and initiatives to benchmark their own systems, tools and processes against agreed best existing practices as described in the GSCP reference tools. A more detailed description can be found on the GSCP website at equivalence-process.html 2012 milestones Finalise the commonly shared (SCI) monitoring question sets with other brands and buyers. Continue preparations to integrate SCI, HRMS and the Fair Wage Assessment to internal SEA practice by Start applying the Global Social Compliance Programme Equivalence Assessment. s Drive efficiencies and effectiveness in the monitoring and improvement of workplace conditions by leveraging our partnerships and collaborations with selected brands, multi-stakeholder initiatives and other stakeholders by: Promoting the harmonisation of corrective action plans at a factory level through brand collaborations and engagement with key suppliers. Completing a Fair Wage pilot in collaboration with the FLA and ILO by prototyping in the Philippines and Central America. The milestone was largely achieved and continuously acted upon. Fair Wage piloting and collaborations met the 2011 target but the increase in the number of suppliers with harmonised corrective actions plans was less than expected. LARGELY ACHIEVED The 2011 milestones were direct actions with the supply chain to achieve 2015 targets of 80% of our strategic Tier 1 suppliers reaching a 3C KPI rating and 25% of them to take direct responsibility for their own social compliance performance. The 2015 targets for collaboration and partnerships with multiple stakeholders (multi-stakeholder initiatives, brands, and local civil society) included work in 2011 to find resolutions in several factory reports Ocean Sky, Style Avenue, PT Kizone. The Fair Wage project, rolled out in five countries, supports the 2015 target that strategic suppliers transparently report on sustainability performance. Stakeholder partnerships and collaborations In 2011, we worked closely with the Fair Labor Association and other brands to refine and finalise the Sustainable Compliance Initiative (SCI). The SCI is an innovative approach for assessing working conditions and developing corrective action that focuses on proper and effective human resource management systems. SEA staff participated in pilot testing of the tool with suppliers in China, India, El Salvador and Bulgaria. Team members attended training to assess the value of the systems and practices in the workplace, including identifying the item to be assessed, and then evaluating that item in a way that leads to sustainable recommendations and remedies. The SEA staff participated in developmental working groups with the Fair Factories Clearinghouse s new programme (ARTS) to seamlessly share compliance data, and the Sustainable Apparel Coalition s Sustainability Index content for the environment and social compliance. Notable collaborations with other brands included work on the FLA SCI, and an increased number of corrective action planning with factories shared with another sports brand. Shared corrective action planning is rolled out in seven countries Indonesia, Vietnam, Turkey, Egypt, Brazil, Honduras, and Mexico. Ongoing efforts in partnerships with eight other brands in the Brown Shoe Collaboration continued for the third year, with the development of common corrective action plans for multiple shared factories for a large scale shoe supplier in China. The collaboration also expanded coverage by looking at opportunities to set common standards and approaches for the safe use of chemicals. Active engagements with local civil society, other buyers and regulatory authorities led to prompt and successful resolution in the Ocean Sky and Style Avenue factory cases in El Salvador. 16

17 Fair Wage pilot The Fair Wage approach is based on assessing 12 complementary Fair Wage benchmarks to gain a complete overview of wage practices at the enterprise level and to identify remedial needs. Different Fair Wage tools capture the different aspects of the wage story in the enterprise and provide findings that are reliable and robust. These include an online questionnaire for managers, a table of statistics on wages, employment and company performance, quantitative interviews of workers and qualitative surveys of a few selected companies. In 2011, three suppliers in the Philippines and one supplier in Mexico started full Fair Wage assessments, and 21 suppliers in El Salvador, Brazil, Thailand and China worked on Fair Wage self-assessments. In Q3 2012, a consolidated Fair Wage Assessment report will be completed and given to the adidas Group and the four factories which completed full assessments. The opportunities in the Fair Wage project will help individual suppliers, as well as the adidas Group, to identify the management practices required in Fair Wage dimensions. The assessments evaluate compliance with legal wage provisions, wage levels and wage adjustments, and set a series of wage policy recommendations. These recommendations encompass the quality of pay systems, their fairness and efficiency, as well as the strength of communication and social dialogue milestones Integrate SCI methodology into current monitoring practices and tools; deeper application from 2013 onwards. Complete and report on 25 full and self-assessments by suppliers using the Fair Wage methodology and tools. Stakeholder Engagement target 2015: Strategic suppliers to have transparent reporting practices about their sustainability performance in place s Address external requirements for transparency and disclosure: Fulfil LOCOG requirements and contract obligations on supplier disclosure and SEDEX uploads. Publicly disclose Olympic supplier list from mid-2011 and update quarterly to ensure it is current and accurate. As a local sponsor of the 2012 London Olympic Games, the adidas Group comprehensively met the requirements as outlined in the Sourcing Code of the London Organising Committee of the Olympic and Paralympic Games (LOCOG). Beyond these requirements we disclosed our Olympic supplier list to the public and updated it quarterly. We also developed and delivered a legacy programme of outdoor sports facilities for local communities in the UK and ran the first ever sports eventfocused stakeholder dialogue. TARGET ACHIEVED Engaging openly with stakeholders and establishing leadership approaches for transparency and disclosure is a fundamental part of our sustainability strategy. Being so visible at major sporting events draws attention to how we do business, so the adidas Group has taken a proactive approach in engaging with stakeholders about its corporate responsibility practices for the London 2012 Olympic Games. The approach has included specific actions: Meeting the requirements of the LOCOG Sourcing Code and disclosing our Olympic supplier list to the public Providing a sporting legacy to the UK and delivering a grassroots programme to the community Seeking direct dialogue with UK-based labour and human rights groups about how events are organised and how the parties involved manage their wider responsibilities when it comes to protecting human or labour rights. 17

18 Meeting the LOCOG Sourcing Code The London Organising Committee for the Olympic Games and Paralympic Games (LOCOG) issued a Sustainable Sourcing Code to its partners. The code clearly outlines four key principles for commercial partners to follow: Ensuring responsible sourcing Using secondary materials Minimising embodied impacts Using healthy materials. Ensuring responsible sourcing All direct suppliers and sewing subcontractors selected to manufacture LOCOG-licensed products: Are to meet the adidas Group Workplace Standards Are fully disclosed in SEDEX (Supplier Ethical Data Exchange) Are subject to regular labour, health & safety compliance inspections by adidas Group SEA compliance staff Meet a defined key performance indicator (KPI) which rates a factory s compliance performance Have a management plan in place that details a factory s compliance programme and future targets Are publicly disclosed via the adidas Group website. Using secondary materials Overall, 90% of the adidas Games products contain sustainable content including 100% of athlete village-wear, 100% volunteerwear, and 73% of on-field performance products. The London Volunteer s uniform is a prime example. All items in the volunteer package contain, at a minimum, 35% sustainable content, with three-quarters of the volunteer clothing and accessories containing more than 50% sustainable content. Additionally, all volunteers will be wearing the London version of the popular Fluid Trainer shoe. The Fluid Trainer is technically advanced in the area of sustainability, with pattern innovations and sustainable content that impact the whole shoe. The shoe contains recycled polyester mesh, recycled EVA (ethylene vinyl acetate), as well as recycled rubber, and has achieved a 70% or greater pattern efficiency for every piece of the upper. Minimising embodied impact All direct suppliers selected to manufacture adidas-branded LOCOG-licensed products and their major materials suppliers have undergone environmental assessments of their sites. Assessments are used for the development of individual factory improvement programmes. Factories progress is tracked regularly. Using healthy materials LOCOG-licensed products comply with the adidas Group restricted substances list and are in compliance with standards listed in the LOCOG Sourcing Code. Leaving a legacy to the UK community As a sponsor of the London 2012 Olympic Games, we wanted to provide a sporting legacy to the UK that would get more people active and break down barriers to sport and physical activity. We engaged with local and central government, organisations like the Youth Sports Trust, Sport England, and LOCOG in the development and rollout of the adizone programme. The adizone programme revolves around creating innovative multi-sport venues that provide a social platform for members of the community to do a range of activities. By end of 2011 the company has built over 50 adizones spanning across every region in England equipped with sustainable facilities for both able-bodied and disabled users. Brand adidas is determined to increase the number in the UK by setting up more than 100 adizones across the country by the time the Games start. The goal is to make sports participation accessible by offering everybody a chance to get active. Each adizone is a free-to-use, permanent outdoor gym-like installation measuring 625sq metres and is open 365 days a year, incorporating basketball, football and tennis areas, a climbing wall, an outdoor gym and an open area to encourage dance, aerobics and gymnastics, set up by the local communities together with adidas. Stakeholder dialogue 2011 Building on previous engagements, in May 2011, the adidas Group hosted a stakeholder dialogue on the topic Respecting Labour Rights in Global Supply Chains: The Impact of Major Sporting Events. The dialogue included representatives from UK labour rights and human rights organisations, from the London Organising Committee for the Olympic Games and Paralympic Games (LOCOG), SRI analysts and senior staff from the adidas Group. The feedback from the meeting helped to shape our approach to managing our supply chain for major sporting events, including the London 2012 Olympic Games. The dialogue was hosted by an independent facilitator. A paper summarising views from the meeting is available on the adidas Group sustainability website milestones To share the findings from the stakeholder dialogue with sports events organisers to raise the sustainability bar for future events where the adidas Group is a sponsor. To further promote transparent reporting practices about our suppliers sustainability performance, we will identify key jurisdiction where public listed supplier companies are required to conduct non-financial (ESG) reporting; we will start engagements with partners who are listed in those markets. 18

19 environment 19

20 environment Management Processes target 2015: Overall target - develop a management system that ensures a successful strategy implementation as well as an effective management of environmental impacts, risks and opportunities Develop a format for guidelines and tools. The overall structure for guidelines has been developed milestones Develop a manual for the entire governance framework that strengthens the uptake of the Strategy by the global organisation. Develop a general set of templates for guidelines, toolboxes and tools based on existing templates and tools, and introduce them Group-wide. Develop specific guidelines and tools for specific brands, business functions or targets. Mature and develop quantitative and/or qualitative KPIs for all business functions engaged with the Environmental Strategy 2015; ensure that KPIs are meaningful and practical. Develop a Group-level Index Guideline. LARGELY ACHIEVED Innovation Managing the Environmental Strategy 2015 across our brands and functions is a complex process. The Strategy covers the entire adidas Group and value chain. In 2011, we developed a format for guidelines and tools to ensure that the Strategy is comprehensive, coherent and that the targets complement and strengthen each other. This will be further refined and implemented to support all functions and brands in their environmental strategy work. Valuable input for the structure of the guidelines was delivered by two university theses: one dealing with Innovative tools for Corporate Environmental Strategies, and one on Environmental management accounting (EMA): a Means of Ensuring Business Integration of Environmental Strategies. Key performance indicators In order to follow up on all targets and to measure the achievements over time, key performance indicators (KPIs) were introduced in 2011 for several business processes, such as Development, Sourcing and Green Company. We will look to develop further KPIs for other business processes in Group-wide index development This year saw the development and piloting of version 1 (V1) of a Sustainable Apparel Index. The V1 Apparel Index is an initiative of the Sustainable Apparel Coalition (SAC), an industry-wide group of leading apparel and footwear brands, retailers, manufacturers, non-governmental organisations, academic experts and the U.S. Environmental Protection Agency. The Index is built around three different levels: brand, product and manufacturing facility level. As a member of the SAC we participated in the pilot of the V1 Index that took place from September 2011 to January 2012 with a project team of around 15 employees and several product teams from adidas, Reebok, TaylorMade and Rockport. The pilot results confirm the complexity of the undertaking and also highlight the challenge in developing a robust assessment methodology across the entire apparel supply chain. In 2012, we will launch a project to understand which elements of the SAC V1 Index can be applied within the adidas Group and its brands with the aim of developing a Group-level Index Guideline. target 2015: All future innovation projects to contain some environmental elements Develop partnerships with research institutions and suppliers. Several research institutions and supplier partnerships have been established by the adidas Innovation Team with the specific goal to increase capacity for sustainable product creation. Process is now a fundamental and required part of all new innovation projects. TARGET ACHIEVED This milestone was developed in order to begin building a deeper technical understanding about the environmental impacts of conventional manufacturing processes and emerging product creation technologies. The adidas Innovation Team also maintains long-term research and leading edge supplier relationships to jointly bring new, environmentally-preferred technologies to the market milestones Most of the adidas branded products for the London 2012 Olympic Games are to contain sustainable innovations from on-field competition wear through to clothes and equipment for volunteers and the public. New product innovations will be quantitatively assessed for environmental performance. Integration of sustainability into 2014 FIFA World Cup projects. 20

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