Just Fix It: How Nike Learned to Embrace Sustainability

BEAVERTON, United States — "The Nike product has become synonymous with slave wages, forced overtime and arbitrary abuse," Phil Knight, then chairman and chief executive officer of Nike, told journalists at the National Press Club in Washington DC in 1998.

The sportswear giant was sinking under a rising tide of scandals, fuelled by a new type of activism targeting consumer-facing brands as a way of curbing environmental and labour abuse further down the supply chain. In 1996, Life magazine had published pictures of a 12-year-old boy in Pakistan stitching ‘Swoosh’-emblazoned soccer balls. The following year, a leaked inspection report, prepared for Nike by Ernst & Young, revealed that 77 percent of workers at a supplier factory had respiratory problems and were being exposed to carcinogens 177 times above the legal level. Television channels like CBS and ESPN broadcast footage from inside the sweatshops where Nike products were made.

As the scandals mounted, Nike insisted it had no control over the third-party suppliers that made its products, an approach current chief executive officer Mark Parker has since described as "reputation management." Clearly, it wasn't working.

"The company took a very defensive approach to it for about four or five years. Really all that did was to fuel the campaign," explains Hannah Jones, chief sustainability officer and vice president of Nike's innovation accelerator.

A former consultant on philanthropy and community programmes to Microsoft and Kimberly Clark, Jones joined Nike as director of government and community affairs EMEA in 1998. From fiscal year 1984 to 1998, Nike revenue had rocketed from $919 million to $9.6 billion. But the scandals were taking a toll. Store openings were picketed by workers’ rights campaigners and, in fiscal year 1999, revenue fell to $8.8 billion. “The company asserted that criticism of Nike’s labour practices had nothing to do with the downturn. But it was clear that Nike was suffering from a serious image problem,” wrote professor Deborah Spar in a 2002 Harvard Business School case on Nike’s labour practices. “It was no coincidence that I was recruited at that time,” adds Jones. “There was going to be a very clear change in strategy.”

In nearly two decades, Jones has helped to transform Nike from a company that was synonymous with sweatshops to a recognised sustainability leader. Last year, Morgan Stanley ranked Nike the most sustainable apparel and footwear company in North America for environmental and social performance, including its labour record.

It moved from being a risk and reputation function to being a business lever function to being an innovation function.

Back in May 1998, Phil Knight unveiled a plan to train 100 of Nike’s over 22,600 employees on sustainability issues and require suppliers to implement minimum wages. It didn’t work. “A group of 100 people alone cannot lead the transition to sustainability at a large organisation like Nike,” reflected Nike’s CSR report for fiscal year 2001. Also in 1998, Marc Kasky filed a lawsuit against Nike in California, alleging the company’s public statements on the working conditions in its supplier factories contained false information.

For the duration of the lawsuit, which was settled in 2003 for $1.5 million, Nike stopped reporting on CSR. “We really started to look into what were the things within our business that we could change or do better, such as our purchasing practises, such as teaching designers how to design with sustainability in mind,” says Jones. Following this analysis, sustainability “moved from being a risk and reputation function to being a business lever function to being an innovation function.”

The result was three major shifts in strategy — all of which the company has maintained to this day. First, Nike committed to transparency. With its fiscal year 2004 CSR report, Nike went public with its list of suppliers — data that many companies view as among their “highest competitive advantages,” says Jones, who wrote the report. “Now NGOs on the ground know which factories we’re in, if they see any issues they know how to alert us.”

Nike also reached out to industry stakeholders, co-founding the Fair Labor Association with other businesses, universities and NGOs. Many clothing factories manufacture for multiple brands — even a company as large as Nike might only make up 5 percent of a particular supplier’s business. If asked by only one brand to improve working conditions, “the factory manager would say, ‘Well, to be frank, you’re just 5 percent, I’d rather lose my business with you than have to invest in X, Y or Z,’” says Jones.

Finally, Nike linked sustainability to innovation, defined by Jones as “invention that creates value, whether that’s value in terms of sustainability, new offerings to the athlete or in terms of our shareholders.” From 1992, Nike spent about $50 million in R&D to swap the gas in the sole of the Nike Air shoe from FS6 — a potent greenhouse gas, which contributes to global warming — to nitrogen. This change yielded performance innovations that led to the Airmax 360. “This unlocked in the company a huge insight, which was [that] solving a sustainability problem can actually unlock new performance, new price or new aesthetic benefits,” says Jones.

“Nike’s sustainability reports are noteworthy for their strategic significance,” says Lynn Paine, John G. McLean professor of business administration at Harvard Business School. “Nike is one of relatively few large, public companies making investments in potentially game-changing innovations for the sake of sustainability.”

Nike’s strategy also stands out for its organisational scope — spanning board level, design, sourcing and production teams and third-party factories. In 2009, teams at Nike became accountable for corporate responsibility as part of their business KPIs. Today, 57,000 materials in Nike’s production chain have an environmental rating; a programme tracks the company’s water footprint across over 811 vendors; and Nike product designs are rated for sustainability.

Currently, 86 percent of Nike contract factories are rated bronze or above in Nike’s Sustainable Manufacturing and Sourcing Index (SMSI), an internal tool that rates factories on health, safety and the environment and indicates that legal wages are being paid. Nike is targeting 100 percent bronze-or-above-rated factories by 2020. A factory’s SMSI result “can lead to greater volume and growth, it can also lead to less volume and ultimately exit,” says Jones.

Since 2013, Nike has cut the number of factories it works with by 12 percent — from 785 to 692 — to embrace larger, longer-term partnerships. “That’s when the factories really start to invest in their workers,” says Jones. Nike declined to reveal how many factories it has cut ties with over non-compliance issues, or how many non-compliance issues were found at its factories. In fiscal year 2015, excessive overtime violations occurred at 4 percent of Nike’s contract factories, 8 percent less than in fiscal year 2014.

While Nike’s sustainability initiatives were launched as a response to past scandals, they are now a tool for future-proofing the company in a world where businesses are under pressure to cut their emissions and climate change threatens supplies of raw materials like cotton and leather.

“This is about leapfrogging into the future before regulation or price volatility hits you,” says Jones. “Post the Paris agreement [a legally binding agreement between countries to limit global warming to 2 degrees], we expect the business down the road will need to become a 2-degree business. And that equates to being able to grow whilst radically reducing your impact.” In May, Nike set an open-ended “moonshot challenge” to double its growth and halve its impact — defined as the company’s carbon emissions.

But not all agree with Jones’ assessment of progress. Nike did not rank in the Corporate Knights 100 most sustainable corporations for 2016 (Adidas, Kering and H&M all did) and has come under fire from Greenpeace for not eliminating toxic chemicals from its supply chain.

“This is a company that is investing in technology, sustainability, innovation and energy,” counters Edward Hertzman, founder of Sourcing Journal, a trade journal covering apparel supply chains and a former executive in global sourcing companies. “They’re investing in auditing the factories, mandating that certain wages are paid and forcing these wages to be paid — instead of just turning a blind eye and placing the order. And don’t forget, they have much more to lose. They can’t afford a PR crisis, so they need to be on top of it.”

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This article first appeared in The Business of Fashion's fourth annual BoF 500 special print edition, which includes stories on Kate Moss, Tory Burch and Matthew Moneypenny, as well as a collectible directory of the people shaping the global fashion industry in 2016. Click here to order your copy.