Exclusive-Some investors demand change at LVMH after probe into Dior contractors

By Helen Reid and Mimosa Spencer

LONDON/PARIS (Reuters) – Europe’s top asset manager Amundi and other LVMH investors want the $370 billion luxury behemoth controlled by billionaire Bernard Arnault to take more aggressive steps to monitor its suppliers’ treatment of workers after Italian prosecutors disclosed alleged sweatshop-like conditions at subcontractors for high-end brand Dior, three investors told Reuters.

The investigation into suppliers for LVMH’s second-largest fashion label, which Reuters revealed on June 11, has shone a spotlight on potential worker exploitation in the $1.6 trillion global luxury goods industry.

Amundi, which holds a 0.6% stake – worth $2.2 billion – in the Paris-listed parent to brands including Louis Vuitton and Tiffany & Co (NYSE:)., said it contacted the French conglomerate after the investigation was made public, asking for more transparency on supplier audits and internal purchasing practices.

“We hope that these recent allegations will be looked at seriously and will speed up the improvement, within the sector of policies and practices to ensure proactive management of supply chain risks including those around working conditions,” Caroline Le Meaux, global head of ESG research, engagement and voting at Amundi, told Reuters on July 18.

CCLA Investment Management, another LVMH investor, told Reuters it wants the company to provide more public evidence of its efforts to ensure workers in its supply chain are fairly paid, while asset manager Robeco said it has been pushing luxury groups including LVMH to be more transparent.

Reuters spoke with four investors holding shares in LVMH after a Milan court placed an Italian subsidiary of Dior under judicial administration following the investigation into the supply chain of Dior and a dozen other fashion brands.

Flavio Cereda, co-manager of GAM’s luxury brands investment strategy, said while he did not see the probe as a “deal-breaker” when it comes to owning shares in LVMH, it is now no longer enough for brands to say a product is made in Europe and that they need to show they are “on top of (their) supply chain because in the end it falls on (them).” 

Amundi leads engagement with LVMH on fair wages on behalf of the Platform Living Wage Financials (PLWF), a group of large investors including Legal & General Investment Management and Storebrand.

The French asset manager voted against the re-election of Arnault as LVMH CEO at the 2022 and 2023 shareholder meetings due to what it said was the French behemoth’s lack of transparency on worker pay and conditions.

Italian prosecutors said Dior, headed by Arnault’s daughter Delphine Arnault, payed Italian subcontractors as little as 53 euros per Dior bag assembled, selling the same style bag in shops for 2,600 euros while failing to implement basic safety requirements, according to court documents reviewed by Reuters.

Dior said last week it has cut ties with the suppliers in question, that they were only partially assembling leather products and that reports of bags produced at “ridiculously low” costs were among “entirely false” information relayed by the media. Dior’s profit margin is “entirely in line with that of the luxury industry and nothing of the order indicated by these erroneous comments,” the label said. LVMH does not publish detailed figures about the financial performance of Dior or its other individual brands.

An LVMH spokesperson told Reuters the French conglomerate updated its supplier code of conduct in March and is working towards a homogenous approach across all its brands, but that the size and complexity of the group, which spans spirits to high-end hotels, mean this process is lengthy and challenging.

“This is a process of continuous improvement,” the spokesperson said.

In some cases, LVMH is also working with rivals who employ the same suppliers, to coordinate efforts to pay workers a living wage.

On Wednesday, Italian antitrust authorities launched a separate probe into whether Dior’s marketing claims touting the craftsmanship of its products mislead consumers. The probe also targeted Armani, which expressed confidence in a “positive result following the (antitrust) investigation”.

Italy accounts for 50% to 55% of the global production of luxury clothing and leather goods, consultancy Bain calculated, with thousands of small manufacturers supplying big brands and allowing them to sport the prized “Made in Italy” label.

TRANSPARENCY QUEST

Amundi has for years been asking LVMH for improvement in its wage policies. “LVMH continues to lack fundamental due diligence efforts that not only promote living wage, but also help to address key human rights risks,” Amundi said in a May 7 report on its engagements with companies.

“We understand their impatience, we are mobilized to move as quickly as we can,” the LVMH spokesperson said of investor requests.

The PLWF, which vets retailers annually on their policies and actions on fair wages, gave LVMH a rating of “embryonic” – the lowest of five grades — in its 2021, 2022 and 2023 reports.

“LVMH are a large fashion house, they have 75 different brands. Some of those are vertically integrated and have a lot of controls, and others don’t,” said Martin Buttle, Better Work Lead at CCLA Investment Management, another LVMH investor.

Dora Buckulcikova, lead portfolio manager at the Robeco Fashion Engagement fund, also an LVMH shareholder, told Reuters luxury brands have blind spots when it comes to “suppliers of their suppliers,” resulting in “not enough knowledge about where these are based and how they are audited”.

Robeco routinely pushes luxury companies including LVMH to publish more information about their suppliers, and to ensure factory audits are unannounced, Buckulcikova said.

Dior said it had audited the suppliers that prompted the probe but they had “evidently succeeded in hiding these practices”. “The Dior teams are working intensely on ongoing reinforcements of the existing procedures,” it said.

LVMH discloses very little about its sprawling supply chain in filings. The conglomerate is controlled by the Arnault family, which owns around 49% of the share capital and 64% of voting rights.

Antoine Arnault, Bernard Arnault’s son and LVMH’s head of image, told shareholders in April the group sought to do better.

“We cannot create products that make people want to dream without tangible improvements such as traceability and transparency,” he said.

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