Supply Chain

Working conditions
Part of the non-financial statement – limited assurance

Our commitment to ensuring fair labor practices and safe working conditions in our
manufacturing facilities throughout our global supply chain is fundamental to our human
rights approach. Our active efforts are guided by the adidas Workplace Standards, which is
our supply chain code of conduct that is aligned with the FLA ‘Workplace Code of Conduct’
and ‘Principles of Fair Labor and Responsible Sourcing.’ The adidas Workplace Standards
are embedded as a contractual obligation in the manufacturing agreements to ensure workers
are employed in fair, safe, and healthy workplaces that are environmentally sound. In
addition, they follow ILO and UN conventions relating to human rights and to fundamental
principles and rights at work, as well as the model code of conduct of the World Federation
of the Sporting Goods Industry (‘WFSGI’).

We also seek to extend our reach by cascading responsibilities to our contractual partners in
order to capture and address potential and actual risks related to possible labor rights
violations upstream and downstream of our supply chain. Specific reference to the code
provisions of the ILO core labor conventions is provided in the adidas Guidelines on
Employment Standards. The Social and Environmental Affairs (‘SEA’) senior management
team reviews and approves all policies and implementation processes of the labor rights
program.

In addition to regularly monitoring our supply chain to ensure compliance with the adidas
Workplace Standards, in 2022, we continued to focus on our own purchasing practices in
accordance with our ‘Responsible Sourcing Policy’ to ensure that they do not negatively
impact our manufacturing partners’ ability to comply with our standards. As a subscriber to
the Better Buying Institute, an independent organization that assesses sourcing practices of
participating brands, we continued to collaborate with our Sourcing team, who took actions to
further improve our purchasing practices based on the feedback we received in the Better
Buying reports. In addition, in partnership with Better Buying, we developed an e-learning
training about responsible purchasing practices, which was launched to adidas’ Global
Operations employees.

Managing the impact of covid-19

From the very outset, adidas has sought to mitigate the impact of the coronavirus pandemic
on the workers in its global supply chain, providing guidance on infectious disease control,
occupational safety, and improvement of workers’ welfare. We continued to uphold our
standard manufacturing terms, including worker rights protection, and assisted key
manufacturing partners in securing bank financing to help them weather the covid-19 crisis.
In 2022, we saw a stepwise relaxation of government restrictions in all countries except for
China, which maintained its zero-covid policy. Suppliers in some parts of China were
impacted by lockdowns and by restrictions on the movement of people and materials to and
from the factories. During this time, we continued to ensure legal compliance with respect to
pay and benefits for all workers affected by operational changes due to covid-19, and we
closely monitored the working conditions at every manufacturing facility.

Targets for 2025

Our social compliance program continues to evolve and is built around three core concepts
with targets for 2025 in place.

Targets for 2025: Social impacts

Impact area Target
Supply Chain
90% of strategic Tier 1 suppliers
achieve at minimum ‘4S;’
Social impact (‘S-KPI’)
100% of strategic Tier 1 suppliers
achieve ‘3S’ or better1
Progressive improvement in compensation,
Fair wages measured by fair wage benchmarks across our
strategic Tier 1 suppliers2
Achieve gender wage parity for workers and their
Gender
supervisors in our strategic Tier 1 suppliers3
Entire value chain (from raw
material production to own
operations)
Human Rights and Environmental System in place to identify and manage high-risk
Due Diligence (‘HREDD’) human rights issues in 100% of value chain4
The S-KPI measures a set of social indicators, such as accident rates, worker satisfaction,
and worker empowerment. Due to positive progress in our suppliers’ overall performance
in 2022, we have upgraded our 2025 target for the number of suppliers expected to
1
achieve a ‘4S’ rating. The overall target seeks to achieve 100% adherence to or 90%
overachievement against these foundational social impact measures, with ‘3S’ being the
minimum expected supplier performance.
The fair wage benchmarks include industry wages, minimum wages and living wages.
These benchmarks are set and tracked through a ‘FLA Fair Compensation Tool,’ which
2
has broad industry adoption and is being rolled out progressively to strategic Tier 1
suppliers.
The measurement of wage parity for production line workers and their immediate
supervisors (i.e., line leaders) forms part of a broader gender strategy rollout to applicable
3
strategic Tier 1 suppliers who complete self-assessments to identify and then close gender
gaps in operating practices and procedures.
In conducting due diligence we seek to identify, prevent or mitigate potential adverse
4 human rights or environmental impacts, with priority given to addressing the most severe
impacts.

Measuring supplier social impact performance

In 2022, we launched our new social impact KPI (‘S-KPI’). The S-KPI measures suppliers’
social impact performance through a set of social indicators, such as accident rates, worker
satisfaction, and worker empowerment. By 2025, our initial target was to have 70% of
strategic Tier 1 suppliers achieve a minimum of ‘4S,’ and 100% of strategic Tier 1 suppliers
achieve ‘3S’ or better. As we have seen very positive progress in our suppliers’ overall
performance following the end of the pandemic, we have upgraded our 2025 target
accordingly and now expect that 90% of our strategic Tier 1 suppliers will achieve a
minimum of 4S or better by 2025. For a detailed description of this new KPI and the progress
towards this target in 2022, and adjusted targets, please see later in this chapter.

Improving gender fairness and wages at our suppliers’ factories

We are committed to upholding responsible sourcing practices, increasing gender equality,

and creating pay equity, with the goal of providing fair compensation for workers in our
supply chain, regardless of their gender. By 2025, we aim to see a progressive improvement
in compensation, measured by fair wage benchmarks, across our strategic Tier 1 suppliers.
We also want to achieve gender wage parity for workers and their supervisors in our strategic
Tier 1 suppliers.

 Fair compensation: In 2022, we completed wage data collection1 among our

strategic suppliers in Cambodia, Indonesia, and Vietnam, representing 62% of all
strategic suppliers. We compared this wage data against external benchmarks, such as
the applicable legal minimum wage, the FLA Country Average2, which represents the
industry average, the Global Living Wage Coalition’s (‘GLWC’) benchmark3 if
available, and the World Bank International Poverty Line. It is important to note that
our collected data coincides with the first year of covid-19, a time period where wages
were impacted by the disruptions caused by the pandemic, particularly in countries
where suppliers experienced long periods of work suspensions and/or shorter hours of
operations.

The data collected shows that payment of wages in these factories did surpass all of
the aforementioned benchmarks. In detail, the data collected for eight factories in
Cambodia, the major sourcing country for apparel, shows that wages paid by adidas
suppliers surpassed the legal gross minimum wage by 50% and the applicable net
FLA Country Average4 by 29%. The eleven factories in Vietnam, the major sourcing
country for footwear, are located within three minimum wage zones. Therefore, their
wage data analysis is grouped by their respective minimum wage requirements: In all
three zones, wages paid at adidas factories all surpassed the applicable legal minimum
wages by at least 65%, up to 78%. Where applicable, wages also surpassed the net
GLWC Benchmark by 18%. Our eight surveyed factories in Indonesia are located
within five different legal minimum wage groups. As such, their wage data analysis
results are reported under their respective minimum wage requirements. Across all
zones, wages paid surpassed the legal minimum wage by between 7% and 45%.

In addition, we continued to support the evolution of the FLA’s data collection tools
by participating in the FLA’s Fair Compensation Practitioners Working Group. In
2022, the primary focus of this work was improving the FLA’s ‘Fair Compensation
Dashboard,’ which is used to analyze, report, and visualize wage data. The year 2022
also saw the continued activation of the five levers that heavily influence wages as
outlined in our ‘Fair Compensation Strategy’: legal obligations, responsible sourcing
 and purchasing practices, worker productivity, government involvement, and
industrial relations. Specifically, we activated our gender pay parity efforts and
continued to focus on closing benefit and wage-related gaps identified through our
compliance activities. In 2023, we will continue to benchmark our strategic suppliers
in the rest of the world, identify and prioritize factories that may require wage
improvements and establish KPIs to help track and measure progress against our five
levers.
 Gender equality: We aim to bring a gender lens to our strategic suppliers’ operations
ensuring that all workers enjoy the same opportunities, rights, and obligations. To
support this aim, in 2022 we launched our ’Gender Strategy for Business Partners’ to
guide and help our strategic suppliers in this process. In addition, we introduced and
shared guidelines alongside a self-assessment tool to help them develop and
implement their own gender strategy. The tool is designed to help suppliers identify
gender-related gaps in their operating practices and procedures and provide the
building blocks they need to develop their own gender strategy. In 2023, suppliers
will develop improvement plans aimed at closing potential identified gaps. These
insights will help us to track their progress against their plans.

Increasing transparency on human rights across our value chain

As part of our broader risk management processes, we will increase the scope and application
of our HREDD efforts. By 2025, we aim to have a system in place to identify and manage
high-risk human rights issues in 100% of our value chain. In conducting due diligence, we
seek to identify, prevent, and mitigate potential adverse human rights or environmental
impacts, with priority given to the most severe impacts. In 2022, we enhanced the mapping of
subcontractors of our Tier 1 manufacturing partners. In addition, as part of our effort to
cascade HREDD processes within our supply chain, we made our key Tier 1 manufacturing
partners accountable for implementing their own due diligence efforts, and we tracked that
implementation via our S-KPI tool. This also required our supplier partners to commission
social compliance audits in their subcontractor facilities.

Monitoring and assessing performance

We regularly assess our manufacturing partners on their ability to provide fair, healthy, and
environmentally sound workplace conditions by conducting announced and unannounced
audits by our own team and by accredited external auditors. Any cases of non-compliance
identified during audits are given a clear time frame for remediation. Potential new
manufacturing facilities are assessed in a similar way, and orders can only be placed if
approved by the SEA team. Based on the results of these assessments, the Sourcing and SEA
teams jointly decide on the course of action, ranging from trainings to enforcement actions,
such as sending warning letters or hiring external consultants to help improve workplace
systems or practices. We also operate several grievance channels allowing workers or third
parties to submit complaints about violations of the adidas Workplace Standards and human
rights generally. All third-party complaints received through our grievance channels are
reviewed and investigated, and the outcome is reported on our corporate website.

Manufacturing facilities’ conditions are also inspected by independent auditors through our
participation in the FLA, demonstrating our commitment to independent manufacturing
facility inspections and external verification of our programs. Our program has been
accredited three times by the FLA and, in 2022, remains accredited based on FLA’s annual
evaluations. In addition to labor rights assurance, the FLA also provides external parties with
an independently managed ‘Third Party Complaint’ mechanism. adidas was the subject of
two FLA complaints over the course of 2022.

At the end of 2022, adidas worked with 424 independent supplier facilities5 (2021: 509) that
manufacture products for our company in 44 countries (2021: 46). The reduction in facilities
reflects the completed divestiture of Reebok and associated impacts on sourcing operations.
The core adidas supply chain has remained stable in line with our strategy to form long-term
relationships with our manufacturing partners. 63% of our manufacturing partners’ facilities
(2021: 67%) are located in the Asia-Pacific region. The number of licensees we worked with
was reduced significantly due to the divestiture of Reebok. In 2022, 39 licensees (2021: 60)
manufactured products in 287 factories (2021: 418) across 34 countries (2021: 39).

Onboarding

Against the backdrop of the Reebok divestiture, our primary focus in 2022 was on
maintaining partnerships with our existing manufacturing partners rather than onboarding
new ones. Consequently, we saw a marked reduction in the number of initial assessments –
the first approval stage for a new entry into our supply chain – in 58 prospective supplier
factories (2021: 142). Of these, 20 factories (2021: 48) were either rejected directly after the
initial assessment identified zero-tolerance issues or were ‘rejected with a second visit’ due to
identification of one or more threshold issues, which means they were rejected but given the
chance to remediate the non-compliance issues within a specific timeframe. The vast majority
(71%) of all initial assessments were undertaken in Asia (2021: 86%), with China accounting
for 26% (2021: 42%).

Overall, at the end of 2022, the first-time rejection rate of 34% of all new factories visited
remained in line with the previous year (2021: 34%). Providing focused support to those
factories that we have onboarded has aided us in maintaining a ‘final rejection rate’ of under
5% in 2022. The remediation of non-compliance issues prior to their onboarding is beneficial
for workers as it raises the bar in terms of better workplace conditions. Manufacturing
partners that have threshold issues are normally given three months to remediate those issues
before being re-audited for final acceptance.

 Download

Supply chain performance data

2022 2021

Onboarding of new suppliers

Total number of first-time rejections1 20 48
First-time rejection rate 34% 34%
Total number of final rejections 4 2
Final rejection rate2 5% 1%

Worker satisfaction
Implementation of ‘Workers Voice’ grievance platform at strategic 100% 99%
 Supply chain performance data
2022 2021
manufacturing partners
Satisfaction rate from workers who raised a grievance through
77% 71%
‘Workers Voice’

Trainings
Number of training sessions (fundamental, performance, advanced) 187 149

Monitoring
Total number of audits (initial assessment, performance audits,
1,222 1,176
environmental assessments)3

Enforcement4
Number of warning letters (first warning) 6 11
Number of warning letters (second warning) 0 2
Number of warning letters (third and final warning) 0 0
Number of business relationship terminations for compliance
0 1
reasons
Factories that were directly rejected after the first visit, i.e., with no chance of being
1 visited a second time, and factories that were rejected after initial assessments but which
were given a chance for a second visit.
Factories that were directly rejected after the first visit, i.e., with no chance of being
2
visited a second time, and factories that were rejected after being visited a second time.
Total number of audits includes audits done in licensee factories. Performance audits
conducted in approved factories that have passed the initial assessment (this includes on-
3
site and desktop assessments). Environmental assessments include ZDHC wastewater test
assessments according to the ‘ZDHC Wastewater Guidelines.’
Includes warning letters issued by licensees excluding warnings to facilities for the non-
disclosure of subcontractors, which are issued either directly through business entities or
4 by the adidas Legal department where there is a breach of contract obligations under a
manufacturing agreement. A third and final warning results in a recommended
termination.

Worker satisfaction and grievance opportunities

A robust grievance mechanism is the fulcrum on which workers can raise their concerns and
secure remedies. Since 2017, we have reduced our reliance on local worker hotlines as a
complaint mechanism by building an application-based ‘Workers Voice’ platform: a bespoke,
manufacturing-facility-based digital grievance channel for workers. We have progressively
improved and expanded the use of this grievance mechanism, and in 2022, more than
440,000 workers employed in 134 manufacturing facilities across 17 countries had access,
reflecting 100% coverage of our strategic manufacturing partners. Access to a digital
complaint mechanism has proven invaluable during covid-19. Close to 48,000 human and
labor rights complaints (2021: around 52,000) were filed through the Workers Voice platform
in 2022, with 99% of these complaints being closed by the end of 2022. The top complaints
received in 2022 were related to concerns over general facilities (more than 16,000), internal
communication (more than 11,000), and benefits (more than 6,000).

Input received through the Workers Voice platform are tracked by adidas, using KPIs and
dashboard reviews, case satisfaction ratings, and on-site worker interviews. This allows us to
evaluate the efficacy of the grievance channels, see major cases in real time, and undertake
timely interventions, where necessary. It also helps us understand the main challenges and
labor rights issues in a manufacturing facility and track how the facility’s management and
their HR teams resolve cases and communicate their findings. Our evaluation contributes to
the facility’s overall social impact rating (S-KPI). adidas provides ongoing capacity building
to enhance the facility teams’ capability to improve the effectiveness of the grievance
mechanism. The case satisfaction rate, which allows workers to input their level of
satisfaction with the resolution of complaints, has almost doubled from 39% in 2019 to 77%
in 2022. The increase in satisfaction is partly related to a significant improvement in the
response time that it took the factory management to address workers’ grievances, which
decreased from 49 hours in 2020 to less than 17 hours in 2022 due to improvements in
communication and transparency in the workplace. The management teams in the
manufacturing facilities have continuously engaged with the facility’s workers through
newsletters and broadcast messages, which has improved the workers’ engagement and the
overall culture in factories.

Complementing the various grievance channels, we expanded the ‘Worker Pulse’ project, a
digitalized short survey launched in 2020 to capture workers’ perception and awareness of
their labor rights on focused areas such as communication, harassment, and abuse, as well as
grievance systems. It builds on what we learned from a previous survey process we initiated
in 2016. In 2022, we undertook these digital surveys in 133 manufacturing facilities (2021:
123) across 17 countries (2021: 16), with more than 85,000 workers participating (2021:
66,000) through a mobile-phone-based application. At its core were six statements for which
the level of agreement or disagreement was assessed. Topics included the willingness to
speak up, to recommend the factory to work at to friends, or the level of comfort when raising
a suggestion or complaint or when talking to supervisors. Results show a steady increase in
the number of favorable respondents across all questions since 2020, from roughly 78% to
87% on average. The percentage figures indicate the average response on a five-point Likert-
type scale where 100% represents ‘strong agreement’ and 0% ‘strong disagreement.’ This
increase in overall worker satisfaction is also a factor in the increase in the average S-KPI
score for our manufacturing partners’ facilities in 2022. This shows that when workers’
voices are being heard and acted upon by the facility’s management, it can have an impact in
improving the overall working conditions within a manufacturing facility. Manufacturing
partners are required to develop and track workplace improvement plans based on feedback
from the Worker Pulse.

Alongside facility-led training, we have also offered tailored training under our ‘Women
Leadership Program,’ first launched in 2016. Building on our team’s learnings, we modified
the training approach in 2022, adopting a hybrid model of in-person and online training to
accommodate countries that were facing restrictions due to covid-19. In 2022, more than
1,100 supervisors at factories participated in the program (Cambodia, China, India, Indonesia,
Myanmar, Philippines, Vietnam).

2022 also saw an expansion of our mobile-phone-based ‘Digital Training’ project, which was
successfully rolled out at 123 manufacturing facilities in 18 countries in 2021. The digital
tool assesses workers’ awareness of their labor rights and remedies, e.g., fire safety,
harassment and abuse, and use of grievance channels. More than 82,000 workers took part in
2022 (2021: 62,000) and averaged a score higher than 91 out of 100 in the post-test questions,
thereby demonstrating very high levels of awareness.

Manufacturing facility engagements and training sessions

In 2022, our ability to physically visit our manufacturing partners continued to be limited in
some locations due to the pandemic, while it was restored in other areas. We used these
opportunities to maximize the impact of our facility engagements and training sessions.
Through a combination of on-site and remote or virtual interactions throughout the year, we
completed 657 individual facility engagements in 2022 (2021: 373), and 187 training sessions
for manufacturing partners, licensees, workers, and adidas employees (2021: 149). Training
sessions covered a broad range of topics, from our Workplace Standards, guidelines, and
supporting policies, through to targeted training on specific labor, health and safety, and
environmental topics. The amount of training delivered also reflected our focused efforts this
year to educate our manufacturing partners on Worker Empowerment projects and the launch
of our new S-KPI tool. Where virtual training sessions could be held, we continued to utilize
this format to attract larger audiences, reaching a total of 4,535 people, slightly down from
the 2021 figure of 5,321.

Wherever possible, we were also able to exchange multiple, shorter virtual interactions, with
longer, and more comprehensive, on-site engagements. In addition to our continuous tracking
of covid-19 impacts on our manufacturing partners’ operations, we used these engagements
to monitor remediation activities, KPI improvement plans, grievance investigations, and
follow-up on worker satisfaction surveys.

We continued to work with our licensee partners in 2022 to ensure that they were
implementing adidas Workplace Standards into their manufacturing partners’ operations in a
consistent manner. In addition, we provided our licensees with access to the FLA e-learning
materials, which include training courses covering topics such as human rights, forced labor,
responsible manufacturing, and worker engagement.

Audits

We audit our manufacturing partners regularly against the adidas Workplace Standards. In
2022, in addition to our own audits, we continued to use ‘Social and Labor Convergence
Program’ (SLCP) assessments. In 2022, we have accepted 133 SLCP assessments in lieu of
our own performance audits (2021: 142). The SLCP, as an industry assessment tool, will
continue to evolve as it is adopted more widely across the sector, and its methodology is
strengthened. With covid-19 continuing to place restrictions in some parts of the world on our
ability to conduct our own on-site assessments in 2022, our monitoring approach had to
remain agile to accommodate lockdowns and travel restrictions. Where possible, we
continued to carry out our regular on-site assessments, while also continuing the use of
remote desktop assessments first piloted in 2020.

 Download
 Number of audits by region and type
Initial Performance Environmental
Region 1 2 Total
assessment audit assessment3
2022 2021 2022 2021 2022 2021 2022 2021
Asia 60 145 426 387 606 511 1,092 1,043
Americas 12 15 34 33 18 15 64 63
EMEA 9 8 35 40 22 22 66 70
4
Total 81 168 495 460 646 548 1,222 1,176
Every new manufacturing facility has to pass an initial assessment to prove compliance
with the ‘adidas Workplace Standards’ before an order is placed. The data shown includes
1
both initial assessments and initial assessment follow-ups, and includes on-site and
desktop assessments.
Audits conducted in approved factories that have passed the initial assessment (including
2
on-site and desktop assessments).
Includes environmental assessments and wastewater test assessments according to the
3
‘ZDHC Wastewater Guidelines.’
4 Includes audits done in licensee factories.

A total of 709 social compliance audits (initial assessments, performance audits, and SLCPs)
were conducted in 2022 (2021: 770), 15 of which were conducted remotely (2021: 67). Of
the 481 on-site performance audits conducted, 78% were carried out on an unannounced basis
whereby the manufacturing facility is not informed in advance of the exact date of
assessment. The number of audits in factories manufacturing goods for licensees was reduced
from 395 in 2021 to 295 in 2022, reflecting the reduction in the number of licensee partners
connected to the Reebok divestiture.

To complement our broader sustainability efforts, as shown earlier in this chapter, we

monitor our suppliers to ensure compliance with our environmental standards and guidelines
and to validate their performance against annual environmental targets. In 2022, 259 facilities
in 20 countries were assessed and evaluated for their environmental performance, which
represented 251 of our key Tier 1 and Tier 2 manufacturing partners, and selected Tier 3
suppliers enrolled in our sourcing sustainability program.

As we continue to increase our focus on added-value advisory services and empowerment

projects, which go beyond our regular audit routine, the number of internally managed audits
decreased to 109 in 2022 (2021: 233), with 860 assessments performed by third-party
monitors (2021: 741).6

A total of 65% (2021: 54%) of all direct and licensee facilities were audited in 2022. ‘High-
risk’ locations in Asia, which is the most significant sourcing region for adidas, were the
subject of extensive monitoring in 2022, with an audit coverage of 84% (2021: 70%). As a
general principle, manufacturing facilities located in high-risk countries are 100% covered in
our auditing scope, which means they receive audits annually, while low-risk countries with
strong government enforcement and inspectorate systems, such as Germany, are considered
out of scope for our audit coverage.

We continue to measure suppliers’ ability and performance in conducting their own, internal
compliance monitoring and due diligence processes, which is captured in our S-KPI tool.
This replaces the previously used self-governance audits, which were only required for our
best performing.

Audit results and S-KPI performance

2022 marks the first year where we have measured supplier performance using the S-KPI
tool. The S-KPI assesses a factory’s performance in delivering a safe and fair workplace by
measuring effective due-diligence processes, as well as the ability to deliver positive social
impact. In total, the S-KPI has 15 units of measures (‘UOM’). These include compliance with
threshold and zero-tolerance issues, completion of remediation plans, accident and
absenteeism rates, as well as a range of worker empowerment measures such as resolution
and satisfaction rate of workers’ grievances, participation rate in worker satisfaction surveys,
and the ratio of females in mid-managerial position. The S-KPI assesses a factory’s
performance in each of the UOMs, based on the information gathered and validated during
social compliance audits which are uploaded to a dashboard for each supplier. The result is a
final score (in %) which is converted to S-rating levels from 1–5, with 5S being the best. The
thresholds are set as follows: 1S: 0–29%, 2S: 30–59%, 3S: 60–79%, 4S: 80–89%, 5S: 90–
100%.

In 2022, almost 75% of our key manufacturing facilities achieved a rating of ‘4S’ or better,
which significantly exceeded the original target that we set for 2025 (70% of suppliers rated
4S). This achievement shows the extraordinary efforts made by our supplier partners to
master the requirements of the S-KPI, and the positive impact of the guidelines and training
provided in the two-year lead-up to its launch. Given this outstanding achievement, we have
upgraded our target for the upper band of performance for our suppliers, and now expect 90%
of our strategic Tier 1 suppliers to achieve a minimum of 4S or better by 2025.

Social impact performance rating of strategic supplier factories by S-KPI in

%

Of our key licensees, 100% achieved a Licensee Compliance Rating (‘LCR’) of at least 4S,
and of these, 33% received a rating of 5S. This rating mechanism mirrors that of our S-KPI
applied to manufacturing partners and reflects that these licensees have successfully
demonstrated that they have embedded strong governance systems, supply chain
management, and purchasing practices compliance requirements into their business practices.
Licensees are also assessed on the existence of policies and systems to address stakeholder
engagement, as well as levels of public reporting and communication.

Non-compliances identified in active factories

Our manufacturing partners’ facilities are evaluated against a number of critical compliance
issues. While threshold issues are considered serious but correctable non-compliances that
can be addressed through remedial action within a specified timeframe, zero-tolerance issues
– such as forced labor, child labor practices, or critical life-threatening health, safety, and
environment conditions – immediately trigger a warning and potential disqualification of a
supplier. During the course of each year, we continuously track non-compliances identified
through manufacturing partners’ performance audits, collaboration audits, self-governance
assessments, and, since 2020, SLCP assessments. We follow up on all non-compliances and
require our manufacturing partners to remediate these findings within a specified timeframe.
The identified issues in 2022 remained largely the same as those reported in 2021.

 Labor: Besides identifying non-compliances with the Workplace Standards, our

social compliance team focuses on the use and effectiveness of the facilities’ HR
management systems, including any gaps in policies and procedures, related to
specific risk areas, such as forced labor, child labor, freedom of association, or
discrimination. As a result, the percentages shown indicate the systemic shortcomings
of active facilities, where corrective action is required to reduce potential risks, rather
than the confirmed presence of a specific case of non-compliance or breach, which
requires remediation.

Shortcomings in the area of labor identified during audits in 2022

1 ‘Other’ includes, for example, overtime/holiday rate and other benefits/allowances.

2 ‘No standardized filing’ indicates a factory does not keep relevant information/documents
and records that demonstrate compliance with laws and regulations.

 Health and safety: Fire, electrical, and machine safety are critical areas for existing
manufacturing facilities, and together they accounted for more than 30% of the non-
compliances identified in 2022. The way chemicals were stored and used, including
the handling of hazardous chemicals, accounted for 10% of non-compliance findings
reported. A further 9% of the findings related to management systems, policies, and
procedures, and specifically a lack of compliance with our Workplace Standards and
expectation for effective occupational health and safety systems, including the
recruitment and retention of qualified safety staff.

Shortcomings in the area of health and safety identified during audits in 2022

1 ‘Other’ includes, for example, material storage, housekeeping, or waste management.

Remediation of shortcomings

We follow up on all cases of non-compliance and require our manufacturing partners to

remediate open issues within a specified timeframe. For the period 2019 through June 2022,
93% of the threshold issues identified in our monitoring assessments were found to be fully
remediated. A small percentage of issues identified over this period remain open, the majority
of which were found during assessments conducted in 2021 and in the first half of 2022.
While in many cases the actual issues will have been resolved, our approach is to only ‘close’
these in our systems when we have verified evidence of completion and established that
corrective actions taken are sustainable and sufficient to avoid reoccurrence.

Independent FLA audits

The FLA has assessed the supply chain of its member brands by utilizing a variety of
monitoring models (e.g., in-person, virtual, or a hybrid approach of both in-person/virtual),
despite the ongoing challenges posed by covid-19. This resulted in adidas receiving four
‘Sustainable Compliance Initiative’ (‘SCI’) Assessments from the FLA in 2022. In addition
to manufacturing facility monitoring, the FLA focused its efforts on more areas, including
enhancing virtual monitoring methodology, issuing specific country-related and topical
guidance, supply chain mapping, grievance mechanisms, revising its third-party complaint
mechanism, developing responsible termination guidelines, and continuing its work to
measure and mitigate impacts of covid-19 on the industry’s supply chain.

Enforcement

Warning letters are an essential part of our enforcement efforts and are triggered when we
find ongoing serious non-compliance issues that need to be addressed by our manufacturing
partners’ facilities. We work closely with our manufacturing partners to help them improve
their performance. However, where we face situations of severe or repeated non-compliances,
which cannot be resolved, we do terminate business relationships with facilities. When
making such a decision, we always seek to balance the adverse impacts arising from the
unresolved non-compliances against the wider effects that a business termination can have on
the rights and interests of the workers, especially if this triggers layoffs. In such
circumstances, we may extend timelines to ensure a responsible exit is achieved.

 Warning letters: In 2022, our close engagement with our manufacturing partners’
facilities has helped reduce the number of active warning letters to six (2021: 13)
across five countries. Compared to the previous year, the overall number of active
first-warning letters decreased significantly, from eleven in 2021 to six in 2022; the
total number of second warnings even decreased to zero in 2022 (2021: 2).
Manufacturing facilities that receive second-warning letters are only one step away
from being notified of possible termination of the manufacturing agreement and are
subject to focused monitoring by our team. No third-warning letters (which result in
business terminations) were issued to our manufacturing partners in 2022 (2021: 0).
 Terminations: In 2022, there were no instances in which a supplier agreement was
terminated for social compliance reasons (2021: 1).

1 Wage data for 2020 was collected in 2021 and 2022 and is self-reported by suppliers. The
data presented here was collected in 2021 and covers 62% of our strategic factories in the
three countries. We are planning to report data collected in 2022 in the next reporting cycle.

2 An applicable FLA Country Average is currently only available by country, and not for
each applicable minimum wage group and/or region for countries with multiple minimum
wage requirements.

3 A 2020 GLWC benchmark is only available for Vietnam. The GLWC published its first
reference value in 2021; it will be used in future benchmarking, and as more GLWC
benchmarks become available, they will be incorporated into our analysis and reporting.

4 Average of all 2020 wage data collected in Cambodia through FLA Fair Compensation
Dashboard as of July 2022.
5 Independent supplier facilities refer to individual Tier 1 facilities (factories) of our
manufacturing partners that adidas has a manufacturing agreement with, and their Tier 1
subcontractor facilities, excluding own factories and licensee facilities. Facilities that work
with our licensees are reported separately. Some of these facilities may produce both for
adidas directly and for licensees.

6 Including social and environmental assessments, excluding ZDHC wastewater assessments.

Targets – results – outlook

2022 Results
2022 Targets1,2 2023 Outlook
(vs. prior year)2
2022 Results
2022 Targets1,2 2023 Outlook
(vs. prior year)2
to increase at a
Currency-neutral sales rate to decline at a high-
1%
development between 11% single-digit rate
and 13%
to increase to a
level of 47.3%
Gross margin
between 51.5% (3.4pp)
and 52.0%
to increase to a
Operating margin/operating level of 3.0% operating loss of €
profit/loss between 10.5% (6.4pp) 700 million
and 11.0%
to increase to a
level of
Net income from continuing between € 1,800 254
operations (€ in millions) million (83%)
and € 1,900
million
to decrease to a to reach a level of
Average operating working 24.0%
level between 25% and
capital in % of net sales 4.0pp
below 20% 26%
to increase to a
Capital expenditure (€ in level of to reach a level of
3 695
millions) up to € 900 around € 600 million
million
1 As published on March 9, 2022; the outlook was updated over the course of the year.
Figures reflect continuing operations as a result of the reclassification of the Reebok
2
business to discontinued operations.
3 Excluding acquisitions and leases.