Asset Class: Responsible Investing

Is the circular economy treading water?

Summary

  • Demand growth in the textile sector has led to increasing stress on natural resources used in textile production.
  • Apparel companies are under pressure to drive innovation in their manufacturing processes and life-cycle management to mitigate the risk of raw material shortages and rising sourcing and
    production costs.
  • In 2017, we reached out to 19 companies in the sector including fast fashion, luxury, outdoor and sportswear companies to discuss their approaches to managing this risk.
  • Companies are aware that they cannot ignore this issue and are starting to implement initiatives in this area, however, most initiatives are still working on a pilot scheme basis.

Background

The apparel industry is well known for its linear model; make, use, dispose. A circular economy model is an alternative to this whereby attempts are made to keep resources in circulation for as long as possible and yield the maximum value out of each resource. The creation of long lasting garments with recyclable qualities, and having the supporting manufacturing systems in place, is key to implementing a successful circular economy model.

Extensive research has shown that natural resources used in textile production such as land and water are coming under increasing stress. According to the Pulse of the Fashion Industry Report written by the Boston Consulting Group (BCG) and the Global Fashion Agenda (GFA), apparel and footwear consumption will rise from 62 million tons in 2015 to 102 million tons in 2030. The report predicts a 50% increase in water consumption, 63% increase in energy emissions and 63% increase in waste creation from the apparel sector between 2015 and 2030.

With the continued growth in consumption and demand for products, it is likely that textile manufacturers will face increasing raw material shortages and rising sourcing and production costs. These stresses will require innovation in manufacturing processes and life-cycle management. The implementation of a comprehensive circular economy business model will allow brands to maximize the use of raw materials and natural resources used in the manufacturing processes; and importantly, reduce their reliance on new raw materials.

Key raw materials for the sector include cotton, which according to the World Resources Institute (WRI) is the most widely used material in the sector, accounting for 33% of all fibers used. Leather is widely used in the luxury and footwear parts of the industry, and polyester is used in the outdoor wear and sportswear industries. Rubber is also an important raw material for the footwear industry. All these have different environmental impacts and thus challenges that brands need to consider.

Resource requirements and reuse challenges for raw materials and manufacturing

Cotton
Around 3% of water used in agriculture is for growing cotton
Cotton accounts for around 48% of textile production
1kg of cotton requires 20,000 liters of water; this makes roughly one t-shirt and a pair of jeans
Cotton does not retain its quality well when recycled, therefore, it is currently not possible to create products from 100% recycled cotton1

Leather
The leather industry is in the top 10 most toxic polluters
In China, the industry is in the top 20 wastewater dischargers
400 tanneries are within the Ganges river basin in India, and the industry is one of the most polluting with around two-thirds of the wastewater not being treated before returning to the river
Cattle farming is a key driver of deforestation
Leather can be recycled into lower quality leather however it is difficult for leather to retain its quality during the recycling process2

Polyester
5 times more energy intensive to produce than cotton
Made from petroleum, which has a negative environmental impact during the extraction process
Has a long useful life—retains quality when recycled and can be recycled a number of times

Rubber
90% of rubber comes from India, Vietnam, Southern China and Indonesia in some of the most biodiverse forest habitats, home to many endangered species
Growing demand for rubber drives deforestation to serve production of this crop
Rubber can be produced without clearing natural forests, a process that should be encouraged
Rubber is a recyclable material1

Garment manufacturing
Water is heavily used in production process, e.g., during dyeing
Water pollution from garment manufacturing accounts for 20% of industrial water pollution
5 trillion liters of water is used in fabric dyeing each year3

Innovative solutions for apparel companies exist and there are new technologies and businesses emerging to support apparel companies on their journeys to implementing a circular economy business model. For example, Lenzing is an Austrian, man-made fiber producer that is working on a range of “specialty fibers,” such as Refibra, which is made out of cotton scraps from factories. In addition, Dyecoo has developed and supplies water and chemical-free textile dyeing systems to garment manufacturers.

Engagement action

Following research on the challenges associated with key raw materials, we looked to understand what sustainable and innovative materials and processes are being developed. This allowed us to identify a best-practice framework for circular economy:

Risk management

  • Mapping emerging natural resource scarcity in manufacturing processes and the supply chain
  • Raw material scarcity mapping is an important risk assessment for apparel companies in addition to conventional cost mapping exercises
  • Risk mapping is key for companies to have a clear understanding of long-term risks and cost impacts, which in turn can incentivize the development of circular economy solutions

Design phase

  • Re-designing garments to increase their potential for recyclability, such as creating garments from single materials as these are easier to recycle than garments made from a mix of materials and/or focusing on the R&D and innovation of fabrics
  • Ensuring minimal fabric waste at factories

Post sales

  • Take-back schemes that re-use and recycle material from garments that have been brought back in new products
  • Repair services aimed at extending the useful life of garments while giving brands the image of quality and durability

We reached out to 19 apparel companies to request a dialogue on their approach to developing circular economy models that use the best practice elements we had identified.

Findings

Of the 19 companies, we had discussions with 12, two companies provided a written response and five companies were unresponsive. We classified responsive companies as either front-runners, followers or laggards.

Seven of the 14 companies that responded were classified as front-runners. These companies are already actively working on circular economy initiatives such as pilot schemes using recycled materials to make garments, launching sustainable clothing lines, performing small scale recycling of waste at manufacturing sites, and conducting research projects. Many companies have also launched or are piloting garment take-back schemes where consumers can bring old or unwanted garments back to the store and these are either re-sold, donated to charity, recycled or disposed of. Nevertheless, these companies are not yet in a position to clear map out the scalability of these initiatives. We have specifically chosen to classify these companies as “front-runners” and not “leaders,” as despite being the most advanced of the companies we engaged in developing circular economy strategies, they still have a long way to go in implementing comprehensive circular business models that would reduce their reliance on natural resources and increase control of volatile raw material prices.

Although the “front runners” showed an understanding of the need to implement circular economy models, we have seen little indication as to the eventual objectives and scope of their efforts to inject circular models into their overall business. Our engagement found that the main driver for companies to implement circular models is due to the customer demand for more sustainable products. Our conversations further revealed that many companies are aware of increasing raw material scarcity but have not developed a risk-assessment for sustainable, long-term material sourcing. Only three of the companies we engaged have implemented leading risk management practices, including identification of key raw materials, development of a sustainable sourcing policy for these, targets and implementation programs on sustainable sourcing.

As a result we found that companies were satisfied with small projects such as a sustainable fashion line, as opposed to working on scalable projects to convert business models from a linear one to a circular one.

Three of the companies that responded were classified as “followers.” These companies have started to work on circular economy initiatives but these are still in an early design phase.

And lastly, we classified four of the companies that responded as laggards. These companies are either unwilling to engage on the topic and/or do not show any evidence on working on this through their disclosures.

Conclusion and next steps

The textile sector shows a range of approaches to implementing circular economy business models. The majority of companies have started to work on and trial circular economy opportunities, however, the scalability of these initiatives is still unclear. In addition, despite the majority of companies already working on circular economy initiatives, it became clear during our engagement that companies have not fully considered and understood the rate at which their businesses could begin to be affected by increasing scarcity and price volatility of raw materials, as well as scarcity of natural resources used in the manufacturing process. Developing enhanced risk mapping will be key for the industry to wake up to this eventual challenge, however, the company approaches we have seen to date still fall short in making significant headway in this area.

Circular economy in the apparel industry is a concept being widely spoken about. Investor engagement on this issue is slowly ramping up. In addition, there are a number of organizations addressing circularity questions, including the Sustainable Apparel Coalition, Wrap, Circular Fashion, The Ellen McArthur Foundation, and it was a big topic on the agenda for the Copenhagen Fashion Summit in 2017. More needs to be done, however, to build momentum and encourage apparel companies to develop effective risk-mapping tools in order to inform circular business models.

 

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1WWF
2China Water Risk, WWF, CDP
3WRI
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