October 01, 2014

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Creating Sustainable Apparel Value Chains: Fostering Total Resource Productivity and (Impact) Investing

"Social compliance has become a threshold requirement to doing business; you simply cannot compete without it."

Impact-economy-series-authors

By Maximilian Martin & William Burckart

Part of the Creating Sustainable Apparel Value Chains series

Myanmar’s readymade garment industry is currently tiny when compared to that of neighboring Bangladesh. The former’s 350 garment factories currently in operation are minute in comparison to the latter’s 5,600. The industry in Myanmar earned 917 million dollars in 2012, up from 770 million dollars in 2011. What’s more, exports are now projected to rise fast following the recent lifting of sanctions that had held back the country’s textile and garment industry.

The Levers of Industry Transformation

Written by the co-author of this post, Dr. Maximilian Martin, Creating Sustainable Apparel Value Chains focuses on the Gordian knot question: how can an adherence to social and environmental standards be reconciled with international competitiveness? This dilemma facing Myanmar today is surprisingly similar to that of other emerging market Gordian knotsourcing locations.

The report provides a response in the context of a number of trends that are changing value creation in the industry, such as the rise of fast fashion, the impact of the emerging circular economy, and the rise of the Asian market. It also identifies a number of key levers that could make a disproportionately positive contribution (relative to resources and efforts deployed) if “pulled”—catalyzing industry transformation in the process. These include:

1. Recognize that competitiveness and social and environmental performance are neither mutually exclusive nor a zero-sum game.

A respondent to the Impact Economy survey for the report offered:

“Social compliance has become a threshold requirement to doing business; you simply cannot compete without it. Therefore, there is no trade-off—social compliance is necessary [for] success.”

The challenge now is to achieve this new standard of practice, and to secure the capital needed in order to do so. The solution can be found in next-gen manufacturing.

A redesign of production processes paired with better infrastructure and training can save up to 20 percent of chemical inputs, up to 40 percent of energy, and up to 50 percent of water. This is the economic rationale for building humane working conditions and an improved environmental footprint. The savings opportunity in water provides an illustration: because water usage may not carry a cash cost in many production locations (and it is often not even metered), incentives are needed to make progress with this part of the equation. From an investor perspective, the cash cost of water can serve as the business rationale for deploying capital, and the case for water savings will only strengthen as water scarcity becomes increasingly accentuated around the world. However, energy and chemicals both pollute and cost money today.

2. Chemicals are the 800-pound gorilla of worker health and safety—and redesign of production processes allows for considerable savings.

The apparel supply chain is very resource intensive. This is particularly true of chemical inputs, which account for approximately 25 percent of globally manufactured chemical usage, according to Greenpeace. Between 100 and 1,000 grams of chemicals are used to produce one kilogram of fabric. Exposure to chemical substances in textile products may result in considerable negative health outcomes, ranging from acute poisoning tonewly-dyed-fabric-garment-factory long-term consequences such as cancer.

The short timeframe inherent to producing fast fashion (i.e., only about 14 days for a fast fashion retailer like Inditex/Zara) means then that there is no time to systematically test the end product. Researchers found that the residue of a variety of hazardous chemicals was present in clothing made by 20 global fashion brands. But the use of chemicals in the production process can be improved. Selecting the least hazardous chemical inputs, rather than focusing on testing the output products, provides one possibility for advancement.

Also, after offshoring to emerging markets, workers are typically trained insufficiently in how to work with hazardous chemicals and often lack adequate protection. An important step: better training for workers.

Process optimizations like these can reduce the amount required to manufacture a given product, often generating savings of up to 20 percent.

3. (Impact) investing can be used to make critically needed upgrades to industry infrastructure.

Basic tactics such as replacing old energy intensive looms and installing advanced LED lights cut energy usage, maintenance costs and reduce emissions while improving visibility and worker safety—with costs of the LED lights often covered from the savings in avoided electricity costs within 36 to 72 months. Capital is needed for this kind of upgrading though, and local capital markets face major limitations.

The report’s good news, however, is that the cost of capital can be covered by impact investing that seeks to improve social and environmental conditions while also enabling producers to save money and investors to make returns.

For example, CDC, a U.K. development finance institution, and Brummer & Partners AB, a leading Swedish hedge fund group entered into an investment partnership where the former invested $10 million (along with a number of other investors) into the first Bangladesh-focused private equity fund launched in 2008, providing growth capital to firms in the country’s export, agriculture, health, education, IT and services sectors. Ananta Apparels Limited is one of the firms that received a $1 million investment to build a new production facility that meets world-class standards in lean manufacturing and social and environmental performance.

The report also emphasizes that to achieve a sustainable future for the industry, we can and need to move garment-factory-Bangladeshin scale.

In Myanmar, investment will be key to making this shift happen. A respondent to the Impact Economy survey put it well:

“If a country like Bangladesh could both be a low cost provider and a transparent, ethical one, it would be unstoppable.”

Using (impact) investing to improve manufacturing by reducing chemicals, energy and water inputs could provide the economic basis. In our next post, we will cover other key additional levers that (i.e., improving working conditions and replicating the best practices of leading players) are going to be critical to achieve the necessary leap forward toward sustainable value chains in the apparel industry.

More about the Creating Sustainable Apparel Value Chains series: 

  • Part I: Transforming the Industry. We need a new model for creating sustainable value chains if we are going to transform the apparel industry. Impact Economy's Dr. Maximilian Martin and William Burckart introduce a new series on Talkback
  • Part II: Fostering Total Resource Productivity and (Impact) Investing. Part II of a new series on creating sustainable apparel value chains introduces the need to foster total resource productivity and increase transparency across the entire supply chain, as well as upgrade industry infrastructure by (impact) investing.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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