Responsible Investment

Is the circular economy treading water?

Goal: Identify and promote best practice of natural resource management in the textile sector
February 2018

Liat Piazza

Associate, Analyst, Governance and Sustainable Investment

LEARN MORE ABOUT THE AUTHOR
Share
Subscribe to our Insights

Risk Disclaimer

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

 

As always investment values may fall as well as rise and capital is at risk.

Goal: Identify and promote best practice of natural resource management in the textile sector

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 and 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 economic model i.e. make, use and 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 maximise the use of raw materials and natural resources 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 fibres used. Leather is widely used in the luxury and footwear segments of the sector, 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 consequently create 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 litres 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 one of the top 10 most toxic polluters
  • In China the leather industry is one of 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

  • Five 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 material3

 
Garment manufacturing

  • Water heavily used in production process e.g. during fabric dyeing
  • Water pollution from garment manufacturing comprises 20% of industrial water pollution
  • Five trillion litres of water used in fabric dyeing a year4

 
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 fibre producer that is working on a range of “specialty fibres”, such as Refibra, which is made out of cotton scraps from factories. In addition, Dyecoo has developed and supplied 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 a 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 incentivise 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 research, development 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, into new products.
  • Repair services aimed at extending the useful life of garments whilst giving brands the image of quality and durability.

 
We reached out to 19 apparel companies requesting 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, written responses from two companies and no response from the remaining five. 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, small scale recycling of waste at manufacturing sites, and research projects. Many companies have also launched or are piloting garment takeback schemes where consumers can bring old and 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 clearly 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 with 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 with have implemented leading risk management practices, including identification of key raw materials, development of a sustainable sourcing policy for these, targets and implementation programmes 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.

Case Study – Hennes and Mauritz Background

The Swedish clothing brand is considered an industry leader for implementing sustainable business practices, and particularly for implementing a circular economy business model. The company has a take-back system whereby consumers have the opportunity to dispose of their old garments from any brand. Whilst the garments that are still in a good condition are either donated to charity or re-sold as vintage products, other garments are turned into scraps to be used in the manufacturing process, or used for fibre to fibre recycling. We were, however, disappointed to discover that a small percentage of these clothes along with some unsold garments are incinerated. We encouraged the company to work on initiatives in order to reduce this, such as designing clothing with a higher recyclable life to make better use of the fibres in unsold garments as well as those brought back through take-back schemes. Despite its robust commitment on sustainability issues, the company, like most of its peers, has a long way to go to implement circular economy processes that would reduce its own supply chain waste, capitalise on its own waste to produce garments from recycled materials, and innovate its products to scale up the use of recycled content.
 

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, 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 organisations 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.

 

All information is at February 2018 unless otherwise stated.

This marketing communication should not be regarded as investment research. The content has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

1 WWF
2 China Water Risk, WWF, CDP

3 WWF
4 WRI

Risk Disclaimer

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

 

As always investment values may fall as well as rise and capital is at risk.

Use our handy glossary to look up any technical jargon you are unfamiliar with.

Related capability

Responsible Investing