DEEP DIVE: Supply Chain Sustainability: A Strategic Priority for Apparel Retailers and Brands

Transcription

1 DEEP DIVE: Supply Chain Sustainability: A Strategic Priority for Apparel Retailers and Brands 1) An environmentally sustainable supply chain is particularly important for the fashion industry, as apparel manufacturers make intensive use of resources, chemicals and energy and often operate a global supply chain, both of which can have a big impact on the environment. 2) Companies benefit from having an environmentally sustainable supply chain, as it helps them reduce costs, manage risks and improve corporate image, ultimately leading to a stronger bottom line. 3) Apparel companies can achieve an environmentally sustainable supply chain by adopting initiatives in green manufacturing, distribution and retailing, such as using ecomaterials for production and encouraging the recycling of used clothes in stores. 4) Most of the main players in the apparel industry have already adopted initiatives aimed at improving the environmental sustainability of their supply chains. DEBORAH WEINSWIG Managing Director, Fung Global Retail & Technology deborahweinswig@fung1937.com US: HK: C N:

2 CONTENTS EXECUTIVE SUMMARY... 3 WHY SUPPLY CHAIN SUSTAINABILITY MATTERS IN APPAREL... 4 HOW A SUSTAINABLE SUPPLY CHAIN WORKS... 7 HOW MAJOR APPAREL NAMES ARE APPROACHING ENVIRONMENTAL SUSTAINABILITY... 8 HOW LI & FUNG IS APPROACHING ENVIRONMENTAL SUSTAINABILITY ENVIRONMENTAL SUSTAINABILITY IS A PRIORITY TODAY

3 Apparel companies can create a supply chain that delivers speed to market to meet demand for fast fashion and is also sustainable. EXECUTIVE SUMMARY The apparel industry is confronted with two apparently conflicting consumer expectations: fast fashion and environmentally friendly clothing. Thankfully, apparel companies can indeed create a supply chain that delivers speed to market to meet demand for fast fashion and is also sustainable. Investing in an environmentally sustainable supply chain helps retailers manage the risk of disruptions that can weigh negatively on the speed of the supply chain. Moreover, sustainability initiatives can reduce costs and improve corporate image, ultimately leading to greater profitability. Source: Shutterstock This report shows why a sustainable supply chain is important for apparel companies today, how it can be achieved and what initiatives major apparel firms are undertaking to make their supply chains more sustainable. In particular, the report illustrates: The environmental impact of apparel manufacturing: about 3% of global CO2 emissions are produced by clothing manufacturers, according to The Carbon Trust. How companies can benefit from a sustainable supply chain: 33% of suppliers of leading companies had achieved cost savings linked to emissions-reduction programs, according to a 2016 study published by the nonprofit group CDP. The main components of a sustainable supply chain: examples include the use of organic fabrics and recycled materials, use of efficient transportation modes and offering customers recycling services in stores. The supply chain sustainability initiatives of major industry players: for example, H&M increased the use of energy from renewable sources for its operations to 78% of its total energy usage in Li & Fung, a leading global sourcing company and supply chain manager and a sister company to Fung Global Retail & Technology, is among those undertaking sustainability initiatives. Between 2014 and 2015 the group reduced its energy consumption intensity by 13% and its greenhouse gas emissions intensity by 15%, while improving its water resource efficiency by 12%. 3

4 Sustainability is particularly important for the fashion industry, as apparel manufacturing can have a significant impact on the environment. WHY SUPPLY CHAIN SUSTAINABILITY MATTERS IN APPAREL Supply chain sustainability is the management of the lifecycle of goods and services to minimize the impact of their production, distribution and consumption on the environment in which the value chain operates. Sustainability is particularly important for the fashion industry, as apparel manufacturing can have a significant impact on the environment, given its intensive use of resources, chemicals and energy. Moreover, the apparel industry often operates a global supply chain, with parts of the production outsourced, under heavy cost pressure, to operators in countries where environmental regulations tend to be less restrictive than in more mature markets. Source: shutterstock A supply chain that ensures speed to market has become crucial for the apparel industry, as a culture of faster apparel consumption has emerged in most markets, prompted by the surge of fast-fashion retailers such as Zara, H&M and Forever 21. The importance of speed to market is discussed in detail in our report Speed-to-Market Differentiate and Coordinate: How to Achieve that Crucial Advantage. Despite the need for a fast and cost-effective supply chain, companies cannot compromise with regard to the impact of their operations on the environment. In today s connected world, information travels fast and corporate accountability is expected. Cutting corners in terms of environmental sustainability not only risks damaging the image of the company, but can also increase the risk of disruptions along the supply chain. These can weigh negatively on speed to market and can be harmful to a company s profitability, as the costs of environmental damage can be detrimental to the bottom line. 4

5 IMPACT OF THE APPAREL INDUSTRY ON THE ENVIRONMENT Apparel manufacturing and its product lifecycle weigh on the environment as a result of the production of waste and pollution and of the consumption of natural resources and energy. Waste: Particularly with the rise of fast fashion, waste has become a concern for the fashion industry. Only 20% of textiles are recycled globally each year, according to textile-recycling firm Soex. In the UK alone, about 2 million metric tons of textiles are discarded each year, but only 16% of that is reused, according to nonprofit organization Fashion Revolution. The organization estimates that 5% 25% of a textile mill s yearly production output can go to waste. Pollution: Nonorganic cotton uses 22.5% of the world s insecticides and 10% of all its pesticides, on 2.5% of the world s agricultural land, according to the nonprofit Pesticide Action Network. A 2012 article published by The Guardian stated that about 20% of industrial water pollution is due to textile manufacturing, which uses about 8,000 synthetic chemicals. The Carbon Trust reports that clothing accounts for around 3% of global production of CO2 emissions. Source: Shutterstock Resources: Apparel is also resource intense. It takes 713 gallons (2,700 liters) of water to produce a cotton shirt, according to WWF (formerly the World Wildlife Fund), an environmental charity organization. In 2014, worldwide consumption of textiles reached about 73 million metric tons, and consumption is expected to grow by 4% per year through 2025, according to Fashion Revolution. Energy: Apparel production entails substantial use of energy, which is needed to power textile mills and, indirectly, to produce the chemicals used in manufacturing. To produce 132 billion pounds (60 billion kilograms) of fabric the estimated annual global textile production in 2008 it is necessary to consume 1,074 billion kilowatt-hours of electricity or 132 million metric tons of coal, according to trade publication Textile World. 5

6 APPAREL CONSUMERS CARE FOR THE ENVIRONMENT Consumers across the globe say that a brand s ethical behavior is among the factors that inform their shopping decisions. According to market research firm Nielsen, 55% of online consumers across 60 countries say they are willing to pay more for products and services provided by companies that are committed to having a positive social and environmental impact. In apparel, environmental considerations are the ones that matter most to consumers. According to a survey conducted by marketing research firm Bellomy, US consumers rate environmental friendliness of the manufacturer as the most important ethical factor for when buying a pair of jeans. Source: Shutterstock SUSTAINABILITY IS GOOD FOR THE BOTTOM LINE A sustainable supply chain does not just help achieve corporate social responsibility goals and preserve the environment for future generations; it also makes financial sense. A sustainable supply chain does not just help a company achieve corporate social responsibility goals and preserve the environment for future generations. It also makes financial sense in terms of: Cost reduction: By investing in a more efficient supply chain, companies can reduce costs. Since minimizing impact on the environment is a key aspect of supply chain sustainability, investing in technologies that optimize energy use, material inputs and transportation resources can help companies cut overall costs and create value in the long run. The Global Supply Chain Report , published by the nonprofit CDP (formerly known as the Carbon Disclosure Project), assessed the climate change actions of 3,396 suppliers of 66 leading global companies, and found that 33% of suppliers had achieved cost savings linked to emission reduction programs. Risk management: A sustainable supply chain can minimize the incidence of environmental issues by making a company s operations less prone to disruptions caused by environmental 6

7 problems. The environmental risk reduction implied in supply chain sustainability also means that the reputation of a company and the value of a brand are less likely to be damaged. Compliance with environmental laws and regulations diminishes the risk of being sanctioned by authorities and can enable a company to attract tax and investment incentives from governments, according to the Sustainable Supply Chain Foundation. Positive image: A sustainable supply chain helps enhance a company s image. Many consumers value sustainable products, and are willing to pay extra to buy them. Moreover, shareholders may perceive companies with sustainable supply chains as safer, as environmental practices can reflect positively on the risk profile of their investment. Ethically minded investors also tend to be attracted to companies that have a sustainable supply chain, according to the Sustainable Supply Chain Foundation. Figure 1. Benefits of a Sustainable Supply Chain Reduced Costs Beher Risk Management Improved Company Image Improved Bottom Line Source: Fung Global Retail & Technology Sustainability is achieved by introducing environmentally conscious practices throughout the supply chain. HOW A SUSTAINABLE SUPPLY CHAIN WORKS Sustainability is achieved by introducing environmentally conscious practices throughout the supply chain. In 2014, author Bin Shen identified key practices in the academic journal Sustainability. Based on this, we note the following phases of an environmentally sustainable supply chain: Green manufacturing: Sustainable production can entail the use of ecomaterials such as organic fabrics and recycled materials such as old clothes, manufacturing scraps and plastic bottles. Organic cotton, for instance, requires not only fewer chemicals to process than conventional fabrics do, but also less water. After one or two rotation cycles, organic crops improve the quality of the soil, making it more efficient in retaining water and more resistant to drought conditions, according to the Soil Association and the Global Organic Textile Standard. Green distribution: Companies can limit the impact of distribution on the environment by adopting pollution abatement technologies and efficient transportation modes, and by using onshoring or nearshoring for categories that are more sensitive to short-lived fashion trends. 7

8 Green retailing: This incorporates initiatives that promote environmental sustainability in stores. For example, green marketing campaigns might target ethically minded consumers and communicate how the retailer s products are sustainable. Other initiatives include offering customers recycling services in stores. Figure 2. Stages of the Environmentally Sustainable Supply Chain Green Manufacturing Use of Eco-Materials Use of Recycled Materials Green Distribulon Efficient Transportalon Nearshoring Green Retailing Green Markelng Recycling Facililes Source: Sustainability/Fung Global Retail & Technology Most of the major apparel manufacturers and retailers are working to make their supply chains more environmentally sustainable. HOW MAJOR APPAREL NAMES ARE APPROACHING ENVIRONMENTAL SUSTAINABILITY Most of the major apparel manufacturers and retailers are working to make their supply chains more environmentally sustainable. The table below shows the main sustainability initiatives of selected companies as detailed in their latest company reports. Figure 3. Selected Apparel Companies Environmental Sustainability Initiatives Nike Adidas SUSTAINABILITY INITIATIVES Nike is eliminating waste through more efficient design and manufacturing; 54 million pounds of factory scrap was transformed into premium materials for Nike apparel and footwear in fiscal year Since the launch of Nike s Energy and Carbon program in 2008, the company s footwear contract manufacturers have cut their energy use per unit in half. The company reduced water use by 18% per unit in apparel materials and by 43% per unit in footwear manufacturing. Nike is working toward exploring and testing new chemistries and setting and implementing standards for chemicals used throughout manufacturing. Since its start in 2008, Adidas s Green Company program has driven continuous improvements in important environmental projects. Adidas currently ranks third among the Global 100 Most Sustainable Corporations worldwide, according to the Global 100 Index. The company has achieved water savings per employee of 28%, a 28% reduction in household waste volume per employee and a 30% reduction in carbon emissions per square meter. 8

9 Inditex H&M Gap VF Corporation PVH Corporation Fast Retailing (Uniqlo) C&A Hanesbrands ASOS Next SUSTAINABILITY INITIATIVES Inditex s Biodiversity Strategy conserves and develops the wealth and diversity of communities in which Inditex has a presence. Since 2007, when the Eco-Efficient Store Manual was published, the company has opened 3,778 eco-efficient stores; more than 54% of its stores were eco-efficient as of fiscal year Inditex s Global Energy Strategy is designed to encourage the rational and efficient use of energy throughout Inditex s business. H&M has massively increased its usage of renewable electricity. As a result, in 2015, 78% of the total electricity used globally by the group came from renewable sources. The company conducted more than 40,000 tests to ensure compliance with strong chemical restrictions. In 2015, H&M reused more than 90 million waste PET bottles to make recycled polyester; the bottles would have gone to landfills otherwise. Gap began reducing its carbon footprint for US operations in 2003, and had reduced it by 33% as of 2015; the company plans to continue its efforts and to reduce its footprint by 50% by In 2011, Gap was a founding member of the Sustainable Apparel Coalition, which brings together retailers, clothing manufacturers, environmental groups and academics to develop a shared vision of sustainability. In 2013, greenhouse gas emissions from direct and indirect emissions totaled 1,449,581 metric tons of CO2; the company reduced this by 3,498 metric tons in one year thanks to emissions and energy reduction initiatives. VF Corporation s new international headquarters in Switzerland uses photovoltaic panels and other methods to benefit from 100% renewable energy. Corporate Responsibility Magazine ranked PVH Corporation as one of the top 100 Best Corporate Citizens for six years in a row. The company increased its recycling rate by 56.52% from 2013 to 2014, and has an average recycling rate of 84% across offices, retail, warehouses and vehicles. Through its All-Product Recycling Initiative, Fast Retailing converts 10% of collected clothing into fuel or fiber (the other 90% is donated to refugee camps). In 2014, the company formulated an environmental policy to clarify its responsibilities for more environmentally conscious operations, encompassing everything from production to recycling. C&A aims to source 100% of its cotton from more sustainable sources that use less water and few or no synthetic pesticides and fertilizers. In 2016, C&A completed its first-ever carbon footprint of the value chain, increased its carbon efficiency by 9% and reduced its total carbon emissions by 1.4% compared to Since 2007, Hanesbrands has reduced its energy use by 25%, its water use by 31% and its carbon emissions by 21%. In 2015, the company derived 25% of its worldwide energy needs from renewable sources, including biomass, hydroelectric, geothermal and wind. Hanesbrands is the only apparel company to ever be honored by Energy Star in the program s 25- year history. ASOS s Environmental Policy contains eight commitments, which include using fewer natural resources and reducing pollution. In December 2013, The Guardian reported that ASOS was the first online retailer to be carbon neutral. Priorities for Next are to improve energy efficiency, minimize waste production and increase the efficiency of is delivery fleet. From 2007 through 2015, the company diverted 91% of operational waste from landfill, reduced its electricity consumption by 30% and reduced its fuel emissions by 16%. Source: Company reports 9

10 HOW LI & FUNG IS APPROACHING ENVIRONMENTAL SUSTAINABILITY Li & Fung describes itself as the leading consumer goods design, development, sourcing and logistics company for major retailers and brands around the world. Along with Fung Global Retail & Technology, it is part of the Fung Group. Li & Fung promotes environmental sustainability in its operations and among its suppliers and customers through the implementation of environmental responsibility programs and global environmental management and data collection systems. Li & Fung describes itself as the leading consumer goods design, development, sourcing and logistics company for major retailers and brands around the world. Source: Li & Fung Li & Fung operations: The company ensures resource efficiency across its operations by measuring resource consumption and emissions. For instance, between 2014 and 2015, Li & Fung reduced its energy consumption intensity by 13% and its greenhouse gas emissions intensity by 15%, while improving its water resource efficiency by 12%. Li & Fung suppliers: Li & Fung promotes responsible sourcing among its suppliers and minimizes environmental impact across the supply chain. This involves sustainable product design, responsible sourcing of raw and recycled materials, environmentally responsible manufacturing, and efficient logistics. Li & Fung expects its suppliers to abide by local environmental legislation, provides technical support on energy and water efficiency and emissions reductions, and facilitates the sharing of best practices across its suppliers. To promote environmental sustainability among its suppliers, Li & Fung is partnering with a number of nongovernmental organizations, industry associations, foundations and academic organizations, including: Business for Social Responsibility and the Fung Academy: These two institutions share guidelines to support factories with regard to effective water and wastewater management to both mitigate risk and identify opportunities for improvement in factories. Sustainable Apparel Coalition: This organization promotes sustainable apparel production. As a founding member, Li & Fung has been actively involved in the development of the Higg Index, a suite of sustainability tools designed to standardize the measurement of environmental performance of apparel products across the supply chain, at the brand, product and facility levels. Business Environment Council of Hong Kong and Environment & Sustainability Committee of the Hong Kong General Chamber of Commerce: Both of these organizations aim to raise awareness of 10

11 environmental issues in Hong Kong, as well as share best practices among companies. Li & Fung provides customers with sustainable design, manufacturing, product and packaging options, and meets customer requests for sustainably sourced materials and products with reduced environmental impact that are created in well-managed factories. Li & Fung customers: Li & Fung provides customers with sustainable design, manufacturing, product and packaging options, and meets customer requests for sustainably sourced materials and products with reduced environmental impact that are created in well-managed factories. In 2015, Li & Fung supported clients in sustainably sourcing the following kinds of materials and products: Garments made of cotton from certified organic sources and sources that meet the Global Organic Textile Standard and the Better Cotton Initiative standard, and garments made by sources that take a holistic approach to sustainable cotton production and/or that have been produced by mills that have joined Cotton LEADS (a program committed to responsible cotton production). Garments comprising recycled yarn, polymers, leather and shearling. Garments that are fur-free or are made from responsibly sourced angora wool or down feathers. Textiles that are independently tested and certified to meet the criteria of the Oeko-Tex Standard 100 system and/or REACH, which is a set of EU regulations on the production and use of chemical substances. Textiles and shoes sourced from suppliers that are phasing out hazardous chemicals in production, for customers committed to Greenpeace s Detox campaign, an initiative promoting toxic-free fashion and clean water. Leather for shoes, wallets, covers and pouches produced from tanneries that are audited against the environmental responsibility practices of the Leather Working Group, an organization that promotes sustainable and appropriate environmental business practices within the leather industry. Source: Shutterstock 11

12 As Li & Fung is a supplier to major global retailers, the trends within the company can be seen as reflecting those within the wider apparel retail sector. The extent of Li & Fung s sustainability efforts suggests that retailers worldwide are placing greater emphasis on more environmentally friendly production methods. In a competitive industry such as apparel, having a sustainable supply chain is becoming a necessity, and most of the main players have already gotten serious about minimizing the impact of their operations on the environment. ENVIRONMENTAL SUSTAINABILITY IS A PRIORITY TODAY A growing body of evidence shows that a sustainable supply chain can be an asset for apparel companies. It can help firms gain a competitive advantage and lead ultimately to a positive impact on profitability. Increasingly, sustainability efforts are moving from being a nice to have element of business to being a must have element: in a competitive industry such as apparel, having a sustainable supply chain is becoming a necessity, and most of the main players have already gotten serious about minimizing the impact of their operations on the environment. Kris Gopalakrishnan, former CEO of business technology consulting firm Infosys, summarized well the importance of sustainability in the supply chain when he said, We live in an increasingly resource-aware and resourceconstrained world. We need to live within our means and not borrow from the future. Vijay Krishnamurthy, Principal Consultant at Infosys, echoed those comments in a blog on the company s site, saying, To build a sustainable tomorrow, we need to make our supply chain sustainable today. In fact, I firmly believe that increased sustainability in the supply chain reduces risks and increases profits for all organizations and stakeholders. Increased sustainability in the supply chain reduces risks and increases profits. Source: Shutterstock 12

13 Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: Hong Kong: China: Filippo Battaini Research Associate HONG KONG: 8 th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: LONDON: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) NEW YORK: 1359 Broadway, 9 th Floor New York, NY Tel: FungGlobalRetailGroup.com 13