By Simon Turner
ESG risk mitigation strategies are becoming high priority management issues for global apparel companies. Leading management teams in the apparel sector are embracing ESG issues such as water and air pollution management in their manufacturing operations. It’s a risk management strategy as investment and consumer worlds increasingly focus on ESG issues. But it’s also a competitive advantage strategy: firms with poor sustainability ratings are losing out to those which proactively take on ESGchallenges. Let’s explore some of the reasons.
Environmental risks of apparel manufacturing are becoming better understood
The environmental risks created by the apparel sector’s manufacturing operations have always impacted costs and reputation. Even though the $3 trillion industry represents 2% of the global economy, it is believed to be responsible for 10% of greenhouse gas emissions and 20$ of wastewater. The associated business risks have been rising in public awareness in recent years. This is largely due to the fact that the availability and quality of ESG data explaining these issues is increasing in response to investors’ and consumers’ growing demand for more ESG transparency. This growing awareness explains to some extent why these issues have become a high priority for management teams in the sector.
This growing awareness is also leading to a more holistic view of management responsibility for impact on the environment. In the past, some apparel companies distanced themselves from manufacturing environmental risks such as water and air pollution for the simple reason they were working with contractors in low-cost countries. However, the sector’s ESG leaders are now working more closely with their suppliers to engage in and help manage the required risk mitigation. This shift in management mindset encompasses better monitoring and auditing of suppliers to ensure that environmental risks are being effectively addressed. The argument that apparel management teams aren’t responsible for the environmental risks within their supply chain is no longer acceptable to most investors and consumers.
Labor risks in manufacturing operations are now a prominent ESG issue
The treatment of workers across an apparel company’s manufacturing operations is another of the more prominent ESG issues on which financial markets, consumers, and regulators focus. Long gone are the days when an apparel company could exploit cheap labor in poor working conditions without taking ownership for the human and social risks involved. However, most apparel companies continue to contract with suppliers in lower cost countries to reduce costs of production. As a result, many apparel companies remain exposed to significant labor-related ESG risks such as employee health and safety, employment of children, forced employment, and fair pay issues. ESG leaders in the apparel sector are mitigating these risks by working more closely with their suppliers to ensure appropriate labor management standards are and by more closely monitoring their contractors.
Dangerous substance risk remains a significant manufacturing risk
After well-publicized incidents involving harmful chemicals and substances in the apparel sector, regulators and investors are also focused on reducing these risks in apparel manufacturing. In particular, substances which are carcinogenic create the heightened risk of health issues and subsequent lawsuits from consumers and workers. Strategies such as being more involved in the management of eliminating banned substances from the supply chain, and being more engaged in the design and manufacturing phases can mitigate these risks.
The risks associated with raw materials sourcing are on the rise
Raw material sourcing is also a high priority ESG issue. Apparel companies source their materials from a range of countries, often from regions where it’s challenging to gauge the sustainability of supply. The key materials most apparel companies need to source include cotton, wool, rubber, and leather. These materials are increasingly exposed to environmental risks such as climate change, resource scarcity, and land use pressures, so it’s a significant manufacturing risk. Strategies such as using sustainability certification standards when available, working more closely with suppliers, requesting better raw material transparency, and using alternative sustainable materials can be applied to mitigate this risk.
Best in class manufacturing is key to ESG excellence
Leaders in the apparel sector are taking urgent ESG action in their manufacturing operations. Investors and consumers are voting with their feet by veering away from apparel brands associated with ESG controversies and low manufacturing standards. Conversely, the apparel manufacturers who are taking sustainable action are being rewarded by ESG-aware investors. So addressing ESG issues as manufacturing priorities are linked to a company’s reputation, costs, and growth prospects. It’s becoming a no-brainer, therefore, for apparel management teams to prioritize ESG issues through the best-in-class management strategies.
At Global Imprint, we’re here to help you make sense of the ever-evolving ESG landscape. Reach out to our team to set up an introductory call or complete our ESG Readiness Survey to get your ESG baseline.