Environmental, Social, and Governance (ESG) criteria play a crucial role for investors in evaluating a company’s performance. These parameters delve into various aspects, including the environmental impact of the company, efforts taken to mitigate it, social considerations such as labour welfare and consumer relations, and governance practices, which involve transparency in decision-making and overall management.
Considering the global push towards sustainability, individual countries must adopt ESG norms. The textile sector, being a significant player in global industries, stands to benefit significantly from incorporating ESG principles. Hence, it is essential to examine why the textile sector specifically needs to adhere to these norms.
ESG scores, reflecting a company’s commitment to environmental responsibility, social welfare, and transparent governance, have broader implications for the economy. Companies with high ESG scores often attract more investment, as investors increasingly prioritise sustainable and socially responsible practices. This, in turn, influences policy support, as governments may be inclined to endorse and promote industries that align with ESG principles.
Moreover, ESG compliance can have a profound impact on trade competitiveness. In a world where consumers are becoming more conscious of the ethical and sustainable dimensions of products, companies that align with ESG standards gain a competitive edge in the global market. Likewise, businesses that prioritise environmental conservation, social responsibility, and ethical governance are likely to secure better trade opportunities and partnerships.
Need to go clean and green
In the textile industry, adherence to ESG norms holds paramount importance, considering their comprehensive coverage of sustainability factors such as transparency, welfare, and resource conservation. Given the industry’s significant contribution to water and land pollution, compliance with ESG norms becomes crucial. ESG scores, serving as a vital assessment tool, gauge a company’s commitment to sustainable practices.
Globally, several countries have experienced an increase in their ESG scores due to policies aligning with environmental conservation. However, major textile economies have witnessed a decline in their scores, especially with the introduction of stringent laws by entities like the EU. As these countries impose rigorous regulations, exporting nations must ensure compliance with these laws.
In a global comparison, India appears to be in a favourable position and has the potential to align itself with major economies like the US and the EU. Notably, the Securities and Exchange Board of India (SEBI) took a significant step by introducing the Business Responsibility and Sustainability Report (BRSR) in 2021. This initiative mandated companies to report on environmental policies and provide necessary disclosures related to governance and other perspectives.
The BRSR encompasses a series of questions covering all aspects of a company’s environmental, sustainability, and governance practices, providing a comprehensive insight into its operations. By implementing such reporting mechanisms, India is taking strides towards enhancing transparency, promoting sustainability, and aligning with global ESG standards.
Figure 1: ESG scores of major textile-exporting countries
Source: TexPro
In 2022, India’s ESG score reduced compared to 2021. Except for Sri Lanka, all the nations saw a reduction in their ESG scores. Any change in the ESG scores indicates increasing growth in the country, a higher pace of development, and robust GDP growth, as it demonstrates the country’s preference for long-term value creation over short-term gains. Therefore, adherence to ESG norms and achieving a good ESG score will ensure long-term development and sustained growth for the country.
An aid to consistent trade growth
Sustainable development has taken centre stage across the globe, and transparency and traceability have now been mandated across the textile supply chain. The ESG scores of the companies will matter as many countries like the EU implement the laws to enforce sustainability across the value chains and apply that to international trade as well.
Apart from the ESG norms and scores, the EU and the US have already been strictly regulating their textile imports—using regulations like REACH1 and CPSIA2—ensuring that they are more in line with the environmental and safety norms. As ESG points out to the more qualitative aspects of the industry, aspects like ethical manufacturing and environmentally sustainable production, the CSR activities will take centre stage in the near future.
A very recent and relevant example is China. The US banned any apparel made from Xinjiang cotton from entering the country, due to allegations of using forced labour. Thus, it is not just about the environment, but also the importance of ethical manufacturing across the value chain. Consequently, as an increasing number of companies adhere to ESG norms and achieve high scores on the metre, both bilateral and multilateral trade will become less burdensome, with consumers in the importing nation placing greater trust in its imports.
India on ESG
On examining the adherence to ESG norms within the Indian textile industry, the findings appear somewhat promising. A Fibre2Fashion (F2F) analysis, which evaluated 34 firms across the textile value chain, revealed that 44 per cent of these companies received a below-average rating in terms of ESG compliance. Meanwhile, 50 per cent of the companies were assessed as having an adequate rating, and a mere 5 per cent achieved strong ratings.
Figure 2: ESG score range for Indian textile companies across different categories
Source: CRISIL ESG Report 2022 and F2F analysis
Although the current situation may seem dismal, this also gives a ray of hope for the industry. With the scores being elaborate, one thing is for sure that the Indian companies need to work on strengthening the environmental norms and strict compliance to the same, as the score range is between 21 and 55 – lower than the governance and the social norms. As there will be policy mandates highlighting proper compliance and disclosure norms, the textile industry will certainly move a step further towards sustainability. For a developing country like India, having an overall ESG score for the textile companies in the range of 34 to 64 still holds a promise – work if done properly, can do wonders. In fact, this offers the industry a chance to not only fulfil regulatory obligations but also to make a significant contribution to sustainable practices and long-term environmental and social accountability.
Figure 3: ESG scores for different Indian Textile Companies
Source: CRISIL report on ESG scores 2022 and F2F Analysis
Opportunity to make India a sustainable community
In today’s globalised world, where trade holds the key to a country’s growth, more abstract factors like labour welfare, environmentally responsible production, and the decision-making of the companies of the exporting countries hold more importance as it shows how responsible a country is in following the sustainability norms. As consumers become more aware of the sustainability norms and the importance of traceability across the value chain, the ESG scores of the companies become instrumental.
India and International Trade
Markets like the EU and the US, which import substantial amounts of textiles and apparel, are of much importance for India. India exports not only apparel but also other textile materials to these countries including handcrafts and handloom products. As the EU implements its Carbon Border Adjustment Mechanism (CABM) as a part of the European Green Deal, the ESG scores will play an instrumental role as it revises all of the major sustainability norms for the textile industry. Along with the products having a digital passport which enables one to trace the entire value chain, having a good ESG score is like the cherry on top.
India’s trade with the EU is estimated to increase as a potential FTA is being negotiated. With the trade deal potentially looking at reducing the tariff on the Indian textiles, the implementation of the ESG norms or even a slight willingness if shown from the government’s side to implement the same can increase the trust, thus helping to maintain and also boost the trade at the same time. And the government is taking positive steps towards ensuring that the textile industry adapts to the sustainability and the social standards that are required.
Figure 4: Textile Exports of India to EU
Source: ITC Trade map
Getting back the competitive edge
India’s competitors had the advantage of being included in the GSP3 regime, which increased the competitiveness of their exports. However, Bangladesh getting an upgrade on its economic status, and lying behind in the ESG scores too can play an important role in distinguishing the country as a trusted exporter. Vietnam, on the other hand, is also one of the major exporters to the EU, due to its free trade agreement signed with the EU. However, according to an RCA4 analysis done between Vietnam and India, both have a competitive edge, but India has a higher advantage even in the absence of an FTA. So, the time is ripe for the country and its government to buckle up and implement the necessary polices and negotiate a successful FTA for India.
Figure 5: RCA in textile exports of India and Vietnam
Source: ITC Trade map, F2F Analysis
Next step
As the European Union rolls out its Green Deal mechanism, India’s Ministry of Textiles has put forth a proposal to establish an ESG committee, solidifying its commitment to achieving sustainability goals. With India targeting a $100 billion milestone in textile exports, the significance of ESG certifications has become paramount. The ESG committee will oversee the sustainability certifications of companies and conduct studies on effective methods for processing textile waste.
As India intensifies its efforts to integrate sustainability into manufacturing and exports, the greater is the likelihood of the country rejuvenating its image as a reliable exporter and environmentally conscious manufacturer.
Note:
ALCHEMPro News Desk (KL)
Receive daily prices and market insights straight to your inbox. Subscribe to AlchemPro Weekly!
marketing@alchempro.com
