Richard Wielechowski, senior analyst of textiles at Planet Tracker, is feeling a bit embarrassed.
He had never thought too deeply about a potential funding asymmetry between different segments of the apparel supply chain. But now that he’s crunched the numbers, it made perfect sense.
“If you think about big institutional investors in the U.S. or Europe, they have certain requirements in terms of liquidity, so mostly their investments are going to flow into big, developed market-listed entities,” Wielechowski told Sourcing Journal of the nonprofit financial think tank’s latest study. “And so when we think about the supply chain of textiles, where do those entities tend to sit? They sit at the retail end of the supply chain.”
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Indeed Wielechowski, a co-author of the report, found a broad schism between Tiers 4, 3 and 2, which comprise textile and raw material production and are generally described as being “upstream,” and Tiers 1 and 0, which focus on garment manufacturing and retail and are typically referred to as being “downstream.” It’s the downstream half, he said, that makes greater use of loan facilities as mostly underwritten by major developed market financial institutions.
The H&M Foundation-funded study found that only four U.S. asset managers—BlackRock, Fidelity, State Street and Vanguard—make up one-fifth of all market capitalization of equity holdings for cut-and-sew production, a.k.a. Tier 1. Conversely, large institutional investors and asset managers hold between one-quarter of the market capitalization for raw material manufacturing (Tier 4) and one-sixth for fiber production and fabric manufacturing (Tiers 3 and 2). At these earlier stages, holding companies and larger conglomerates are the major equity owners.
“In some senses, it was unsurprising once I’d really thought about it,” Wielechowski said. “But what I wasn’t expecting was the sheer dominance of the corporates in those early stages.”
He also found it interesting to map the domiciles of those holding companies. Planet Tracker’s analysis found, for instance, that China-domiciled investors hold more than 40 percent of equity capital in each of the three earlier value chain stages. In contrast, U.S-based shareholders, in the form of large institutional investors, control less than 10 percent, with the exception of raw material manufacturing, where they maintain roughly 15 percent of shares.
What all this means is that investors operating within the countries where most textiles are consumed are often “shielded” from the negative environmental impacts that happen before clothing hits the stores, Wielechowski said.
“We have to understand that the big investors that we’re going to spend time talking to tend to own retail and maybe garment manufacture; they don’t tend to be the owners of raw material manufacturing or the early stages of the supply chain,” he said.
To put it another way, why would investors push an H&M Group or an Inditex to improve sustainability in its supply chain when there’s no direct benefit to them?
Another thing to consider, Wielechowski said, is that most of the “heavy lifting” when it comes to supply change transformation—decarbonization, for example, or toxic chemical reduction—needs to happen further up in the supply chain where big banks and major investors don’t tend to be heavily exposed.
While organizations like the Apparel Impact Institute and Fashion for Good are doing a “really good job” of filling that breach, there remains the “challenge of bringing the capital that’s needed to make the change into those nodes,” he added.
What Wielechowski would like to see happen is for investors to “push their holdings out” and work with their supply chain partners to improve social and environmental conditions and drive the transition to a “just, sustainable textile industry.” By tweaking the way they support the funding needs of retailers and apparel manufacturers, they can facilitate a “trickle down” of a sustainable agenda through proxy voting.
This becomes more important as regulators begin moving into the space, too, he said.
“If we look at something like the [European Union], the due diligence proposals that are going through at the moment…they’re going to massively change the way that everyone has to think about supply chains,” Wielechowski said. “Companies are going to have to be responsible all the way up their supply chain and that’s a big risk to an investor if your holding doesn’t engage, isn’t improving things and doesn’t know what’s happening.”
