India’s textile sector and ESG norm challenges

Syllabus: GS 3 > Economic Development   >   Indian Economy and issues   >   Manufacturing sector

REFERENCE NEWS:

• There is a notable concern within India's textile sector, which is largely made up of micro, small, and medium enterprises (MSMEs), about the challenges of complying with global environmental, social, and governance (ESG) norms.
• As many countries, including the European Union's (EU's), move towards implementing its environmental, social, and governance (ESG) goals, it is necessary for the Indian textile sector to comply with these norms to cement the sector’s position as a top global supplier.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) NORMS:

• "ESG" stands for Environmental, Social, and Governance. The term originated from a 2004 UN report titled "Who Cares Wins," linked to the Global Compact initiative of 2000.
• ESG norms encompasses a series of principles, such as policies, processes, and metrics, which organizations adopt to either reduce their negative impacts or enhance positive impacts on the environment, society, and governance bodies.
• ESG approach assesses a company's broader influence beyond financial performance.
• When investors and stakeholders evaluate a company's sustainability and social impact, they focus on three key areas under ESG:
• Environmental Factors: Impact on environment; includes energy use, emissions, waste, resource use. Example: Renewable energy efforts.
• Social Factors: Impact on people; includes labor, health, diversity, community engagement. Example: Community programs.
• Governance Factors: Governance and decision-making; includes board composition, executive rules, transparency. Example: Board diversity.

INDIA’S TEXTILE SECTOR:

• The domestic apparel & textile industry in India contributes approx. 2.3 % to the country’s GDP, 13% to industrial production and 12% to exports. 
• India has a 4.6% share of the global trade in textiles and apparel. Moreover, India is the world's 3rd largest exporter of Textiles and Apparel. (Source: India Brand Equity Foundation (IBEF)).
• India is one of the largest producers of cotton and jute in the world. India is also the 2nd largest producer of silk in the world and 95% of the world’s hand-woven fabric comes from India. 
• Second largest manufacturer of PPE and producer of polyester, silk and fibre in the world.
• The textiles and apparel industry in India is the second-largest employer in the country after agriculture, providing direct employment to 45 million people and 100 million people in allied industries. (Source: Invest India)
• Total textile exports are expected to reach USD65 billion by FY26 and is expected to grow at 10% CAGR from 2019-20 to reach USD190 billion by 2025-26.

CHALLENGES ASSOCIATED WITH ESG COMPLIANCE FOR INDIA'S TEXTILE SECTOR

• Compliance Costs:  
  • Adhering to ESG norms involves significant financial investment in sustainable practices, technology upgrades, and infrastructural changes. These expenses are particularly challenging for Micro, Small, and Medium Enterprises (MSMEs) that dominate the industry (almost 90% of garment exporters are MSMEs, and 50%-60% of cotton and synthetic exporters as well).
• Documentation Requirements: 
  • Comprehensive documentation is required to demonstrate compliance with ESG standards. This process can be cumbersome and resource-intensive, especially for smaller companies that may lack the necessary administrative infrastructure.
• Labour Cost Variations: 
  • ESG norms include fair labour practices, which can lead to variations in labour costs across different states. This factor can affect competitiveness, as companies in states with higher labour costs may find it harder to price their products competitively.
• Quality of Recycled Materials: 
  • As the demand for sustainable materials like recycled fibers increases, challenges arise in maintaining quality. For example, Tiruppur is importing hosiery waste from Bangladesh for recycled fiber, but due to its lower quality compared to fresh cotton, it can only be used in limited quantities in blends, according to garment manufacturers.
• Lack of Support from Global Buyers:
  •  While some global brands are willing to pay a premium for sustainable products, many remain reluctant. This hesitancy places additional financial pressure on manufacturers who invest in sustainable practices but do not receive adequate compensation.
• Market for Sustainable Products in India: 
  • There is a concern that sustainable products are not adequately marketed as such in the domestic market, leading to a lack of premium pricing for these products within India.
• Variability in ESG Standards: 
  • Different European countries may have varying ESG codes, creating a complex regulatory environment for exporters to navigate.
• Potential Trade Barriers: 
  • There is an apprehension that linking social and environmental policies to trade policies could potentially create trade barriers, affecting the industry's global competitiveness.
• Changes in Fashion Seasons:
  • The emphasis on sustainability and circularity could lead to a reduction in the number of fashion seasons, impacting the industry's production and sales cycles. For instance, some brands have more than 10 fashion seasons in a year and this is likely to reduce with emphasis on circularity and reuse.

WAY FORWARD

• Implementing Sustainable Production Processes: 
  • Adopting eco-friendly production methods, such as using less water and energy in textile processing, minimizing chemical use, and switching to cleaner, renewable energy sources.
• Sourcing Raw Materials: 
  • Prioritizing the procurement of sustainable and ethically sourced raw materials, like organic cotton, recycled fabrics, and other eco-friendly materials. This also involves ensuring that the supply chain is transparent and fair.
• Waste Reduction and Recycling Initiatives:
  • Implementing practices to minimize waste during production and encouraging recycling of textile waste.
• Fair Labor Practices and Worker Safety: 
  • Ensuring fair wages, safe working conditions, and respecting workers' rights in all aspects of the textile production process. 
• Environmental Certification and Compliance: 
  • Obtaining relevant environmental certifications (like ISO 14001, Global Organic Textile Standard) that demonstrate commitment to ESG norms.
• Investing in Employee Training and Development: 
  • Providing regular training to employees on sustainable practices, ESG compliance, and the importance of environmental stewardship.
• Adopting Circular Economy Models: 
  • Embracing circular economy models in business practices, such as designing for longevity, supporting repair and reuse, and implementing take-back schemes for end-of-life products.
• Need for Incentives and Exemptions: 
  • The industry is advocating for incentives for sustainability efforts and exemptions for MSMEs in the proposed Free Trade Agreement (FTA) with the EU. For instance, the EU has exempted its own MSMEs from ESG norms and the Indian government must ask for a similar treatment for India’s textiles producers

PRACTICE QUESTION:

Q. Discuss the challenges that the Indian textile industry encounters in adhering to global ESG standards, and what strategies could be proposed to overcome these challenges.(15 marks, 250 words)