THE price of cotton is near a decade high as surging demand and lower supplies threaten to raise the price of our t-shirts and jeans.
Making matters more complicated for fashion producers, governments are increasingly implementing restrictions on cotton imports from the Xinjiang region in China, which accounts for around a fifth of the world’s cotton supply.
For the past five years China has faced international allegations of forced labour and worse abuses against the Uygur Muslim population in Xinjiang province. Beijing denies the allegations.
These modern slavery concerns mean manufacturers and retailers — and their investors — have to rethink supply chains, manage cost pressures and consider different products.
In Australia a Modern Slavery Act has been in force since 2019, covering “situations where offenders use coercion, threats or deception to exploit victims and undermine their freedom”. It includes forced labour, human trafficking, child labour, debt bondage and forced marriage.
Trade restrictions on Xinjiang cotton demonstrate real-world consequences for investors.
“We are seeing a number of apparel companies pull their supply and production out of the Xinjiang region in China in response to concerns about potential forced labour activities,” says Alison Ewings, Head of Engagement at responsible investing leader Regnan.
Pendal’s small cap team recently engaged with ASX-listed fashion retailer City Chic Collective (ASX:CCX) which has moved to ban raw materials sourced from high-risk regions such as Xinjiang.
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“The remaining global cotton supply is in high demand.”
Over this time the price of cotton has jumped sharply. Cotton futures are trading close to $US1.20 a pound. It was last that high in 2011.
Governments and corporates have stepped up efforts to address human rights concerns in Xinjiang in recent years.
For example, imports of tomatoes and cotton from Xinjiang province has been banned in the United State since January 2021 and in Canada since July.
The Better Cotton Initiative — a global organisation of more than 2000 suppliers, manufacturers, retailers, traders and community groups — has driven change in the industry.
The flow-on from the disruption is widespread across industries using cotton and other similar fibres.
“There is an opportunity for some businesses to rethink the materials they use,” Ewings says.
“They can consider the extent in which they use recycled fibres or alternatives, such as more sustainable fabric solutions including bamboo or other tree fibres.
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“It means solution providers with an alternate for cotton are a potential investment option. It also means there’s a potential risk to a company currently held that use cotton in its supply chain.
“If you’ve already got cotton in your supply chain, you’ve got higher risks, you’ve got greater regulation around modern slavery and greater expectations that you will be vigilant around it.
“You really want to be looking for companies that are managing that risk well and you want to look for companies that are looking for alternate opportunities,” she says.
Australia and the rest of the globe is only at the beginning of the journey on modern slavery, says Ewings.
“There’s much greater awareness as a result of modern slavery regulation around the world, including the Modern Slavery Act in Australia.
“Most companies have now done at least a cursory look through their supply chains. Better practice companies have gone deeper looking at their suppliers.
“But it’s still an area where many companies haven’t made a lot of meaningful progress.
“It’s a story where we expect to get more bad news before it gets better. And that, in fact, is a sign of progress. After all, companies can only act on issues once they have identified them.”
Alison is Head of Engagement at responsible investing leader Regnan. Regnan is a Pendal Group business.
Alison manages Regnan’s program of engagement with ASX listed companies, which aims to help improve business performance by addressing issues such as climate change, modern slavery and Indigenous relations.
Alison has worked in sustainability for more than a decade and was formerly the Head of Sustainability at Westpac.
Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.
Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.
The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.
The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change. Both funds are distributed by Pendal in Australia.
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For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at firstname.lastname@example.org.
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