ESG: The New Compass for Chinese Apparel Companies Going Global

Sustainability is increasingly becoming a vital factor for global consumers when making purchasing decisions. According to surveys by McKinsey in 2021 and 2023, in the UK, around 25% of respondents said their buying decisions are driven by sustainability. Meanwhile, 80% of US consumers stated that sustainability is an essential factor when choosing brands to shop from. Chinese consumers have also expressed concerns about sustainability. According to PwC's "2022 Global Consumer Insights Survey China report", 45% of respondents are willing to buy products made from recyclable, sustainable, or eco-friendly materials.

Promoting sustainable values has become the path for contemporary businesses to enhance their brand image and obtain a global "Golden Pass." Advancing in environmental, social, and corporate governance will be the next critical victory point for Chinese enterprises expanding overseas. Zhong Xiaoyang, PwC China's Partner in charge of ESG Sustainability Strategy and Operations, stated, "As consumers' concerns about climate change intensify, sustainable consumption is expected to become a disruptive force and a significant value driver in the coming years... As more and more consumers seek brands that they can trust and align with their values, brands will be more proactive in promoting their efforts in sustainable development, winning customers' trust."

In this article, EqualOcean focuses on the apparel industry's overseas enterprises, analyzing their current sustainable practices and ESG performance.

For overseas apparel businesses, sustainability is both a responsibility and an opportunity

In practicing environmental, social, and corporate governance (ESG), the apparel industry inherently holds a duty and has much potential.

Data from the United Nations reveals that the textile and apparel industry is the second-largest polluter in the world, trailing only the oil industry. Its total carbon emissions surpass the combined emissions of international flights and maritime shipping. According to the United Nations Environment Programme (UNEP), the global production of clothing and footwear contributes to 8% of the world's greenhouse gas emissions. As the manufacturing sector is primarily centered in Asia, this industry heavily relies on hard coal and natural gas for electricity and heat production. If business operations continue as usual, it's projected that greenhouse gas emissions from this sector will surge by nearly 50% by 2030.

The apparel industry has an extensive supply chain, involving numerous ESG-related tasks. Considering just the dimension of carbon emissions, this includes emissions from direct operations, emissions related to purchased energy, and emissions occurring throughout the company's value chain (both from suppliers and during the consumption process).

Consequently, multiple stages in the life cycle of apparel can incorporate the concept of sustainability, enabling a transformation in production and management from an ESG perspective. For instance, in the early design phase, decisions can be made about whether materials are eco-friendly and if the apparel is easy to repair or recycle. During the production phase, manufacturers can choose the types of energy they use and methods for handling waste and inventory. At the consumption stage, companies can decide on sales channels and recycling routes.

Why should overseas apparel businesses adopt sustainable principles and develop their own ESG strategies? Apart from consumer demand, in the financial sector, ESG disclosures are deemed as vital as financial reports. Especially in the current capital environment, a good ESG score can help businesses reduce external financing costs (both domestic and international) and find new financing channels. Moreover, for globalized Chinese companies, their products will face regulatory requirements in foreign markets, such as challenges based on ESG disclosures related to carbon emissions, supply chain management, and green energy, especially in the European market.

Chinese Apparel Companies Show Moderate ESG Performance

In 2022, out of the 42 apparel companies listed on the A-share market, 19 have publicly released ESG or social responsibility reports, resulting in a disclosure rate of 45.2%. Moreover, a total of 1,755 A-share listed companies published ESG reports for the year 2022, with a disclosure rate of 34.3%. Banks achieved a disclosure rate of 100%, while the machinery equipment industry had the lowest rate at 19.2%.

Among the A-share listed companies, 38 apparel companies are incorporated into the MSCI concept. Bosideng achieved an "A" level in the MSCI ESG rating, making it the highest-rated apparel company in China. Additionally, Xtep and Li Ning received "BB" ratings, while Anta received a "B" rating.

Overall, Chinese apparel companies have not yet established a leading trend in ESG disclosures, and the top-tier companies' disclosure rates are still at a medium level domestically.

Overcoming Challenges Abroad: ESG as a Game-Changer for Chinese Apparel Brands

It's notable that among large apparel firms disclosing ESG reports (including those listed on A-shares and Hong Kong stocks), many also have overseas operations, including Bosideng, Semir, Xtep, Li Ning, Anta, HLA Group, Dazzle Fashion, JNBY, Joeone, and Meters/bonwe.

The overseas expansion paths of Chinese apparel companies vary. EqualOcean has identified several prevalent strategies:

Brands Going Global: Enhance brand recognition by sponsoring popular overseas events, collaborating with renowned global brands, participating in international fashion weeks, and organizing fashion shows. Examples include Li Ning and Joeone's approach to Europe and the US.

Target Similar Markets: Replicate successful domestic strategies by utilizing mature marketing tactics to establish physical sales channels abroad, as seen with Xtep's strategy in India.

From Online to Offline: Initiate entry via collaborations with local e-commerce platforms and then transition to brick-and-mortar stores. Semir's strategy in Southeast Asia illustrates this approach.

Acquire International Brands: Focus on developing global brand lines through acquisitions.

Shift Supply Chain Overseas: Set up production bases and sales branches abroad, leveraging supply chain and channel advantages to enhance competitiveness. Jasan Group's strategy serves as a case in point.

Regardless of their chosen approach to going global, many Chinese apparel brands have faced setbacks abroad. In some cases, they've even been forced to halt their international operations. Common challenges include a mismatch between brand investment and returns, inaccurate product positioning leading to weak store profits, and operational chaos due to a lack of talent and experience. Moreover, Chinese apparel businesses seem to lack a unified and effective "calling card" that would ensure significant returns in foreign markets.

However, as mentioned earlier, ESG might offer a solution. It can lead the development in areas ranging from technology, products, and supply chain to branding. More than just a strategic approach, ESG could become the core value system guiding the operations of these companies, providing them with a more cohesive and consistent global presence.

Designer Brands Championing "Sustainable Fashion"

Bosideng, rated “A” by MSCI, emphasized the concept of "sustainable fashion" in its 2023 report: “Companies should holistically consider environmental, social, and economic values. They should minimize the negative impacts on the environment and society throughout a product's lifecycle, extending sustainable concepts along the value chain, and encourage the entire fashion industry to co-create a sustainable future."

Abroad, "sustainable fashion" is already a well-known term. Europe has always been at the forefront of establishing policies and strategies in sustainable fashion. In 2021, France passed a law encompassing new requirements about waste and waste prevention, material reuse, and the responsibilities of environmental or sustainability marketing claims. In March 2022, the European Commission outlined a plan to set standards for mandatory minimum usage of recycled fibers in textiles, tightly regulate "greenwashing", and take measures against the release of microplastics from textiles. In the US, the New York State legislature is considering the "Fashion Sustainability and Social Accountability Act", which requires clothing companies operating in the state and with annual revenues over $100 million to describe and disclose their supply chain and environmental footprint, and to set science-based emission reduction targets.

China has also recognized the significance of sustainability in the fashion industry. At the 2022 China Fashion Conference, Sun Ruizhe, the president of China National Garment Association, mentioned that sustainable fashion has become a valuable tool for brands to win the hearts of the people.

Chinese companies have already taken steps in sustainable fashion. In 2020, JNBY initiated the "Sesame Lab", advocating for material reuse. They transformed inventory and fragmented fabrics into art pieces like dolls, ornaments, and home decorations, employing sustainable cotton materials certified by the Global Organic Textile Standard (GOTS) and recycled materials certified by the Global Recycle Standard (GRS). The same year, prominent Chinese haute couture designer Guo Pei used Piñatex, a material extracted from pineapple leaf fibers. Fabric company FUEN launched the “Surplus Fabric Rebirth Program”, introducing a 48-hour R'Rtverse Designathon, encouraging the community to reuse environmentally-friendly fabrics.

Green Supply Chain: "Purifying" Upstream and Downstream

An increasing number of Chinese clothing enterprises mention the construction of a green supply chain in their ESG reports and sustainable philosophy. By rigorously selecting suppliers, governing factories, and controlling packaging and sales channels, they ensure that products align with ESG principles both before and after the production phase.

Cotton cultivation has a significant impact on soil and water resources. In its 2022 ESG report, Purcotton stated that the company is committed to using cotton fiber brands. They start by reducing pollution in the cultivation stage through cotton breeding and have conducted carbon footprint checks for three of their products, including 100% cotton towels, baby hand and mouth wipes, and baby robes. ZUG ZUG advertises sustainable supply chain management on its official website, emphasizing the use of eco-friendly cotton that avoids chemicals, guaranteeing that the cotton is pollution-free, non-toxic, and the farmland is sustainably cultivated.

Regarding energy use, Anta has set a goal that by 2030, 50% of the energy consumption of strategic partners will be replaced with renewable energy, and 50% of the energy consumption of its own transportation equipment will be replaced with clean energy.

Semir's achievements in green supply chain management are also noteworthy. Semir invested tens of millions of yuan in pollution control and park environment management, ensuring that parks in Wenzhou and Shanghai meet comprehensive environmental standards. At the same time, they developed a virtual business model, collaborating with suppliers who produce green, pollution-free, and environmentally friendly products.

Empowering People, Enhancing Governance

For labor-intensive enterprises, how to employ and create social value will be indispensable topics that need consideration when brands venture overseas. Beyond the environmental dimension, Chinese clothing companies are also making efforts in the areas of social and corporate governance.

Li Ning, in its 2022 ESG report, presented an "Internal and External Stakeholder Importance Matrix." Within it, issues such as "Labor Standards," "Employment," "Safety and Health," and "Anti-corruption" are placed at the maximum values of both axes, highlighting Li Ning's care for its employees and the emphasis on internal company governance. In community collaboration, Li Ning has a long-term partnership with the China Women's Development Foundation and, in conjunction with Tencent's charitable ventures, organizes donations, assistance for the disadvantaged, care for women and children, and cultural heritage events. Other clothing brands also showcase activities in charity, rights protection, and social education in their ESG or social responsibility reports. Xtep introduced the "321 Running Festival," connecting grassroots running enthusiasts and enriching the makeup of China's sports community.

Semir highlights talent recruitment as a key showcase of its social value on its official website. According to the site, Semir's entire system (including the upstream and downstream industrial chain) provides nearly 150,000 jobs for society. Since 2005, they have been conducting large-scale campus recruitment every year, absorbing hundreds of recent university graduates annually.

However, there hasn't been a systematic approach regarding employee and consumer education by Chinese companies. Presently, doing good in business has become the direction for companies to undergo production, management, and organizational changes. The academic and business sectors in China have repeatedly proposed combining social and business values. In the future, for Chinese clothing enterprises, sustainable business also means linking corporate operations with corporate social activities, placing issues like social charity, employee care, and gender equality at the foundation of corporate identity.

Green production and circular economy, sustainable supply chain management, and community and employee participation, combined with international collaboration and continuous reporting to stakeholders, will become essential tasks for the long-term development of clothing companies. To better help overseas companies understand the necessity, opportunities, and directions of ESG practices, EqualOcean plans to release the "ESG Outstanding Cases Report for Consumer Industry Overseas Enterprises." The report is currently open for external collaboration, and those interested can scan the QR code below the article to get in touch. Let's venture into overseas markets and understand ESG together.