The Circular Economy in the Fashion Industry
Philip Hanan, Research Executive
The Linear Economy model that most businesses still adopt today is characterised by a ‘take-make and dispose’ model; raw materials are taken to produce goods where they become waste after consumption (Ellen Macarthur Foundation). Furthermore, stakeholders in this economy have no concern for any environmental consequence on nature and the climate, resulting in a loss of biodiversity. As such, with the earth’s resources being limited while demand for consumer goods will continue growing, eventually, nothing more can be produced. The following diagram depicts the Linear Economy (Wautelet, 2018).
This linear model has brought upon revolutionary industrial and economic growth, increasing world GDP from $3.42 trillion in 1900 to $108 trillion in 2015 (Maddison & World Bank, 2017). However, the rising issue of climate change and importance of sustainability demands a shift towards a new model for the economy, especially when considering the foundational role of economic production and output in economic growth, directly translating to higher wages, income, and living standards for the population. Hence, it is no surprise that the circular economic model has become a hot topic for governments and international agencies alike.
The Ellen Macarthur foundation defines the circular economy as a “system where materials never become waste and nature is regenerated.” In contrast to the linear economy, the diagram below indicates used resources remaining in the loop and re-circulate within the economy (Ellen Macarthur Foundation).
Today, the circular economy is on the rise in a multitude of different sectors, including energy in the form of renewables, waste management in the form of more capable recycling and reusing capabilities of waste material, and the food industry where food waste can be reused as food stock. Moreso, one such industry where the circular economy has already made a significant mark is the fashion industry (Lindfred & Nordeld, 2017).
The Circular Economy’s rise in the Fashion Industry
In the linear model, fashion firms extract raw materials including synthetic materials in which its product-life ends once the consumer disposes of the product when they no longer want them. As mentioned, this has significant environmental repercussions, including resource depletion and pollution. McKinsey describes the future of fashion as one with sustainable brands and circular business models (McKinsey & Company, 2022). In such a model, fashion brands would incorporate the use of sustainable materials, including those that could be recycled and have lower carbon dioxide impact materials such as organic cotton, as opposed to regular cotton. As such, this circular business model will be centred around the resale, rental, repair, and reimbursement of fashion products with the objective of providing a circular customer experience where customers can easily participate in returning products (and consequentially their materials such as garments or cottons) into a circular cycle (UNEP and UNFCCC, 2023).
Overall, the Ellen MacArthur Foundation suggests that the fashion industry’s transition into the circular economy could unlock a $560 billion economic opportunity, with the restoration, resale, repair, customisation, and rental markets—key cogs in achieving circularity in the fashion industry—are already worth over $73 billion and has the potential to increase to a staggering $700 billion by 2030 (Ellen Macarthur Foundation). This economic potential could mainly be attributed to circular fashion products, by virtue of being circular and needing no raw materials, being cheaper to produce relative to its linear counterparts. Moreso, although clothing production doubled between 2000 and 2015, consumers’ length of use of retail products decreased in the same period by more than a third (Gomes de Oliveira et al., 2022). As such, circular fashion products would appeal to consumers motivated by affordability, convenience, and environmental awareness, presenting firms opportunities to increase their income. Furthermore, Morgan Stanley noted that circularity’s increased prevalence in the industry has bolstered investments in capital, specifically the technology needed to produce circular products. This effect will eventually increase the firm’s production capabilities and further increase profitability (Alsford, 2022). Overall, the fashion industry’s circular transition will prove beneficial to the larger economy as it increases firm’s profits, promotes employment and higher wages, and achieves economic growth.
One fashion brand that has begun to champion circularity is H&M. According to the company’s website, H&M Group’s circular approach focuses on three interconnected areas: circular products, circular supply chains, and circular customer journeys, covering the firm’s products and services, supply chain, and non-commercial goods including packaging and distribution centres (H&M, 2022). Moreso, H&M has incorporated the six targets for a sustainable textile industry released by a collaboration of the Stockholm Resilience Centre and the Ellen Macarthur Foundation to be achieved in this case in the group’s efforts to transition towards circularity (H&M, 2022). In the past few years, H&M has launched innovative and high-impact circular initiatives. They have invested in algorithmic commerce that uses artificial intelligence to better understand consumer needs which enables better resource allocation to fulfill consumer demand, optimising production costs (McKinsey & Company, 2020). Additionally, H&M has developed circular products such as a garment recycling machine, and pursued material innovation to increase the durability of products materials, rendering them more suitable to remain in the circular cycle as traditional materials such as cotton wear out easily (Preuss, 2022). In 2020, H&M inked a partnership with Renewcell and is currently developing a new material, Circulose, made by recovering cotton from worn-out clothes (H&M, 2023). Lastly, H&M has also launched COS Resell, a digital platform where consumers can buy and sell preowned items (Cernansky, 2020).
By embracing circularity and digitalisation at the same time, H&M has positioned itself not only in the forefront of circular model adoption but of the fashion industry entirely. One key parameter was the extent to which H&M aligned with changing consumer preferences due to the Covid-19 Pandemic. In three months, e-retail in the US grew the same as it had in the last ten years, while in Europe, the number of people who began using online shopping platforms from January to August 2020 grew the same as the prior six years (McKinsey & Company, 2020). Therefore, by also accounting for changing consumer attitudes towards the importance of product sustainability, online platforms that can embrace circularity and sustainability principles effectively capture the growing market for environmentally friendly products. Effectively, H&M has become not just a product-seller, but a solution and services provider.
However, although an increasing number of firms in the fashion industry are beginning to adopt circular models, some of the processes involved are still not very economical. For instance, in the United States, some large-scale textile reuse and repair services are still subject to high transportation and labour costs, rendering circular fashion products still more expensive than buying conventional products (Schumacher & Forster, 2022). Specifically, consumers are unwilling to pay the existing premium of circular products over their traditionally manufactured substitutes. As such, further developing circular production processes are imperative in increasing the economic viability of circular practices thus incentivising companies to adopt them, especially those that must overcome initial transitory costs of shifting away from existing linear production processes.
Furthermore, greater environmental awareness alone is insufficient in driving circular economic models in the private sector (Rizos et al., 2016). Businesses are profit-driven and will base their decisions on rational decisions that maximise production and profit. Hence, a key driver in implementing such circular models are mandatory regulatory frameworks. Such framework incentives include Extended Producer Responsibility (EPR) scheme, tax breaks for circular firms in repairing, reusing, and recycling activities, lump sum transfers to households of recycle revenues, and material taxes on natural resources and goods particularly produced in materially intensive sectors (Kautto & Lazarevic, 2020). Particularly, increasing the prices of such goods would lead to a shift away from their production and incentivise firms to develop material saving technologies. The tax revenue earned by the government could then be used to fund investments for public Research and Development on circular products, supply chains, and services. Importantly, as such regulatory frameworks apply to all companies in the economy, the system does not distort competition in the industry.
Numerous countries and multinational government agencies are looking for ways to incorporate a circular economic model within their economies, with the fashion industry being a focus in many cases. For instance, the European Parliament’s new circular economy action plan mandates “additional measures to achieve a carbon-neutral, environmentally sustainable, toxic-free and fully circular economy by 2050,” proposing a strategy on sustainable textiles (European Parliament, 2023). However, Hanna Salmenperä postulates that there must be elements of collaborative governance where companies and governments can create a “supportive operative environment for sustainable business,” with emphasis on more efficient and sustainable material use and production processes (Salmenperä, 2023). Particularly, firms are less accepting of policies that hinder prevailing practises due to potentially negative effects on production.
Overall, all signs point towards the circular economy being the future. Nevertheless, institutional steps need to be taken to both incentivise and support companies in adopting the relevant practises. Only then can we hope for a smooth transition towards the circular economy.
Bibliography
Alsford, J. (2022). Circular fashion in Capital Markets. Morgan Stanley. https://www.morganstanley.com/ideas/circular-fashion-economy-capital-markets
Cernansky, R. (2020, September 3). Why H&M is jumping on resale at COS. Vogue Business. https://www.voguebusiness.com/sustainability/why-handm-is-jumping-on-resale-at-cos
Ellen Macarthur Foundation. (n.d.-a). Circular economy introduction. Ellen MacArthur Foundation. https://www.ellenmacarthurfoundation.org/topics/circular-economy-introduction/overview
Ellen Macarthur Foundation. (n.d.-b). Fashion and the circular economy. https://www.ellenmacarthurfoundation.org/fashion-and-the-circular-economy-deep-dive
Ellen Macarthur Foundation. (n.d.-c). What is the linear economy?. How to Build a Circular Economy. https://www.ellenmacarthurfoundation.org/what-is-the-linear-economy
European Parliament. (2023, May 24). Circular economy: Definition, importance and benefits: News: European parliament. Circular economy: definition, importance and benefits | News | European Parliament. https://www.europarl.europa.eu/news/en/headlines/economy/20151201STO05603/circular-economy-definition-importance-and-benefits
Gomes de Oliveira, L., Miranda, F. G., & de Paula Dias, M. A. (2022). Sustainable practices in slow and fast fashion stores: What does the customer perceive? Cleaner Engineering and Technology, 6, 100413. https://doi.org/10.1016/j.clet.2022.100413
H&M. (2022, December 16). Circularity. H&M Group. https://hmgroup.com/sustainability/circularity-and-climate/circularity/
H&M. (2023, August 2). H&M Group and Renewcell expand partnership in Industry First. H&M Group. https://hmgroup.com/news/hm-group-and-renewcell-expand-partnership-in-industry-first/
Kautto, P., & Lazarevic, D. (2020). Between a policy mix and a policy mess: Policy Instruments and instrumentation for the circular economy. Handbook of the Circular Economy. https://doi.org/10.4337/9781788972727.00025
Lindfred, L., & Nordeld, I. (2017). Investigating The Move Towards Circular Economy for Consumer and Retail Companies.
Maddison, & World Bank. (2017). World GDP over the last two millennia. Our World in Data. https://ourworldindata.org/grapher/world-gdp-over-the-last-two-millennia
McKinsey & Company. (2020, December 14). For H&M, the future of fashion is both “circular” and Digital. https://www.mckinsey.com/industries/retail/our-insights/for-h-and-m-the-future-of-fashion-is-both-circular-and-digital
McKinsey & Company. (2022). The State of Fashion.
Preuss, S. (2022, April 26). How effective are H&M’s circularity efforts? FashionUnited. https://fashionunited.uk/news/business/how-effective-are-h-m-s-circularity-efforts/2021021953726
Rizos, V., Behrens, A., van der Gaast, W., Hofman, E., Ioannou, A., Kafyeke, T., Flamos, A., Rinaldi, R., Papadelis, S., Hirschnitz-Garbers, M., & Topi, C. (2016). Implementation of circular economy business models by small and medium-sized enterprises (smes): Barriers and enablers. Sustainability, 8(11), 1212. https://doi.org/10.3390/su8111212
Salmenperä, H. (2023). Governing the transition to circularity of textiles – Finnish companies’ expectations of interventions for change. Circular Economy and Sustainability. https://doi.org/10.1007/s43615-022-00238-x
Schumacher, K. A., & Forster, A. L. (2022). Textiles in a circular economy: An assessment of the current landscape, challenges, and opportunities in the United States. Frontiers in Sustainability, 3. https://doi.org/10.3389/frsus.2022.1038323
UNEP and UNFCCC (2023). The Sustainable Fashion Communication Playbook. Nairobi. https://doi. org/10.59117/20.500.11822/42819
Wautelet, T. (2018). Exploring the Role of Independent Retailers in the Circular Economy: A Case Study Approach. https://doi.org/10.13140/RG.2.2.17085.15847