{"id":22434,"date":"2024-08-12T10:08:56","date_gmt":"2024-08-12T10:08:56","guid":{"rendered":"https:\/\/lightcastlepartners.com\/bunon2030\/?p=22434"},"modified":"2024-11-23T17:04:21","modified_gmt":"2024-11-23T17:04:21","slug":"rmg-bunon-policy","status":"publish","type":"post","link":"https:\/\/lightcastlepartners.com\/bunon2030\/rmg-bunon-policy\/","title":{"rendered":"Bunon 2030\u2019s Policy Dialogue: Key Insights into the Future of Sustainable Apparel"},"content":{"rendered":"\n
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Originally published on the<\/em> LightCastle Partners website<\/a><\/em>.<\/p>\n\n\n\n

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The RMG <\/strong>(Ready Made Garments) sector in Bangladesh, a cornerstone of the apparel economy, has historically enjoyed strong government support through various policies such as back-to-back L\/C, bonded warehouse facilities, cash incentives, export credit guarantees, tax breaks, and more. <\/p>\n\n\n\n

Despite these measures, questions persist about their adequacy and the future challenges facing the industry. As the global landscape is evolving the requirements for the industry are also changing. Beyond domestic hurdles, global geopolitics and buyer countries’ policies increasingly shape Bangladesh’s RMG landscape. The sector grapples with complex issues such as sustainability, the circular economy, environmental impact, decarbonization, automation, and rising production costs, <\/strong>all crucial factors influencing its present and future trajectory. Moving forward, ensuring sustainable economic growth requires bolstering the garment industry with competitive policies and incentives keeping the local and global challenges in mind.<\/p>\n\n\n\n

Bunon 2030<\/a><\/strong>, supported by the H&M Foundation<\/strong> and The Asia Foundation<\/strong> as the backbone organization under the “Oporajita: Collective Impact on the Future of Work in Bangladesh”<\/a> <\/strong>initiative, focuses on empowering women garment workers. It addresses challenges including automation, geopolitical uncertainties, circular economy practices, and carbon footprint reduction, aiming to enhance sector competitiveness which will in turn improve worker wellbeing.<\/p>\n\n\n\n

In line with Bunon 2030’s<\/strong> objectives, on May 11, 2024<\/strong>, LightCastle Partners<\/strong> and Policy Exchange<\/a><\/strong> convened a policy roundtable dialogue. This gathering allowed policymakers, government officials, development partners, and industry leaders to discuss critical issues and propose potential solutions, fostering dialogue for sustainable development in the sector.<\/p>\n\n\n\n

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The policy roundtable aimed to underscore the urgent need for strategic measures to address pressing issues in Bangladesh’s apparel export market. These include challenges like c<\/a>urrency fluctuations<\/a><\/strong>, the impact of the 4<\/a>th industrial revolution<\/a><\/strong>, post-LDC graduation impact<\/a>, decarbonization<\/strong>, and geopolitical tensions<\/strong>. A crucial outcome of the discussions was the call for Bangladesh to enact supportive policies to facilitate the transition to a circular economy, ensuring the sustainability of its RMG exports amidst upcoming challenges. Meanwhile, the European Union’s<\/strong> initiatives towards establishing carbon-neutral supply chains<\/strong> and implementing carbon taxes on various products, including apparel, were highlighted as significant developments shaping global trade dynamics in the RMG sector.<\/p>\n\n\n\n

The event commenced with a keynote presentation titled \u201cPolicy Discussion: Navigating Industry Shifts by 2030,\u201d <\/strong>by Zahedul Amin<\/a>, Co-founder & Director of Finance, Strategy & Consulting Services<\/strong> at LightCastle Partners<\/strong>. The presentation highlighted the looming challenges anticipated after 2026 and graduating from LDC status for Bangladesh, including the potential loss of trade privileges and rising labor expenses. Additionally, the removal of GSP <\/strong>benefits is poised to significantly hinder the industry’s global competitiveness. Moreover, the keynote presentation also focused on the current challenges faced by the industry, such as the impact of trade war, and nearshoring among other challenges faced by the industry.<\/p>\n\n\n\n

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Following the comprehensive presentation, a roundtable discussion was held with prominent industry stakeholders. The session addressed key issues and presented policy-level challenges along with proposed solutions. Dr. M Masrur Reaz,<\/a><\/strong> Chairman of Policy Exchange Bangladesh, moderated the roundtable discussion. Speakers and participants emphasized several recommendations, including tailored export-oriented policies for the apparel sector in Bangladesh and the adoption of innovative strategies akin to India\u2019s<\/strong> Product Linked Incentive<\/strong> scheme. Proposals such as providing duty-free access to imported raw materials<\/strong> for Man-Made Fibers (MMF)<\/strong> production aimed to stimulate fiber diversification. Moreover, discussions explored opportunities for investment and job creation through the establishment of recycling facilities, pointing towards a comprehensive approach to enhance Bangladesh\u2019s garment industry sustainably.<\/p>\n\n\n\n

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Embracing Sustainable Future: Key Challenges Shaping Apparel in Bangladesh<\/strong><\/h2>\n\n\n\n
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From sourcing the fibers for garments to their finishing touches, every step in the textile and garment production process consumes a significant amount of energy. Most of this energy is derived from burning fossil fuels. Despite consumers focusing on upfront costs, the true impact of fast fashion on the environment is often overlooked. This oversight imposes costs on all life on Earth, regardless of individual responsibility. The textile and garment sector is a significant contributor to global carbon emissions, accounting for 6 to 8 percent <\/strong>of the total, which translates to approximately 1.7 billion tonnes<\/strong> of carbon<\/strong> emissions annually.[1]<\/sup> If current trends persist, the fashion industry’s greenhouse gas emissions are expected to rise by more than 50%<\/strong> by 2030<\/strong>.<\/p>\n\n\n\n

Moreover, each year, the fashion industry consumes 93 billion cubic meters<\/strong> of water, enough to fulfill the needs of five million<\/strong> people. Fabric dyeing and treatment processes alone contribute to about 20%<\/strong> of the world’s wastewater. Additionally, a substantial 87%<\/strong> of the fiber input used for apparel ends up either incinerated or deposited in landfills. According to data from the United Nations Environment Programme (UNEP), producing a pair of jeans, from growing the cotton to delivering the final product to stores, requires approximately 3,781<\/strong> liters of water and results in emissions equivalent to about 33.4 kilograms<\/strong> of carbon<\/strong>.[1]<\/sup><\/p>\n\n\n\n

The European Union accounts for almost half of Bangladesh\u2019s export revenue, underscoring its significant importance. In FY2023<\/strong>, Bangladesh earned USD 23.52 billion<\/strong> from exports to the EU<\/strong>, contributing to nearly USD 47 billion<\/strong> in total earnings from the ready-made garments sector EU has been focusing on a more circular approach, their initiative aims to reduce textile waste, prolonging product lifecycles, and promote textile recycling. These efforts form crucial parts of the EU’s broader strategy to transition to a circular economy by 2050.<\/p>\n\n\n\n

The updated strategy includes new eco-design standards for textiles, improved transparency in information sharing, the introduction of a Digital Product Passport, <\/strong>and calls for manufacturers, including those in Bangladesh, to implement measures that reduce their carbon footprint and environmental impact. These policies directly influence the Bangladeshi RMG sector, necessitating a shift towards producing durable garments and integrating circular design principles and other sustainable practices into their operations. Leading apparel brands, including H&M<\/strong>, Zara<\/strong>, Levi\u2019s<\/strong>, Primark<\/strong>, and C&A<\/strong>, have actively reshaped their brand visions in response to changing dynamics. They have aligned with principles of sustainability, innovation, diversity, and social responsibility to better meet the expectations of customers and stakeholders. These companies aim to create positive global impacts through their business practices. Concurrently, policy shifts within the European Union, such as the introduction of the Carbon Border Adjustment Mechanism(CBAM) <\/strong>and Due Diligence Laws<\/strong>, EU\u2019s Sustainable Textiles Strategy<\/strong>, Eco-design for Sustainable Products Regulation (ESPR)<\/strong> have accelerated these transformations, underscoring a firm dedication to sustainable and socially responsible strategies.<\/p>\n\n\n\n

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Identified Challenges from Roundtable Stakeholders<\/strong><\/h2>\n\n\n\n
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Untapped Opportunities with the GCF Fund<\/strong><\/h3>\n\n\n\n
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Bangladesh, despite contributing only 0.4%<\/strong> of global carbon emissions, faces significant climate change risks due to its geographic and socio-economic vulnerabilities.[1]<\/sup> The country has set ambitious targets to reduce carbon emissions by 21.8%<\/strong> by 2030<\/strong> and has introduced government funds to support these efforts.<\/p>\n\n\n\n

The Green Climate Fund (GCF)<\/strong>, a key part of the Paris Agreement<\/strong>, aims to assist developing countries like Bangladesh in achieving their climate goals through low-emission and climate-resilient development pathways. However, the GCF has struggled to meet its initial funding pledges, mobilizing only 2 to 3 percent of the promised USD 100<\/strong> billion annually from developed nations.[2]<\/sup> This shortfall underscores the challenge of adequately financing adaptation projects in vulnerable countries like Bangladesh, which require significant investments to mitigate climate impacts. This fund could be utilized to facilitate the essential green transition needed over the next five years. <\/p>\n\n\n\n

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Insufficient Investment Fund<\/strong><\/h3>\n\n\n\n
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Since the Paris Climate Agreement<\/strong> in 2015<\/strong>, there has been a rising demand for environmentally sustainable practices in production and consumption. While larger companies adopt green initiatives, many small and medium-sized enterprises (SMEs), especially in tiers 2 and 3, struggle due to limited access to finance and stringent collateral requirements. This financial barrier often deters brands and buyers concerned about environmental compliance. In the roundtable discussion, Mesbaul Asif Siddiqui, Deputy Managing Director & Chief Risk Officer, at City Bank<\/em><\/strong> highlighted <\/p>\n\n\n\n

\u201cThe manufacturing sector such as RMG and Textiles, requires long-term financing heavily relying on commercial banks. However, due to evolving expansion needs, certain sectors require financing extending to 10 years or more. This poses challenges for commercial banks due to maturity and market risks, compounded by having short-term deposits mostly maturing within a year.”<\/em><\/p>\n\n\n\n

Therefore, funding spanning 10-12 years should ideally be sourced from the bond market, which offers repayment period beyond 10 years. A thriving secondary bond market is crucial to ensure liquidity and sustainability of the bond market.\u201d<\/em> <\/em><\/p>\n\n\n\n

The policy roundtable emphasized the urgent need for longer-term<\/strong> loans<\/strong>, typically 10-12 years<\/strong>, tailored to these firms’ sustainability needs, yet current offerings are predominantly shorter-term, limiting their uptake.<\/p>\n\n\n\n

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Figure 1 Year Wise Performance of Green Finance<\/em><\/figcaption><\/figure><\/div>\n\n\n
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To catalyze green finance in the RMG sector, there’s a need for diverse funding sources beyond public resources like the Green Climate Fund, which faces challenges in disbursing funds efficiently. A blended finance approach<\/strong>, including grants, green loan guarantees, subsidized loans, and buyer support, can mitigate investment risks and attract private sector involvement. Such green investments not only ensure sector sustainability but also advance Bangladesh’s commitments to SDG 12<\/strong> (responsible consumption and production) and SDG 13<\/strong> (climate action)<\/a>, promoting intergenerational equity.<\/p>\n\n\n\n

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Challenges in Infrastructure and Logistical Delays<\/strong><\/h3>\n\n\n\n
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Logistical delays present a significant risk to businesses, potentially causing breaches of time-sensitive contracts and agreements with buyers. Dissatisfied buyers may consider canceling orders and turning to more reliable suppliers to meet their deadlines. To manage these challenges and ensure timely deliveries, factories may resort to using air freight as a last resort, despite its higher costs compared to sea freight. This can ultimately reduce profit margins and diminish the overall export profitability of goods.<\/p>\n\n\n\n

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Figure 2 Alternative Route Due to Red Sea Crisis<\/em><\/figcaption><\/figure><\/div>\n\n\n
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Bottlenecks, bureaucratic procedures, and shortcomings in the domestic transport network contribute to delays in material flow and shipment arrivals. Bangladesh’s logistics performance lags behind its competitors, exacerbating these logistical challenges.<\/p>\n\n\n\n

Industry insiders reveal Hazrat Shahjalal Int’l Airport’s<\/strong> struggle to cope with surging cargo volume, prompting fashion brands to opt for airfreight <\/strong>due to extended sea route lead times <\/strong>amidst the Red Sea crisis<\/strong>. Bangladesh secures dedicated air cargo space at Delhi’s Indira Gandhi Int’l Airport<\/strong>, offering lower airfreight costs<\/strong>: $6\/kg to New Jersey (Dhaka) vs. $4\/kg (Delhi), $8\/kg to New York (Dhaka) vs. $5\/kg (Delhi), and $5.5\/kg to Madrid\/London (Dhaka) vs. $4\/kg (Delhi).[2]<\/p>\n\n\n\n

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Slow Adoption of Renewable Energy<\/strong><\/h3>\n\n\n\n
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As global manufacturing shifts towards sustainability, companies are increasingly driven to adopt green energy sources, driven by stringent new regulations in Europe and growing consumer awareness of climate impact. In response to these trends, the BGMEA<\/a> <\/strong>has committed to reducing greenhouse gas emissions by 30% by 2030<\/strong>, marking a significant move towards sustainability. Achieving this target entails adopting energy-efficient technologies, optimizing production processes, and promoting sustainable practices across the industry.<\/p>\n\n\n\n

Currently, the manufacturing sector, including the Readymade Garments (RMG) industry, heavily relies on energy consumption, facing challenges like power disruptions that disrupt operations and reduce efficiency. Despite efforts by some major manufacturers to generate their own electricity, overall demand surpasses internal production capacities. Consequently, many businesses resort to expensive alternatives such as fuel or coal-powered generators, impacting their competitiveness against grid-supplied electricity. Bangladesh’s increasing dependence on imported electricity, amounting to approximately 4.22%<\/strong> of total demand as of June 2024<\/strong>, adds to these challenges, especially with the rising adoption of automation.[1]<\/sup><\/p>\n\n\n\n

However, due to the current economic situation, the government has been forced to reduce fuel imports for electricity generation. Consequently, despite adequate production capacity, the country is facing power outages. This situation leads to increased electricity costs, which in turn impact profit margins. Moreover, Bangladesh’s transition to renewable energy sources is accompanied by environmental concerns, especially with forthcoming EU regulations on the horizon.<\/p>\n\n\n\n

To mitigate these issues and align with global efforts to reduce carbon footprints, Bangladesh is encouraging the adoption of renewable energy sources through government policies and financial incentives. Initiatives like the Bangladesh Net Metering Guideline<\/strong> -2018<\/strong>, which currently limits solar system installations under net energy metering, are being reconsidered to allow more substantial contributions from solar power. Such measures aim to bolster industry competitiveness while addressing environmental concerns in anticipation of evolving global regulations, particularly from the European Union.<\/p>\n\n\n\n

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Strategies from the Dialogue to Address Current Challenges in The RMG Sector<\/strong><\/h2>\n\n\n\n
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The RMG sector in Bangladesh can potentially benefit significantly from international climate funds aimed at promoting green initiatives. These funds, including the Global Environment Facility (GEF)<\/strong>, and Green Climate Fund (GCF)<\/strong>, among others, offer crucial financial support for climate adaptation and mitigation projects. Bangladesh has already secured substantial financing from the GCF for energy-saving technologies in the textile and garment sectors, targeting a significant reduction in carbon emissions. To leverage these opportunities effectively, Bangladesh must establish a robust Measurement, Reporting, and Verification System (MRV)<\/strong> to ensure transparency and accountability in implementing its Nationally Determined Contributions (NDCs)<\/strong> under the Paris Agreement.<\/p>\n\n\n\n

Furthermore, exploring additional sources of climate finance from multilateral development banks, bilateral agreements, and private-sector collaborations is essential. The private sector plays a pivotal role in mobilizing finance for climate projects, as highlighted by Asif Ibrahim, Vice Chairman of Newage Group<\/strong>.<\/p>\n\n\n\n

\u201cTo access long-term green financing, RMG factories should consider listing in the stock market. By listing on the stock exchange, particularly through the alternate trading board, factories can dilute 10% of their shares. This strategic move allows them to register and raise capital, thereby enhancing their financial stability and capacity for sustainable investments.\u201d<\/em><\/p>\n\n\n\n

The bond <\/strong>and capital markets<\/strong> are essential for mobilizing funds, with ongoing efforts to revitalize these markets. The Dhaka Stock Exchange has started integrating green ready-made garment factories into the capital market via IPOs or bond issuances<\/strong>. Around 100 LEED<\/strong>-certified garment units across the country meet the necessary regulatory criteria for equity or debt financing. These companies can capitalize on sustainable investment opportunities as more investors show interest in supporting environmentally friendly businesses.<\/p>\n\n\n\n

Initiatives such as the Fashion Climate Fund, aimed at decarbonizing supply chains, present further avenues for RMG entrepreneurs to pursue sustainable investments. Efforts are also underway to integrate green RMG factories into the capital market through initiatives like green bonds and stock market listings, which offer long-term financing solutions aligned with environmental goals.<\/p>\n\n\n\n

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Streamlining Logistics with the National Single Window<\/strong><\/h3>\n\n\n\n
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The effective implementation of the National Single Window System<\/strong> for trade facilitation is essential to addressing logistical challenges in Bangladesh. Enhancing port handling capacity, improving inland and water transportation systems, and implementing cost-saving measures are critical components of this effort. Echoing this, Md Ariful Hoque, Director General (Deputy Secretary), of Bangladesh Investment Development Authority (BIDA), <\/em><\/strong>emphasized<\/p>\n\n\n\n

\u201cPolicymakers can engage in consultations with pertinent stakeholders to craft effective export-oriented policies tailored to the needs of the RMG sector in Bangladesh.\u201d<\/em><\/p>\n\n\n\n

Reducing lead times is imperative in today’s competitive business landscape. Improving Bangladesh’s trade infrastructure and logistics has the potential to not only boost its global market share in garments and textiles but also to open new markets and sectors.<\/p>\n\n\n\n

A study by the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) suggests that such infrastructure enhancements could generate an economic impact of USD 35.5 billion<\/strong> in 2030<\/strong>.[1]<\/sup> A comprehensive governmental approach is required, involving greater coordination among ministries, authorities, and the private sector to enhance port capacity and improve Bangladesh’s standing in the World Bank’s Logistics Performance Index<\/strong>.[2]<\/sup> Effective infrastructure is crucial for achieving Bangladesh’s Vision 2041<\/strong> and expanding its global market share. Projects like the Bay Terminal<\/strong>, which will significantly increase Chattogram Port’s handling capacity, are vital. Integrated logistics systems with world-class ports, roads, storage facilities, and transportation networks, supported by state-of-the-art technology, are necessary to achieve competitive turnaround times and foster economic growth.<\/p>\n\n\n\n

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Advancing Renewable Energy Targets in Bangladesh<\/strong><\/h3>\n\n\n\n
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Bangladesh is falling short of its renewable energy targets<\/a>, with only 4%<\/strong> capacity compared to the 10%<\/strong> goal for 2020<\/strong>, casting doubt on achieving 100%<\/strong> renewable energy<\/strong> by 2050<\/strong>. Challenges include land requirements for solar expansion and insufficient investments in transmission and distribution systems, leading to inefficiencies despite new power plants. Rising costs of imported fossil fuels amid a foreign exchange crisis further underscore the need for diversifying into renewables.<\/p>\n\n\n\n

To accommodate renewables’ intermittency, the transmission and distribution system must be upgraded. Regional trade, involving surplus energy from Nepal and Bhutan and potential from India, necessitates expanded transmission systems. Investment and coordinated development are crucial, aligning capacity increases with evolving industrial energy demands. Efficient transmission systems also reduce system loss and carbon emissions. Initiatives such as rooftop solar<\/strong> and net metering<\/strong> for households and industrial rooftops require grid modernization<\/strong>. Lowering duties<\/strong> on inverters<\/strong> and increasing the availability of bi-directional <\/strong>meters can incentivize solar adoption.<\/p>\n\n\n\n

However, to upgrade the infrastructure, securing adequate financing is challenging due to high costs and a shallow domestic financing market. A combination of funding sources, starting with public financing, and transitioning to bond financing, can help. Capacity-building<\/strong> by older Multilateral Development Banks (MDBs) can help countries like Bangladesh secure viable project financing from Southern development banks.<\/p>\n\n\n\n

Moreover, policy support, such as subsidies or feed-in tariffs, is essential for renewable energy investments’ economic viability. Phasing out fossil fuel subsidies can reallocate resources to renewables and grid modernization<\/strong>. The transition to green energy must also consider job impacts, ensuring benefits for low and middle-skill workers.<\/p>\n\n\n\n

While solar seems like the potential way forward, implementing bigger projects requires a lot of land. A potential solution for this could be integrating agrivoltaics, combining crop harvesting with solar energy, offering a promising solution, increasing land productivity, and creating jobs, especially for women and low-skill workers. It can enhance the economic value of land and support agricultural production. Crops thriving under partial shade, like tomatoes and garlic, are ideal for such systems, reducing irrigation needs and mitigating soil erosion. Proof-of-concept pilots and policy amendments are necessary to implement agrivoltaic systems effectively. Coordination between the power and agriculture ministries is crucial for maximizing benefits and minimizing conflicts with agricultural practices.<\/p>\n\n\n\n

Simultaneously, offshore wind energy presents another promising opportunity. Bangladesh’s offshore wind energy sector is poised for significant growth with Denmark’s Copenhagen Infrastructure Partners (CIP) and Copenhagen Offshore Partners (COP) collaborating with the local Summit Group to develop a $1.3 billion wind power project in the Bay of Bengal. The Danish investors have proposed a project with a capacity of 500 MW, making it the largest investment offer in Bangladesh’s wind energy sector to date[1]<\/sup>. Moreover, Bangladesh could explore the possibility of co-investing in hydroelectric projects in Nepal and subsequently purchasing the generated electricity.[2]<\/sup><\/p>\n\n\n\n

Using agricultural lands exclusively for energy production could negatively affect the livelihoods of households reliant on farming. Therefore, combining crop cultivation with solar energy generation and other alternatives could be potentially beneficial and the way forward.<\/p>\n\n\n\n

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Integrating Sustainable Raw Materials: A Key to Closed-Loop Fashion<\/strong><\/h2>\n\n\n\n
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As global policies on environmental and sustainability practices evolve, suppliers are increasingly adopting resource-efficient and recycled fiber approaches in their apparel production processes. Major global apparel brands are moving towards sustainable initiatives to boost the use of recycled inputs, incentivizing suppliers to adhere to various regulations and incorporate environmentally friendly materials. Embracing these practices supports a closed-loop system in the apparel lifecycle, fostering circularity by continuously reusing or recycling resources into new garments.<\/p>\n\n\n\n

Apparel producers are increasingly integrating eco-friendly<\/strong> raw materials<\/strong>, such as man-made fibers (MMF)<\/strong>, known for their lower water and energy consumption, signaling a shift towards sustainability-<\/p>\n\n\n\n