Taking a Closer Look at Three Major Risks to Cotton Sourcing

The rising global demand for sustainably grown cotton has created many opportunities for businesses worldwide, but it has also resulted in growing supply chain complexity and increasing sustainability risk. Along with regulations like the Uyghur Forced Labor and Prevention Act (UFLPA) and escalating climate change concerns, businesses must watch for associated risks in their supply chains.

As organizations move to incorporate ethical sources and sustainable business practices into their operations, finding reliable sources of cotton production will become more challenging than ever. The processing of raw cotton products is projected to have a global retail market value of over $22 billion by 2027, and any shortage of supply would result in widespread ramifications — affecting not only the apparel and textile sectors, but also critical infrastructure sectors such as healthcare and the Defense Industrial Base.

To mitigate risks associated with cotton sourcing, it’s crucial to understand the market forces at play and the restrictions that exert pressure on both suppliers and business customers. Our latest white paper takes a closer look at three of these major risks.

The Geopolitical Risk of Forced Labor

More than 80% of the cotton produced in China comes from the Xinjiang Uyghur Autonomous Region (XUAR), where over 1 million Uyghurs and other mostly Muslim minorities are detained and subjected to forced labor in prison-like conditions. Described as “crimes against humanity” in a 2022 United Nations report, this violation of human rights has garnered the attention of lawmakers across the globe.

The outcome of this focus is a growing list of global regulations, such as the UFLPA and the German Supply Chain Act, which are designed to prevent the usage of commodities associated with modern slavery. To avoid disruptions in your supply chain, it is necessary to identify the true origins of your sourced cotton to ensure compliance with the increasing number of regulatory acts against forced labor, including child labor.   

Cotton has a greater impact on the global supply chain than most business leaders expect. As a sub-tier component in a vast number of supply chains, there are scenarios where the fiber plays only a tiny part in the creation of an end product. In such cases, identifying supply chain links to Xinjiang may require a deeper level of insight — all the way down to the nth tier of your entire supplier ecosystem.

“Most of the Xinjiang connections we find have nothing to do with the entity our customers are purchasing from,” said Brandon Daniels, CEO at Exiger. “They are two to three layers down in the supply chain and can’t be scaled with manual investigative research or list creation.”

Increasing Consumer Demand for Sustainably Grown Cotton

Consumers and businesses worldwide are increasingly opting for environmentally friendly cotton produced in accordance with voluntary sustainability standards (VSS). A 2020 survey in the US found that 66% of respondents were aware of the cotton and textile sectors’ social and environmental impacts. Additionally, 31% of Generation Z consumers were willing to pay more for sustainable clothing compared to 12% of Boomer consumers.

“Sustainable cotton is in high demand as customers look to make responsible purchasing decisions and brands use sustainability to differentiate their products in the market,” said Vivek Voora, Senior Associate at the International Institute for Sustainable Development (IISD).

The following table from IISD shows a global overview of cotton production based on 2019 output figures. The largest producers of cotton — India, China, and the US — have begun producing VSS-compliant cotton, but the vast majority of cotton producers within their borders still utilize conventional production methods.

Image source: IISD

The growing consumer preference for VSS-compliant cotton is accompanied by the need for more sustainable production practices and ethical labor conditions. These challenges put immense pressure on global supply chains, emphasizing the importance of visibility and real-time monitoring.

Climate Change and Its Devastating Effect on Cotton Supply

Increased climate risk is threatening many cotton-growing regions, such as India, Brazil, Pakistan and the U.S. As cotton plants require specific temperatures and moisture levels to yield sufficient quantities of high-quality fibers, extreme weather events such as extended droughts, heavy rainfall and flooding can adversely affect cotton plant growth.

For instance, textile shipments from Pakistan dropped 90% from February to March 2023 due to impacts from regional floods, the power shortage crisis, and changing government policies.

To gain a better understanding of the risks associated with climate change on cotton sourcing, businesses must have a clearer view of their supplier ecosystem. Having this level of insight allows for the tracking of evidence of events and circumstances in specific countries that have drastic impacts on supply chains globally.

Noncompliance Isn’t Worth the Risk

For all the business and industrial sectors that have cotton in their supply chains, adhering to global regulations and keeping track of sustainable efforts has become a priority. Failure to adhere to regulations could result in unnecessary additional costs due to disruption in the production line, delays in your supply chain due to the confiscation of goods under the UFLPA legislation and fines of up to 2% of global revenue. Other potential repercussions include reputational damage, loss of market share and the need to remediate ESG issues in your cotton supply chain long after the damage has been done.

When it comes to mitigating risk, start by taking a look at the bigger picture. It’s important to account for the impact that shortages and potential price changes would have on your end products. This can be done by ensuring full transparency within the cotton supply chain from both a regulatory and overall supply standpoint. Implementing real-time monitoring and improving visibility into all levels of the supply chain will help you not only reduce compliance risk, but also thrive in today’s complex market.

To learn more about anticipating and managing risks linked to cotton, download our white paper.

Other Resources:

• The Uyghur Forced Labor Prevention Act and Its Impact on Supply Chains
• The ESG Due Diligence Process — Why It’s Important in 2023
• Setting Up a Supply Chain Risk Management Program