Improved working conditions and energy efficiency have helped create a virtuous circle for the Canadian manufacturer of active wear.
Textile and clothing manufacturers need to be conscious of working conditions including the physical state of factories and their treatment of employees – particularly in emerging markets – to maintain the integrity of their reputations in the industry that originated the ‘sweatshop’ tag.
Between 2002 and 2004, serious allegations about exploitative labour practices were levelled at Montreal-based apparel maker Gildan. Following these claims, the company underwent an externally verified remediation process to improve practices at its production sites in Honduras, Nicaragua and Haiti. The result was the Gildan Code of Conduct, and this marked the start of the company’s development of best-in-class environmental, social and governance (ESG) practices within its industry. This discipline has helped the company improve productivity, lower costs and generate stronger returns for shareholders.
The remediation process saw Gildan introduce measures to improve workplace conditions, including health and safety training for staff, fire escapes and a medical room for night workers. The company also supports employees by offering free transport to work, subsidised meals and schools for workers’ children on site.
Measures to reduce the impact of waste and wastewater from its main production plants were also implemented, which include the recycling of any waste materials from shirt production to make socks. It created a proprietary biomass energy system to convert selected packaging and production off-cuts to help power its factories, thereby improving energy efficiency and reducing overheads. The majority of its energy now comes from renewable sources.
ESG research providers including Sustainalytics and MSCI consider the company’s approach to managing ESG risk exemplary, a view supported by the research of our in-house stewardship and engagement team.
By owning 90% of its manufacturing facilities, Gildan is able to directly reduce supply chain risk, and it provides detailed disclosures of its audit methods and results. This ownership also enables Gildan to scrutinise water consumption – a risk for clothing producers, given the water-intensive nature of their work. This insight has helped it achieve a 17% reduction in water use since 2010, with the company targeting a further 10% reduction by 2020.
Gildan’s work to improve the safety and wellbeing of employees helped it gain accreditation for the Social Compliance Program of the US Fair Labor Association (FLA), a requirement for businesses that focuses on labour practices and working conditions. The agreement insists that apparel makers’ facilities and those of their suppliers comply with specific standards, local and international law, and the principles of the FLA and Worldwide Responsible Accredited Production. For example, the company has taken steps to calculate a living wage for its workers in Honduras and the Dominican Republic, after being criticised for paying too low rates, an indicator the FLA will assess in the future. Internal and external audits of its adherence to the programme are now also performed.
In 2012, price dynamics in the commodities market and severe floods in Pakistan saw the price of cotton – Gildan’s largest input cost – spike and then collapse, affecting the stock prices of apparel makers. The Hermes US Small and Mid Cap equity team saw this volatility as an attractive entry point to the stock and initiated our position in February 2012.
Gildan is not known as a desirable consumer brand, but has achieved success through the quality of its products and its ability to control costs. Higher employee satisfaction has increased staff retention and productivity, and this, combined with efficient energy usage, enables the company to consistently produce appealing garments at lower prices.
Having dominated the North American screenprint market, Gildan’s future growth is likely to be sourced from three main channels: direct screenprint, a market encompassing non-retail orders for brands such as Adidas and Disney; international screenprint, for which it has acquired a factory in Bangladesh to meet demand in Asia; and retail, a sector in which it will be a new entrant vying for business against established brands. Gildan has demonstrated that it can excel by overcoming steep challenges, and we are confident in the company’s ability to grow in all three markets.
Gildan stock price, February 2012 – April 2017
Source: Hermes, Bloomberg as at 20 April 2017
Hermes US SMID initiated a position in Gildan on 8 February 2012 and remains invested in the company.
Past performance is not a guide to future performance. The value of an investment can fall as well as rise and you may not get back the original amount invested.