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Organic Cotton Fraud Gets Textile Exchange Fired Up

Textile Exchange has released a new report addressing the root causes of integrity issues across the organic cotton sector.

“We believe that integrity is critically important to the organic cotton supply chain, but equally, we recognize that there are difficulties upholding this principle,” the report said. “Challenges in integrity are neither new nor unique to organic cotton, and they often evolve.”

“Strengthening Integrity in Organic Cotton” aims to provide more guidance on ways the industry can act to improve the integrity, recommending that brands and supply chain partners proactively adopt an integrity system that tackles fraud by building compliance through standards and certification, achieving traceability for organic content, improving incentives for supply chain partners, and reviewing, improving, and collaborating with others.

Instead of detailing the challenges faced by the sector published in the organization’s 2018 report, this new compilation focuses on actionable solutions, though a bit of backstory is necessary.

These challenges include supply chain actors facing supply chain insecurity, quality and contamination issues, as well as most organic farmers lacking access to good-quality non-genetically modified organism (GMO) cotton seeds and secure buyer relations without receiving price differentials that offset their efforts. There’s greater pressure on farmers to increase their yields while reducing costs, which increases the risk of fraud. There’s a lack of transparency in most value chains due to fragmented delivery mechanisms.

Without better traceability of the supply networks, providing proof of an organic chain of custody is challenging, limiting accountability when integrity is called into question. And where that integrity is concerned, the industry is often divided.

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So, Textile Exchange has outlined a relatively simple series of steps—an integrity system—for stakeholders to protect honesty in organic cotton and therefore minimize fraud.

Step one: Understand pressure.

A good place to start is by reviewing supply networks to see where there are vulnerabilities—places where, due to pressure, fraud could occur. Look for systems and processes where financial stress (underinvestment that has led to price pressures), rationalization (the justification of dishonest actions), and opportunity (where loopholes in the processes exist) intersect. This may look like introducing appropriate standards, certifications, and testing, particularly concerning GMOs; implementing robust internal systems to support, advocate for and investigate the strength of organic cotton integrity mechanisms; and introducing positive incentives and price premiums that reward effort and reduce risk.

Step two: Limit opportunity.

Organic is not a purity claim. It is a production claim. Understanding the rules and regulations surrounding organic and how to gather assurance over the production throughout the entire value chain is vital. Organic is the only agricultural production system focusing on sustainability that has been codified into law, which is in place in most regions of the world. This means that the term “organic” has greater legal protections—and scrutiny—than any other “green” claim. Thus, standards and certification are fundamental to limiting fraudulent opportunities and are critical tools in the industry-wide effort to build integrity. The Textile Exchange recommends that brands aim for a fully certified supply chain with appropriate standards, certification and testing, particularly concerning GMOs, to provide greater transparency and surety over production claims.

After compliance is in place, traceability comes into play. There’s a lack of transparency along the supply network, with poor links between farm standards and the textile chain of custody standard and insufficient physical checks performed as the cotton journeys from farm to factories. According to a 2019 UNICEF study, only about 34 percent of the top 100 apparel companies track and trace their value chains, of which half have visibility only up to their immediate suppliers. Capturing both operational data (traceability) and supply chain mapping data (transparency) gives brands better control and visibility within their supply chain.

Textile Exchange has invested heavily in centralizing and digitizing certification for volume reconciliation and traceability through its Trackit system, a formative industry-wide program for improved integrity, traceability and efficiency of sustainable material provenance. The program, due to be completed this year with a full launch in 2023, is developed directly to support the industry’s traceability and transparency needs.

Brands should have sourcing and procurement policies in place that incentivize transparency. Brands should also adopt forensic authentication of material as part and parcel of their strategy and investigate concerns around transparency and traceability to ensure risks are mitigated or minimized.

Step three: Remove rationalization.

Once an integrity system of compliance and traceability is in place, there’s an opportunity to look at the broader incentives and behavioral aspects—rationality—within the sector and supply networks specifically to assess whether they strengthen or reduce integrity. A starting point is investing in long-term relationships built on trust, appropriate due diligence, and fair premiums to increase the supply’s surety and quality and stabilize supply and demand challenges.

This is where price comes into play. Practices throughout the value chain, such as price squeezing or up charging, have been troublesome. This price pressure is one of the critical tenets that, if not dealt with properly, increases the risk of fraud and undermines integrity. Currently, organic cotton prices are high, resulting in increased production and incentive to mislabel cotton to achieve higher returns. Recent surveys by the Textile Exchange show that price is the crucial reason brands and retailers struggle to scale or increase their use of preferred fibers and materials, including organic cotton.

A new textile economy should be based on transparent, traceable and accountable principles that lead to better economic, environmental and societal outcomes. One tool to help organizations make the pivot to new incentives that promote these principles is the Environmental Profit and Loss statement (EP&L), a type of corporate natural capital accounting that encourages all levels of management and investors to seek environmental and social reassurances before deciding where and how much to invest. The EP&L helps to reframe the culture and incentivizes individuals to look holistically at financial, environmental and social impact rather than just price or cost to the business.

By taking these steps, brands can significantly reduce their chances of fraud and dramatically increase the integrity of their products.