NB Financial Health

Wednesday
December 31
2014

James Militzer

The Supply Chains of the Future: How Tau Investment Management is using strategic supply chain investment to transform the garment industry

Editor’s note: As part of our Most Influential Post of 2014 contest, we are re-publishing the articles that attracted the most reads. This article was the most-viewed for August. To see the full list of the most popular posts in 2014 and to vote for your favorite, click here.

In late 2012, a fire at the Tazreen garment factory in Bangladesh claimed the lives of 112 workers – and it later emerged that two American apparel makers in Walmart’s supply chain were using the factory around that time. A little over a year later near the Bangladeshi capital, a concrete building called “Rana Plaza” collapsed, killing over 1,100 people and injuring 2,500 – the worst accident in garment industry history. Since 2005, garment factory fires and collapses have killed at least 1,800 workers.

Yet in spite of these tragedies, the industry has been a boon for Bangladesh’s economy, accounting for roughly 78 percent of its total exports and dramatically improving the lives of millions of (predominantly female) workers. But though both retailers and the Bangladeshi government have taken steps to improve worker conditions in the garment industry supply chain, challenges remain.

Tau Investment Management is addressing these challenges through a novel application of what could be termed “impact investing” – though Tau itself is reluctant to call it that.

“Impact investing is a term that we don’t wear automatically,” says the company’s co-founder and senior vice president, Benjamin Skinner, interviewed at this year’s Sustainatopia Impact Conference. “The impact from us comes because we’re showing that it’s highly profitable to do business in a different way. We believe that what we’re doing is turnaround and growth equity. It’s that simple.”

Tau is aiming to raise and deploy a billion dollars to tranform the supply chains of major global brands, which it is currently investing to improve working conditions and transparency in textile manufacturers. “We fix supply chains, in a nutshell,” he says. “We look for industries … where investment and know-how are needed to turn around vendors, to make them more sustainable, productive and efficient – to make the vendors of the future that are being demanded by certain brands.” After revamping the operations of these vendors through its investments, Tau is left with equity in a more profitable company – and workers are left with significantly better working conditions, Skinner says.

Though his company ultimately plans to work with other industries, Skinner says it chose to start with apparel because it was most clearly at an “inflection point” where retailers and consumers were demanding action. “The need was broadly evident to the brands well before the tragedies at Tazreen and Rana Plaza – but those two tragedies made the need evident for the world,” he explains. Business factors also played a role in the decision. In the garment industry, he says, “doing business in an unsustainable way has been revealed to be more costly than doing business in a sustainable way. The average monthly turnover rate, for example, in Bangladesh, of workers who are leaving factories to go across the road for a few taka more, is between eight and 12 percent. So the best workers leave as soon as they have the basic training. Their value per minute, as it goes up, is enjoyed by one of your competitors. That’s enormously inefficient. So why not make workplaces where people want to work? It’s nuts and bolts economics. And it makes for a business proposition that, whether you’re talking to factory owners, brands, consumers – and certainly workers – they get it.”

When it comes to determining companies in which to invest, he says, “We look for existing companies that have problems, challenges that need to be addressed, and that need capital to address them. But critically we look for good management that wants to do the right thing – and that wants to be one of the suppliers that make the cut as the brands increasingly consolidate.” Making that cut is increasingly important, he explains, as public consciousness of supply chain ethics grows, and as the major players in the garment industry and other sectors respond. “Money is lost on the part of companies that weren’t doing the right thing, and contracts are gained on the part of companies that were doing the right thing. So there’s an obvious market incentive.”

And in his view, the strength of this market incentive means that history is moving in a direction that benefits not just ethical supply chains (and investors like Tau), but sustainable capitalism in general. “What we’re doing is really accelerating the inevitable in certain industries,” he says. “Certain industries are going to change. Just as (electric car maker) Tesla is accelerating the inevitable in the car industry, where because of the destruction wrought by carbon fuels … there was inevitably going to be change. Tesla just had the foresight to get there first, and to build a sexy car that sold to consumers. So we’re essentially doing the same thing in the garment industry. We’re reforming it in a way that desperately needs to happen … and we want our portfolio companies to be the suppliers of the future. Part of the way that we make these portfolio companies more valuable is by making them more socially and environmentally friendly and better on governance and all sustainability metrics – but first and foremost, we’re turning 100 million-dollar companies into billion-dollar companies.”

In the video below, part five in our Impact Investing Insights series, Skinner covers topics that range from Walmart’s controversial (and extremely effective) “Red List” of factory groups it will not buy from, to how Tau responds to abusive practices in companies it encounters (“it’s something that we deal with all the time”).

You can view the other parts of the series here:

Part 1: A Small Drop in a Large Bucket: The World Economic Forum’s Abigail Noble, on why impact investing needs to go mainstream

Part 2: Pay for Success: Can social impact bonds provide the fabled “win-win-win”?

Part 3: Start Small, Stay Small: Can better finance help Latin America’s microenterprises take the next step?

Part 4: The Best-Kept Secret in Impact Investing

Categories
Entrepreneurship, Environment
Tags
corporate social responsibility, impact investing, investment fund, supply chains, sustainability, video