Regulation Is Turning Products Into Trackable Assets, And Supply Chains Have To Adapt

The EU’s new textile regulations are in full swing. Rules on the destruction of unsold clothing are already taking effect for large companies, mandatory disclosure requirements for unsold inventory follow in 2027, extended producer responsibility is being phased in, and digital product passports are expected from 2027 onward. Companies are increasingly expected to take responsibility for the full product lifecycle, from what a product contains to what happens when it comes back to the warehouse. For an industry built around moving products efficiently in one direction, that’s a significant operating change.

Martijn Lopes Cardozo, Partner at Regeneration.VC, has spent the past two years investing in early-stage companies building circular business models. Before joining the firm, he spent four years as CEO of Circle Economy Foundation, the Amsterdam-based organization behind the widely cited Circularity Gap Report, and six years as CEO of Black Bear Carbon, a cleantech company recovering materials from end-of-life tires. That mix of operating and investing experience gives him a broad view of where circular models are already working across fashion, electronics, and other industries.

"Re-commerce is currently one of the fastest-growing segments of the market. If you're a brand, you want to make sure you participate in that, so those revenues, plus the associated brand value, don't disappear onto other platforms," Lopes Cardozo says. 

Digital product passports as part of reverse logistics infrastructure

Digital product passports could become one of the most important parts of the new regulatory framework because reverse logistics depends on knowing what’s coming back. “Take digital product passports. I think it’s incredibly helpful for a brand to know exactly what’s in a product,” Lopes Cardozo says. “If a product has a digital product passport and perhaps a small RFID chip, or even a code you can scan, you know exactly what you’re getting back.”

That information becomes useful as soon as a product re-enters the supply chain. A company can identify what it contains and determine whether it should be resold, repaired, refurbished, or recycled without reconstructing its history each time it changes hands. The same product data can also move across organizations, giving companies a better view of assets that previously disappeared from their systems after the initial sale.

Lopes Cardozo points to Apple as an example of what that model can look like in electronics. Its devices remain connected to an ecosystem of trade-ins, refurbishment, and resale after the first owner is finished with them. “They build iPhones that last a long time, but they’re also part of the return experience,” he says. “You can hand them back, and they can be refurbished and reused. That creates an incredibly valuable secondary revenue stream.”

Why reverse logistics requires a different operating model

Modern e-commerce is built for one direction. Brands have spent two decades optimizing how quickly a product moves from warehouse to doorstep. "They're incredibly efficient at getting things out to customers," Lopes Cardozo says. "But reverse logistics is much more complicated. You're taking in secondhand clothes, grading them, sorting them, getting them ready, taking the right pictures, and preparing them for e-commerce, recycling, or whatever makes the most sense in that case. That requires a whole new skill set."

Companies don't need to look far to see this challenge already playing out. Even ordinary e-commerce returns expose it. Shoppers routinely order two or three sizes of the same item, keep one, and ship the rest back. Once those products have been unpacked, they need to be inspected, regraded, repackaged, and returned to inventory, assuming they make it back at all. “Some of those products end up in recycling bins or are even destroyed,” Lopes Cardozo says. It's an efficiency problem hiding inside brands' existing return rates.

Those losses were easier to absorb when the business largely ended with the first sale. Recommerce changes the calculation because products that leave a brand’s system can continue generating revenue elsewhere. The resale market gives brands a commercial reason to build reverse logistics before regulation forces the issue. A returned or secondhand garment can become inventory again if the company can identify it, understand its condition, and process it cheaply enough to put it back into a market.

AI changes the economics of product returns

Processing those products cheaply is where AI starts to become important. Sorting is one of the first places the cost appears, and Lopes Cardozo sees computer vision making a direct difference there. He points to Greyparrot, a Regeneration.VC portfolio company whose camera systems sit above conveyor belts in recycling facilities and identify materials in real time. “It basically uses a vision camera system with NVIDIA chips on the edge that can look at materials and identify them in real time, then feed that straight into how things get sorted,” he says. “I think that’s an incredibly valuable piece.” 

The principle transfers directly to apparel. For a business model built on five, ten, or twenty-dollar garments, that kind of automated identification is what makes the unit economics work at all. Manual sorting simply doesn't scale to the volume of secondhand apparel now entering the market. “The combination of better data gathering, AI, computer vision, and robotics gives you the technology levers to accelerate a lot of these processes and create unit economics that actually work,” Lopes Cardozo says.

AI can also reduce the number of products coming back in the first place. Better fit prediction, customer segmentation, and product recommendations can help customers choose items they’re more likely to keep. “That’s also a data problem, and that’s exactly where AI really shines,” Lopes Cardozo notes.

Both applications depend on companies having enough information about the product, customer, and transaction to understand what’s moving through the system and why. Once that visibility extends to incoming products, AI has much more to work with.

Better demand data changes what companies produce

Once a brand can see demand clearly, in something close to real-time, the next question is why it's still manufacturing the same way it did a decade ago. "Supply chains have become incredibly efficient, and the cycles have become faster and faster," Lopes Cardozo says. "Ultimately, you want them to be informed by the end user and end-user behavior in a very tight way. If you see demand happening on the consumer side, you want to feed that into your supply chain immediately so you can start producing just in time."

Lopes Cardozo sees portfolio companies pursuing that model, with production shifting closer to the consumer and relying more on robotics than on the traditional overseas manufacturing pipeline. "You order something, and it gets produced not too far from the consumer when the order is placed, without all the shipping, warehousing, and steps in between," he says. "I think that's incredibly exciting." 

The natural extension of that model is fit, since sizing remains notoriously inconsistent across brands. A medium at H&M can be a very different garment from a medium at Calvin Klein. Once a brand can capture sizing data directly from the customer, it can correct for that inconsistency and, eventually, move toward genuine customization at a reasonable price point. "Hopefully, some of this creates a world where you don't buy a three-dollar T-shirt, wear it once or twice, and throw it away," Lopes Cardozo says. "Instead, you create fashion items that are genuinely valuable to the consumer and, as a result, last longer." 

Europe’s textile rules may be setting a broader operating model for global markets

Europe’s textile rules are arriving in stages, and together they point toward a broader shift in how fashion operates. The phasing itself is important. First comes the destruction ban, followed by unsold-inventory reporting, extended producer responsibility, and eventually digital product passports. For brands, that creates time to build the systems needed to track products, manage returns, and understand what happens to them after the initial sale.

Fashion is one of the first places where that shift is becoming explicit, but Lopes Cardozo sees the same pattern in electronics and other categories. Companies that once ran highly efficient one-way supply chains are starting to incorporate resale, repair, recycling, and end-of-life into their operations.

Once that infrastructure exists for Europe, extending it elsewhere becomes much easier. “If you implement them for one market of a couple hundred million people, it makes a lot of sense to eventually implement them globally,” Lopes Cardozo says. "I would encourage brands to look at these regulations and ask how they underpin new business models that are going to be profitable, then make sure they incorporate those models into their strategic plans," he concludes.