Landmark due diligence directive marks an “increasingly aggressive” regulatory approach in assessing textile firms’ supply chain impacts amid green claims clampdown.
The fashion industry must pursue greater traceability and transparency in its supply chain or risk exposing investors to non-compliance risks under the EU’s Corporate Sustainability Due Diligence Directive (CSDDD).
Planet Tracker’s ‘Following the Thread’ report found that regulators globally are taking on an “increasingly aggressive approach” towards supply chain impact responsibility. It also noted a rise in international efforts to crack down on disingenuous ‘green credentials’.
The report warned that without “significant efforts” by fashion retailers to work with their supply chains to reduce negative environmental impacts, regulatory measures could result in “significant exposure for many major companies”.
It also highlighted the “opaque nature” of the sector’s supply chain, making the attribution of responsibility for environmental impacts and investors’ ability to exert pressure and drive change “challenging”.
Richard Wielechowski, Senior Investment Analyst, Textiles, at Planet Tracker, told ESG Investor that the CSDDD is the “most important” regulatory item for the supply chains of textile companies, with the industry accounting for approximately 10% of global emissions.
Earlier this month, the European Parliament backed a robust version of the CSDDD which will hold firms, including those fashion retailers, accountable for human rights and environmental violations.
The directive is still subject to trilogue discussions with the European Council and the Commission, with dialogue expected to get under way in the coming weeks, with a potential resolution hoped for by the end of the year.
Wielechowski said that while the CSDDD “could be stronger”, he believes that it will foster “better behaviour” in the sector on human rights and environmental-related risks in its supply chain.
Rising regulatory requirements
Planet Tracker’s report called for investors to increase pressure on fashion retailers to invest in their supply chain partners, which would enable them to substantiate green claims about their collections at a time when regulators “appear to be taking a keener interest in potential greenwashing”.
The think tank also underlined the long-term profitability of investments in making the fashion industry more sustainable, having previously estimated that implementing a robust traceability system could improve net profits on average by 3-7% for apparel companies in a joint analysis with digital supply chain firm Segura.
Wielechowski said for investors traceability should be non-negotiable.
“If a brand hasn’t got, or isn’t putting in a traceability system, I would say that is somewhat of a red flag,” he cautioned. “It means companies are not really getting serious about sustainability or could be hiding something.”
“A key factor in the regulatory discussion is having full traceability, the ability to know who your suppliers are all the way along the chain, including where the raw materials come from and who made the fibres,” he added.
“If you’ve got no traceability system, how on earth are you going to be able to answer those questions?”
In February 2022, the Commission put forward proposals to add the environmental and social impact of goods as areas where traders cannot mislead consumers, as well as calling for a ban on generic or vague environmental claims.
In March 2023, the EU proposed a directive on green claims focused that will require a more robust proof, requiring claims to be checked by “an independent and accredited verifier”.
The fashion industry also faces sector-specific regulation including an EU strategy for sustainable and circular textiles the State of New York’s proposed Fashion Sustainability and Social Accountability Act.
The Commission is additionally due to revise its textile labelling regulation in Q4 this year, which will introduce specifications for physical and digital labelling of textiles, including sustainability and circularity parameters based on requirements under the proposed regulation on eco-design for sustainable products.
Long-term risks
According to Wielechowski, action around the greenwashing of green claims and sustainability due diligence represent significant risks in the near-term for the fashion industry. However, he said that there is also “growing awareness” from regulators about the environmental risks posed by microfibres, a form of microplastics, produced by the fashion industry in the manufacturing of clothing.
There are up to 171 trillion microplastic particles floating on the surface of the ocean, according to a recent estimate, with the average human consuming up to 50,000 microplastic particles annually – and inhaling roughly the same – due to food chain, potable water, and air contamination.
Globally 16-35% of microplastics released to oceans are from synthetic textiles, while up to 65% of the shed microplastics may be released during wear and drying into the surrounding aerial environments.
Wielechowski also flagged due diligence on the post-sale of garments as an issue that will see a rise in regulatory scrutiny. This includes clothing items’ design for recyclability and for durability, as well as who the responsibility for textile waste falls on.
“This is important step because it’s all very well to decarbonise the supply chain, but producing tonnes of textiles that end up dumped in the environment is a problem,” he added.
