Commentary

Dress to Change

Johanna Schmidt, Investment Strategist at Triodos Investment Management, explains how investors can bring about a more sustainable fashion industry.

In recent years, the clothing sector has been increasingly criticised for creating vast amounts of carbon emissions and millions of tonnes of waste, while fashion companies have been accused of disrespecting and violating labour rights.

Occupational health and safety disasters such as the collapse of the Rana Plaza factory in 2013 in Bangladesh, as well as recent examples of garment workers producing clothes for the UK brand Boohoo without Covid-19 safety measures, add to the picture of worldwide structurally underpaid workers in the garment sector.

Responsible investors committed decades ago to not investing in harmful products such as arms and tobacco. However, given that clothes are not controversial products per se, and the underlying processes of harmful sectors such as fast fashion are more difficult to grasp, many responsible-minded investors still invest in the big fast fashion players. In the meantime, fast fashion brands continue to reach new heights, with controversial fast fashion company Shein recently being valued at US$100 billion.

In fact, many of these companies receive high scores in ESG ratings and transparency rankings, as they have adopted the language of sustainability and promote cosmetic changes to curb side effects without effectively tackling the root problems.

Yet, consumer awareness of the issues related to fast fashion is growing. More sustainable, circular and re-sale fashion companies are entering the market, while even the trendsetting UK television show Love Island has announced it will no longer use fast fashion to dress its contestants. With this focussed attention on the negative impact of fast fashion in particular, now is the perfect time for investors to demonstrate their leadership when it comes to responsible investing in the fashion industry.

Transitioning to a sustainable fashion industry

A transition to a sustainable fashion industry at scale requires companies to fundamentally change their business models to those that focus on a circular economy and incorporate responsibility for people and planet.

Investors have a key role to play in this transition, working in partnership with other stakeholders across the fashion industry. Through the power they have as shareholders, investors can push the fashion industry in a more sustainable direction, while consumers can make informed choices in terms of what they buy. But to move towards slow, sustainable, and circular fashion, regulators also need to step in to create the tools through legislation and tax policies to push the industry.

In order to accelerate the transition in the fashion industry, it is vital that investors look beyond environmental and social features of a company, by scrutinising the corporate strategy and business purpose, and the core business model. The corporate value proposition must be sustainable, and the strategy must be translated into key performance indicators, ranging from corporate programmes on supply chain due diligence to investments in innovation in recyclable and biodegradable materials.

A truly responsible investor will select companies for investment based on a set of strict criteria, including how a company generates positive impact – which could include areas such as circular business models, sustainable supply chains or promoting fairer working practices. Through active engagement and dialogue, investors can keep these companies on the right track and stimulate further improvement.

Only companies who are embracing or clearly transitioning towards sustainable fashion in terms of valuable products, durable processes and long-term purpose should be considered investable.

Driving the fashion industry in the right direction

To focus investment only in those businesses that are working towards more sustainable ways of working, investors should look at fashion companies that have a particular focus on the life cycle management of garments, textiles and fibres – contributing to a circular economy. These could be fashion companies with a special focus on reusing and recycling clothes, for example by leasing clothes, operating second-hand clothes stores or offering comprehensive take-back programmes.

Companies that focus on sustainable and biodegradable raw materials and clothes or are leading the sustainable textile innovation should also be considered.

On the other side of the coin, we would strongly recommend against investing in companies whose business model relies on the fast pace of seasonality, large volumes and the disposability of garments. These companies depend on consumers’ fear-of-missing-out on trends, engage in overproduction and drive overconsumption leading to the exploitation of workers. They offer low value clothes at low prices, are responsible for massive textile waste generation and do not price in social and environmental costs.

The garment industry is an important and necessary sector, employing many people and producing products that we all need. A large part of it, however, is also highly unsustainable, which is why fashion companies need to redefine their business purpose and model. We therefore call on the industry to make this transition, and on investors to help power this change.

Triodos Investment Management is a signatory of the Fashion Declares campaign, which calls for an urgent shift in behaviour in the fashion industry to cut carbon emissions and tackle the climate, ecological and social crisis.

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