As scrutiny of the fashion sector grows, its myriad environmental and social externalities could finally catch up with it.
While the fast fashion industry’s dire sustainability and human rights record is a never-ending cycle of scandals, it seems to hardly make a dent to its perennial popularity with fashion-hungry consumers and money-hungry investors.
But there are emerging signs that the model of the US$106 billion industry is under threat, with investor attention on the rise and policymakers seeking serious overhauls.
In June, the European Parliament called for measures to “put an end to fast fashion”, as the bloc moves on a range of rules imposing stricter waste management practices and greater usage of sustainable textiles on the industry.
Netherlands-based Triodos Bank welcomes regulation, noting that business-led sustainability initiatives have seen little success.
Johanna Schmidt, Sustainability Research, Impact & Economics at Triodos Bank, says: “It’s a very, very good step forward… over the last few years we’ve seen that fast fashion brands have introduced their own recycling programmes and there’s more and more evidence that they actually don’t work.”
In July, the Changing Markets Foundation found that major fashion brands and retailers had been failing to honour promises to give a second life to used clothes donated by consumers in store take-back schemes. It used Apple AirTags to track 21 ‘good condition’ garments donated to stores’ take-back schemes – just five were resold, while seven were downcycled or destroyed, four were “lost in limbo” and four were shipped to Africa.
The sheer wastage of the fast fashion industry is now even visible from space with satellite images in June capturing an ever-growing dumpsite of 60,000 tonnes of discarded clothing in Chile’s Atacama desert, labelled “an environmental and social emergency” by the United Nations.
New business models
In March, UK-based asset manager Columbia Threadneedle released a report on the fast fashion industry, warning that voluntary initiatives will not be sufficient to make the industry more sustainable.
Author of the report, Tenisha Elliott, Vice President, ESG Analyst at Columbia Threadneedle, tells ESG Investor that instead an overhaul of their business model is needed. “In short, companies should deploy holistic frameworks of operational and supply chain due diligence, to meet increasing regulatory scrutiny and maintain their social licence to operate.”
She continues that companies should have clear policies and proactively assess the potential adverse impacts of their operations on people and the planet. Where impacts are identified, particularly through dialogue with workers and NGOs, she says, companies should consider if there are operational changes that can be made to support better outcomes. To create additional accountability, a framework of iterative assessment to track the effectiveness of the approach should be incorporated, she adds.
Elliott also notes that there are interesting drivers for change for fast fashion business models that will improve its sustainability credentials such as a return to near-shoring where brands source from manufacturers near their home country.
“Near-shoring is being driven by multiple factors including a need for more resilient supply chains, so that brands can insulate themselves and their operating models from any exogenous shocks caused by the geopolitical environment and allegations of the proliferation of environmental and social harm through their buying practices,” she explains.
She adds that fast-changing consumer tastes are driving a move toward smaller order quantities and increased technology innovation to speed up the design process, which is likely to change brand sourcing patterns.
Another emerging trend highlighted by Elliott is worker shortages. The Wall Street Journal reported this month that garment factories across Asia are struggling to attract younger workers who, drawn in by the lure of social media influencer lifestyles, are less willing to work long hours in factories for low pay. “Factories are having to be creative to attract and retain workers and this may eventually lead to increased wages meaning that Asia, in time, could become less cost effective as an apparel sourcing region,” she says.
The low pay and poor treatment of workers in garment factories has been a persistent issue for the industry. In 2021, human rights index the World Benchmarking Alliance (WBA) singled out the apparel sector in its first gender benchmark for failing to protect the millions of women workers.
Among a litany of shortfalls, WBA found that violence and harassment was a key issue across the apparel value chain, and that the payment of a living wage was not a widespread practice.
Namit Agarwal, Social Transformation Lead at WBA, adds that only just under half of companies (45%) in the sector in 2020 had commitments to International Labour Organisation (ILO) core labour standards such as freedom from forced labour, and freedom to associate and collectively bargain across their business and supply chains.
Just last week, the Business & Human Rights Resource Centre reported that several garment workers and trade unionists are facing trial in Myanmar after taking part in protests for a pay rise at a now ex -supplier of Inditex, owner of fast fashion titan Zara. In July, Inditex pledged a “phased and responsible” exit from the region under military rule.
Schmidt at Triodos Bank says current business norms are impeding progress on decent wages and the right to unionise in the apparel supply chain industry, but like Elliott from Columbia Threadneedle says generational, along with power dynamic shifts, offer hope for change.
Triodos is a founding member of the Platform Living Wage Financials (PLWF), an alliance of investors, including Columbia Threadneedle, that encourages, supports and monitors investee companies to enable living wages in global supply chains. It has completely divested the fast fashion sector over its poor record on sustainability and the payment of decent wages but maintains engagement through PLWF.
“We speak through the platform to several supply chain actors,” says Schmidt. “I was really flabbergasted by a factory manager from Asia saying that investors are only interested in the return on their investments and have no interest in the well-being of workers.”
She adds that some fashion brands label worker and supply chain unionisation as a business risk. “If you look at classical valuation literature guaranteeing worker rights is not a good thing, because if collective bargaining delays a supply chain order for example, there’s no long-term planning capacity.”
But the alliance’s continuing conversations with supply chain actors are also showing signs of shifting power relations, where once all-powerful fashion brands are no longer as able to dictate conditions and prices to factories.
“I’ve spoken to factory managers who don’t accept low prices or won’t cut corners on conditions as their product is so unique, the brand depends on them. So, it’s a more equal power relation,” she says, adding that reports of younger workers starting to shun the industry due to lacklustre conditions could also shift power imbalances and force positive change.
Environmental and social legislation
Aditi Pai, ESG Analyst at American Century Investments, is hopeful the California Garment Worker Protection Act will have a positive impact, but says it is still too early to identify how the Act is changing working conditions. “The Act has been in effect for about a year and a half. According to the Garment Worker Center, some members are now getting paid minimum wage, but others are still facing wage theft,” says Pai. She adds that New York lawmakers are considering similar legislation to make companies liable for unpaid wages in the state.
New York lawmakers are also considering social and environmental rules for the apparel sector through the Fashion Sustainability and Social Accountability Act, says Pai. Outside the US, she says, countries like France and Germany have laws requiring clothing to display environmental and social information on labels and the EU has implemented reporting and governance mandates that cover environmental issues and working conditions through laws such as the Corporate Sustainability Due Diligence Directive.
Europe’s textile strategy
The EU is also working on a range of measures to make the clothing industry greener. The European Commission kickstarted the process last year with the publication of a textile strategy and the European Parliament responded this June with its call to “end fast fashion” and the adoption of the non-binding EU strategy for sustainable and circular textiles.
Next, EU lawmakers will move to creating new measures across different pieces of legislation to implement the agreed strategies on the fashion industry.
According to Valérie Boiten, Senior Policy Officer at the Ellen MacArthur Foundation, the main measures will be through the proposed Ecodesign for Sustainable Products Regulation (ESPR) that will introduce stricter environmental requirements for many product groups, including clothing. Proposed requirements under Extended Producer Responsibility policies could also include making brands and retailers responsible for their products after consumption, says Boiten. “I would say that’s really a tectonic shift. We know that Extended Producer Responsibility (EPR) has been in place in other sectors like plastic, packaging and batteries. It hasn’t meant we suddenly have a circular plastics economy, but it’s definitely impactful.”
Proposed new ecodesign laws could also influence the microplastic impact of the clothing industry, and the EU Waste Directive could be used to tackle the industry’s overconsumption problem. There are also proposals to empower consumers with better information on the greenness of their garments. With the EU importing 96% of its clothing, according to Boiten, the laws could have a dramatic impact on the industry globally. China also issued a textile strategy last year, she says, and parts of Latin America are making moves in this direction too. The G20 Resource Efficiency Dialogue also focused on the fashion sector last year, she adds.
Of course, moves towards stricter regulation risk raising costs for the industry, and potentially harm fast fashion’s unique selling point – dirt cheap items.
Boiten argues that the industry has had “hidden costs” for some time which are set to become more visible. “At some point somebody will have to start paying for the landfills and incineration that will only grow as consumption grows.”
According to the foundation’s 2017 data, only 1% of textiles are recycled, says Boiten, and other recent figures suggest the situation has barely changed.
She adds that climate change is also set to raise costs for the clothing industry. “We know from projections going forward that it will be harder to guarantee access to cotton as floods and droughts make the certainty of harvests more volatile. We’ve seen in Pakistan last summer that two-thirds of cotton harvests were simply culled after disastrous flooding.”
Investor engagement and voting
UK-based Wiltshire Pension Fund goes even further, arguing that the fast fashion industry is “not consistent with a net zero future, due to the way it monetises over-consumption”. It only has £20.8 million invested in the fashion sector, representing 0.64% of its portfolio, but has a focus on the sector due to its negative impacts on people and planet, says Jennifer Devine, Head of Wiltshire Pension Fund.
The fund says that although the fashion industry and its supply chains were brought into public consciousness by the infamous Rana Plaza disaster ten years ago, tragedies have still occurred elsewhere and the industry’s health and safety hazards, labour rights and pay issues remain. “This is an industry with tight margins, and manufacturers without proper supply chain management and manufacturing standards may lead to cost cutting measures (or turning a blind eye) which leads to these tragic incidents,” says Devine.
Devine adds that it is important that the topic does not become something “we can only talk about from a point of privilege”.
“There needs to be a wider focus on fairness within society and ending poverty for all, particularly in the current context of the cost-of-living crisis which is putting many people in challenging financial situations, and not inadvertently penalising people by making basics like clothing unaffordable. We also need to consider the workers in the industry. There is a lot to be done and there is not a one-dimensional solution,” she says.
The fund publicly outlines how it is engaging and implementing ESG with the fast fashion sector, including through its proxy manager Hermes EOS that recently engaged with Nike on supply chain traceability to mitigate human rights abuses.
Devine says this year the fund also plans to scrutinise its asset managers’ actions. “We are interested in how our managers are voting on these issues, and will look for any interesting examples when we review our quarterly voting information.”