Pollution, high carbon footprints and overproduction in the apparel and retail industry are going out of fashion for allocators scrutinising companies’ environmental and social impact. Investors from Calvert discuss analysing sustainability in the fashion industry and challenges along its supply chain.
According to the World Bank, the fashion industry is responsible for 10% of annual global carbon emissions, which is more than all international flights and maritime shipping combined.1 In addition to the impact on global warming, consumers and investors in fashion companies are also scrutinising the sector’s fast pace of production, labour practices, pollution and biodiversity impact.
To unpack how investors who prioritise environmental, social and governance (ESG) factors can assess sustainability in the fashion industry, Morgan Stanley spoke with Calvert Research & Management’s Hellen Mbugua, Director of Research, and Kara Huang, who cover the Apparel and Retail sectors at the firm’s Investment Management division. They discussed the biggest sustainability challenges that fashion companies and their supply chains face and innovations that could make the biggest differences in mitigating issues such as climate change and waste.
Hellen Mbugua: The way we think about sustainable fashion is by looking at every stage in the supply chain: design, material procurement, processing and production,2 transportation, distribution, end of life, and understanding companies’ initiatives. The financially material factors are assessed based on impact to natural capital—how polluting and intense the water usage and carbon emissions are during processing; labour—balancing the positive, such as poverty alleviation,3 while ensuring fair labour practices; and waste management at the pre/post-consumer stage, are all important.
The way we think about sustainable fashion is by looking at every stage in the supply chain.
Kara Huang: Apparel companies typically miss the mark in addressing core environmental issues directly, mainly due to the industry’s reliance on overproduction for growth. Because of that, I’d be hesitant to call any apparel company “sustainable.” Perhaps a handful are leading the charge, those that, as Hellen said, mitigate the environmental footprint at every stage of the apparel value chain, or those that either don’t rely on production (like resale) or pure-play sustainable brands that leverage circular textiles.
KH: The first step for many companies is to implement recycling programs. They might disclose the percentage or amount of clothing that gets recycled, goes to landfills, gets sold or shipped to other countries. They might keep track of this progress to demonstrate an initial level of commitment to sustainability. A large parent fashion company recently spoke about how it’s ramping up circularity efforts by integrating durability at the design and material procurement stage, as well as offering repair services. Companies can implement these strategies without completely altering business models.
HM: But with larger brands, so much is being produced that recycling doesn’t even make a dent. Some of the worst actors are dropping thousands of new products per day because the more they produce, the more they will likely sell, and more money they will likely make, and acceleration of consumerism more so in the West is not being addressed. The number of times an item is worn has been cut in half in the last decade, according to the Ellen MacArthur Foundation.4 China carries the highest risk on the post-consumer waste problem. The aspirational middle class in China, combined with a boom in e-commerce, has turned the country into the world’s biggest fashion market, overtaking the U.S. in 2019. There’s only one apparel company that’s been vocal about consumerism—they market their clothing as that which can be worn for longer to mitigate the environmental impacts of apparel production and consumption. This is akin to the stakeholder capitalism that we have seen in other industries. Companies exist within a complex, global economic system that is influenced—explicitly and implicitly—by ESG factors.
KH: The consumer is pretty mixed. A typical consumer is not uniform in their purchasing behavior. They might be buying from both a fast-fashion company and a more circularity-minded one. Consumer sentiment versus actual purchasing behavior is a really interesting point of discussion. We know Millennials and Gen-Zs tend to prefer more sustainable goods, but because of where price points are, and the race to the bottom in fast fashion, I’m not sure that the drastic change in behavior we’d like to see has come to fruition yet.
HM: It depends on the market. In resale for instance, in some markets, wearing second-hand clothes is taking off, in others there is a stigma in wearing old or second-hand clothes. We expected to see the resale market decelerate during the pandemic in the U.S. due to health concerns. However, the opposite occurred. The fact that most sales occurred online benefited tailwinds for the sector—value, variety and sustainability. For new items, like any new industry or trend, sustainable fashion is still grappling with high price points and how to make sustainable products that are affordable. Just because a product is sustainable, it does not make it impervious to market factors influencing price—labour costs, raw material cost, etc.
KH: I’m probably most excited about digital traceability and how it can increase transparency in the supply chain. With emerging blockchain projects from both start-ups and large-caps, the future is heading towards widespread and traceable supplier disclosure. Granular supply chain data is known to be difficult to access, especially in the garment industry, with a lot stored in physical documents and unorganised spreadsheets. This technology could also enable brands to trace their supply chains from raw material to finished good and monitor suppliers for compliance. Companies can thus strategically target potential risks in their supply chains. Some firms are also working on unique digital passports that are tied to a specific garment. This might be a QR code or RFID that presents to both consumers and companies where something was manufactured, what the materials are, how many times it’s been owned by someone, and end-of-life information such as the most effective recycling practice. We’re in the first innings; this digital infrastructure will take an incredible amount of investment and time.
HM: The digital opportunity in e-commerce, as well as in the digitisation of business processes and operations, is likely the greatest opportunity for the industry. In addition to what Kara listed, 3D printing is another interesting area—digital printing would enable designers to take their ideas from concept to garment in a much faster time frame and open new avenues of creativity. The global digital textile printing market is projected to grow at a compound annual growth rate of 19.1% from 2020 to 2027.5 Although digital printing fits the fast-fashion “see-now, buy-now” mold well, there is an opportunity for it to help eliminate the use of hazardous chemicals, increase resource efficiency and reduce waste during the design stage of the supply chain as well. It could encourage more vs. less production, but it could also eliminate the use of chemicals, increase efficiency, reduce waste and encourage the use of alternative materials.
KH: Exploring upcycling and next-generation textiles will also be essential. There are some companies that have made commitments to using recycled polyester (rPET) in products, typically by utilising plastic waste from water bottles. Though a great reuse story, an issue is that when washed, recycled polyester may release micro-plastics into the ocean. Otherwise, companies may choose to increase adoption of certified responsible animal or plant fibers, or regenerative fibers. However, the cost of third-party certification can be a hurdle, especially for farmers.