The asset management industry is increasingly incorporating sustainability and ESG factors into investment philosophy and analysis. As a result, companies are facing shareholder demand for evidence of policy, transparency and communication regarding these factors. Always in vogue, the fashion industry is one that is eager to take this trend on board.
Impact investing and Environmental, Social and Governance (ESG) strategies have been gaining momentum over the last few years. ‘“Responsible investments now exceed US$1.3 trillion in assets through registered investment products such as US mutual funds, European UCITS, and exchange-traded funds (ETFs)”, says Jag Alexeyev, founder of Impactvesting LLC.’
The fashion industry is a key contributor to the global economy, it is estimated to employ over 60 million people across its global value chain and generates over EUR1.5trn in revenues every year. However, it is also notoriously known as one of the worst offenders on ESG policies. In November 2018, a UN Environmental Programme study concluded that the fashion industry is one of the biggest environmental polluters accounting for 20% of global wastewater and 10% of carbon emissions. The industry has also repeatedly been in the headlines for employee rights violations especially for wages and work conditions
The question arises whether this is the turning point of a long-term industry revolution or simply another trend to gain investor and consumer attention.
The demand for sustainability in the fashion industry has been driven multilaterally.
Regulation is key in reviewing the industry’s value chain. Policies such as the EUs Circular Economy Package (2018) and Waste Directive (2018) aims to increase recycling of materials and ultimately reduce landfill waste.
Evolving consumer behaviour is also a driver. The McKinsey Apparel Chief Procurement Officer (CPO) survey 2019 notes that internet searches for “sustainable fashion” tripled and Instagram hits for #sustainablefashion increased 4x between 2016 and 2019. Ignoring the importance of sustainability to the consumer damages brand equity. In 2018, Burberry was heavily scrutinised for destroying “deadstock”, the industry’s jargon for excess material and products. Burberry responded by halting “deadstock” destruction and has stopped selling products with real animal fur.
Given these pressures, companies are realising the opportunity and competitive advantage in catering to these consumer needs. According to the McKinsey survey, sustainability and transparency is the top priority for CPOs going forward, with 55% of companies aiming for sustainable materials to account for 50% of their products by 2025. Currently, only 1% of new products offered online in 2019 were tagged “sustainable” but this offering has increased 5x over the past 2 years.
Consequently, the Fashion Pact was introduced at the G7 summit in Biarritz in August 2019. An initiative led by President Macron and Francois-Henri Pinault, Chairman and CEO of Kering, The Fashion Pact aims to align the fashion industry with the United Nations “Sustainable Development Goals” (UN SDGs). Specifically, the pact focuses on Climate, Biodiversity and Oceans. Its goal is to gain representation from at least 20% of the entire fashion industry, from luxury houses to fast fashion brands. So far, 32 fashion companies have signed up ranging from luxury houses such as Kering, Prada, Burberry to fast fashion groups such as Inditex and H&M to global sportswear such as Adidas and Nike and department stores such as Nordstrom, Galleries Lafayette.
The Fashion Pact is the first framework of its kind specifically aimed at the fashion industry and its supply chains to collaborate on targeted goals. However, the Fashion Pact is not a legally binding document but a set of guidelines for the fashion industry to follow. How a company follows these guidelines or executes these targets is at the company’s own discretion.
It is not enough to commit to guidelines, currently there is no global standardised body that can hold companies accountable for executing “sustainability” policies. This not only makes it difficult to compare industry peers, but it also confuses what a “sustainable” brand means to the end consumer. CEO of Hong Kong Research Institute of Textiles and Apparel states that “Many companies say they are moving to sustainable materials, but that is quite a loose term at present. And we don’t yet have the vocabulary or language to explain what we are doing at the consumer level.”
Ultimately, this emphasizes the need for robust ESG analysis by the asset management industry which makes up a significant part of these companies’ shareholder base. It is not enough to scan for buzzwords such as “waste management” and “sustainable sourcing” in company filings, it is also vital to engage with management to provide evidence and promote transparency of what it means to be sustainable and align the company’s supply chain with the same values. This is what Aubrey Capital Management does, it scrutinizes company ESG policies and engages with company management as part of our analysis.
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