ESG in the fashion industry, an opportunity for cost saving and brand strength

-Millennial and Z generation buyers are driven by ethical consumption, and this will affect the fashion industry

-Investors and governments are pressing brands for greater transparency across ESG criteria as social inclusion and environmental pressure increases

- By incorporating ESG into their business model, fashion companies can build preparedness against upcoming ESG laws while strengthening their brand

With stricter ESG measures coming to market in the US and Europe, the fashion industry is taking notice and some of the sector leaders are positioning themselves to be the front-runners of the sustainability movement. In the US, a few states are leading the charge, and once the proposed sustainability bill (which is also known as the Fashion Sustainability and Social Accountability Act) is approved, fashion corporations operating out of the state of New York will be required to be more transparent and accountable in terms of their supply chain contribution. This law will only target clothing and shoes companies with revenues that exceed $100 million. The companies being targeted will have about 12 months to ensure that they comply with the new law provisions which will include mapping the supply chains, set ESG targets, and issue annual reporting about their environmental, social and governance impacts to ensure compliance to the NY requirements.

Trend going forward

States and regions across the world are establishing their own ESG, sustainability, and ethics bills, to ensure that all sectors increase their corporate transparency and accountability around sustainability efforts and impact. This is pushing companies to reshape their business model while adopting new ESG standards starting with decarbonization efforts. Some of the front runners are companies like Burberry, which was a leader of the ESG movement to ensure that the company becomes “carbon neutral” by 2022. This means that Burberry operations will be able to offset its carbon emission via mitigation measures which could include adoption of renewable energy or trading its emission via carbon markets. Other companies including Zara, Adidas, Nike, TOMS, and Puma are working hard on minimizing the environmental impact, and some of them are aiming to align management compensation with shareholder priorities and diversifying its leadership position by adding workers from minority groups as well as ensuring that more board positions are given to women. Zara’s parent company Inditex (The Spanish global fashion leader) was named the most sustainable retailer by the Dow Jones sustainability index from 2016 to 2018.

What should fashion companies do?

While there have been some good successes as mentioned above, what we have seen so far are an excessive focus on green PR campaigns, hiring sustainability experts, and making big ESG commitments in terms of their NetZero carbon emission targets. What they have not done is build an internal ESG baseline to understand and quantify their environmental social and governance footprint and adjust their operations to it.

Fashion companies should work on developing a simple database across the ESG priorities to better understand how the company scores against the specific criteria that is relevant to their production, supply chain and sale. Here following are some of the standard indicators that companies can use to assess their sustainability and social scoring that may be affecting the company bottom line and growth.

Environmental Social Governance

Carbon emission Diversity, Equity & Inclusion Board diversity in terms of gender and ethnicity

Water Intensity & Wastewater Management Employee Safety and Empowerment Ethics & Code of Conduct

Waste management and recycling efforts Supply Chain Labor Conditions Supplier Diversity

Product Design & Management of Chemicals Human Rights Donations and training

Sourcing Sustainable Raw Materials Worker’s empowerment Policy & Advocacy

Prevention and resilience investment Vulnerable community projects Compensation equality

Source: Good Lab

Conclusion

Ultimately, a good internal understanding of ESG scores will help companies align their priorities with new binding regulations (becoming laws in 2022 in Europe), while ensuring that efficiency, sustainability, and diversity are mainstreamed. Additionally, this will help companies build lasting relations with investors and with consumers (PWC found that 49% of consumers look at ESG procedures), while reducing the company exposure to legal action. Expect big change in the fashion industry in 2022 and don’t underestimate the role that start-ups will play to transform the way fashion interacts with the environment, investors and with society.