This amorphous term ESG encompasses a wide spectrum of information and considerations but is so often assumed to mean something it does not. To paint a better picture of what the term ESG actually means, each month we will be outlining examples of what ESG integration looks like in practice across a variety of sectors, through the lenses of risk, opportunity, and impact.
ESG in Action: November 2023
- Sector: Consumer Discretionary
- Industry: Textiles, Apparel, and Luxury Goods
- ESG Issue: Pollution, waste management, and biodiversity loss
Risk: Dressing the planet in pollution
The single biggest retail day each year for the fashion industry is the Friday after Thanksgiving, known as Black Friday. This year, Black Friday resulted in $9.8 billion in online sales in the U.S. – a record number for the day and an increase in sales of 7.5% year-over-year.1 Of the 100 billion garments produced each year globally, only 1% gets recycled and reused. Meanwhile, nearly 90% of all clothing ends up in an incinerator or landfill.2 In the US, this equates to 2,150 pieces of clothing per second that ends up discarded.3 Because 60% of fabrics today are synthetic, this all means that billions of discarded articles of clothing will never decay.4
Did you know?
Production in the fashion industry over the last 15 years has doubled, while clothing wear time has fallen by around 40% before ultimately getting thrown away.
According to the UN, the fashion industry is estimated to be the second most polluting industry in the world.5 They estimate that 20% of global wastewater comes from the industry, including runoff from fertilizers and pesticides in cotton farming, the release of pollutants like lead and arsenic during synthetic fabric production, along with oils, phenols, dyes, and heavy metals during dying and fabric treatment processes.6 Synthetic textiles shed microplastics with every wash and wear, accounting for 9% of microplastic pollution in the oceans in addition to polluting freshwater and land, posing a danger to the animals that inhabit these environments.7 Meanwhile 8% of global greenhouse gas emissions every year result from the fashion industry’s value chain, including emissions from clothing production all the way down the chain to emissions from burning discarded textiles.8
The outstanding question is: who exactly should pay the costs associated with the pollution and biodiversity loss caused by the industry? Across the EU and UK, and in California and New York, regulators have proposed rules that would require the fashion industry to adopt extended producer responsibility programs (EPR).9 EPRs require producers of hard-to-recycle goods to bear the financial burden associated with recycling their products and managing the resulting waste. In France, where an EPR program has not only been proposed but implemented, over 6,000 brands were required to pay a collective $55 billion in fees in 2021–fees which have been acknowledged to currently be too low given the costs.10
In addition to recycling and cleanup requirements, the industry also faces a consumer base that desires sustainably sourced goods as most consumers say they care about the sustainability of the clothing they wear.11 There is an attitude-behavior gap among fashion consumers today, meaning that few act on their sustainability concerns in their purchasing behavior. As this gap begins to close with greater disclosure, however, the industry may face reputational risk as consumers become increasingly aware of the impacts the industry has on the planet. H&M, for example, faced a class action lawsuit from customers in the US for marketing a line of clothing as “conscious” claiming the line required less water to produce when the clothing line may have used more water than average.12
Opportunity: Waste not wasted
As the attribute-behavior gap does close, an opportunity exists for companies to capture a new market share of sustainability-conscious customers who do act on their sustainability concerns, introducing new revenue streams. Sustainably produced clothing is often higher-quality and more durable, factors found by a 2022 Bain report to be most important among consumers when considering whether to purchase a piece of clothing. Durability allows for the articles to have more resale and reuse opportunities which may increase a company’s profit margin. In fact, Bain estimates that fashion resale could account for 20% of revenue by 2030 for a luxury brand while a 2019 report from ThredUp, an online fashion resale store, showed that resale grew 21 times faster that year than retail.13,14 Brands like ThredUp, Patagonia, and Rent the Runway have not only committed to sustainable practices but have differentiated their businesses by supporting the circular economy. The concept of circularity is that products and materials are kept in circulation through processes like maintenance, reuse, refurbishment, remanufacture, recycling, and composting. Patagonia’s “Worn Wear” program, for example, allows customers to trade in worn clothing, which the company then repairs and refurbishes for resale at a discount.15 Stella McCartney, a subsidiary brand of LVMH , has an ongoing partnership with the Real Real and Reformation’s partnership with ThredUp are other examples of resale collaborations. The Ellen MacArthur Foundation estimates that moving fashion to a circular system could unlock $560 billion in economic opportunity.16
Did you know?
Almost half of assessed companies in the textiles, apparel and luxury goods industry have at least one circular fashion program in place. As more companies see the benefit of participating in the circular fashion model, there is even greater need for these companies to actively measure the impact of these programs.
In addition to durability, transitioning to a circular business model also requires the use of more sustainable sourcing of materials in production, as well as the ability to recycle those materials during that process and at end of life. Some companies are making progress. For example, Moncler Group has set a target for 50% lower impact nylon and cotton, and 50% of yarns and fabrics will be from lower impact materials, by 2025. As of 2022, More than 15% of the nylon used in the 2022 collections were made of recycled material. The company is also taking steps to extend product life cycles, and in 2022 100% of nylon scraps from Group’s direct production sites recycled.17
Impact: The future of fashion
The fashion industry has also been a significant contributor to deforestation globally because of its reliance on nonrenewable resources. In 2020, over 60% of all fabric produced was synthetic, and many of the common synthetic fabrics–polyester, acrylics, nylon, and spandex–are produced from petrochemicals, a fossil fuel.18 A report released in late 2021 found that fashion brands contribute substantially to forest degradation as land is cleared for cattle grazing to produce fabrics like leather, and wood-pulp is required to produce synthetic fabrics like rayon and viscose.19 In fact today, less than half a percent of textiles are produced from experimental, sustainable fabrics.20
Did you know?
Today, 48% of fabrics that are produced from wood-pulp, including rayon and viscose which are among the top fabrics used in fast fashion, are linked with deforestation and forest degradation.
In the luxury space, Stella McCartney has led the way, launching in 2001 with a commitment to “no leather, fur, skins, feathers or animal glues.”21 Since then, the brand has invested in sustainable practices and materials beyond cruelty-free, committing to materials without polymers and plastics, sourcing 100% recycled cashmere to replace all virgin cashmere, and investing in biodegradable rubber, and plastic-free, vegan leather sourced from agricultural waste, just to name a few. The brand’s commitment to sustainability has proven that it’s possible for luxury fashion to be profitable while minimizing the harm it does to the planet.
For the industry at large, in which fast fashion and ultra-fast fashion dominate, the ability to scale biodegradable and resource efficient textiles while turning a comparable profit is more difficult today. Some textile companies have been innovating, creating fabrics from plant-based and natural materials, including Ananas Anam which developed Piñatex® and Piñayarn® from pineapple leaves, Swiss brand QWSTION which developed Bananatex® from banana plants, and MycoWorks which produces mycelium textiles from mushrooms. While these innovations are relatively nascent, and will require significant investment to scale, they lay the important groundwork for how companies in the fashion industry will position themselves in the future, given changing consumer preferences, expectations around brand value, and pressure to develop more efficient supply chains.
The bottom line
The fashion industry relies on natural capital through every stage of its supply chain: design, material procurement, processing and production, transportation, distribution, end of life. And the industry’s contribution to pollution, deforestation, and biodiversity loss is far from insignificant and becoming increasingly noted by both regulators and consumers. Investors may consider to what extent these activities are financially material, the costs associated with continuing to do business this way, and the effect that will have the ability to stay competitive over various time horizons.
Learn more
To learn more about supporting your clients with sustainable investing solutions, reach out to our team at sustainable@envestnet.com or visit envestnet.com/sustainable.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
An ESG integrated or ESG data screened investment strategy may limit the types and number of investment opportunities available to the strategy. This may have a positive or negative effect on investment performance relative to strategies which do not utilize ESG integrated investment approaches. There is no guarantee that an ESG integrated strategy will be successful and meet its investment objective. Companies selected for inclusion in a strategy may not exhibit positive or favorable ESG characteristics at all times and may shift into and out of favor depending on market and economic conditions.
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1 Adobe Analytics, https://news.adobe.com/news/news-details/2023/Media-Alert-Adobe-Cyber-Monday-Surges-to-12.4-Billion-in-Online-Spending-Breaking-E-Commerce-Record/default.aspx#:~:text=It%20was%20bolstered%20by%20record,online%2C%20up%207.3%25%20YoY
2 https://www.earthday.org/campaign/sustainable-fashion/?gclid=Cj0KCQiApOyqBhDlARIsAGfnyMoAe9WdqZEyQ7S_0v7TUUmBa-Y63nmyBP97qp7IyxGLzD2jqV-gDDEaAow4EALw_wcB
3 https://www.bloomberg.com/graphics/2022-fashion-industry-environmental-impact/?leadSource=uverify%20wall#xj4y7vzkg
4 https://www.nytimes.com/2019/09/03/books/review/how-fast-fashion-is-destroying-the-planet.html
5 https://news.un.org/en/story/2019/03/1035161
6 https://fairplanet.org/story/how-the-fashion-industry-pollutes-our-water/
7 https://www.spglobal.com/esg/insights/fast-on-fashion-slow-on-sustainability-clothing-companies-and-the-circular-economy
8 https://www.spglobal.com/esg/insights/fast-on-fashion-slow-on-sustainability-clothing-companies-and-the-circular-economy
9 https://www.bloomberg.com/news/articles/2023-05-25/clothing-waste-is-a-problem-fashion-brands-could-force-you-to-pay-for-it
10 https://www.bloomberg.com/news/articles/2023-05-25/clothing-waste-is-a-problem-fashion-brands-could-force-you-to-pay-for-it
11 https://www.bain.com/insights/how-brands-can-embrace-the-sustainable-fashion-opportunity/
12 https://www.thecut.com/2022/08/h-and-m-greenwashing-fashion.html
13 https://www.bain.com/insights/how-brands-can-embrace-the-sustainable-fashion-opportunity/
14 https://www.ellenmacarthurfoundation.org/fashion-and-the-circular-economy-deep-dive#:~:text=Clothing%20resale%20is%20already%20widely,from%2044%20million%20in%202017
15 https://wornwear.patagonia.com/
16 https://www.ellenmacarthurfoundation.org/fashion-and-the-circular-economy-deep-dive
17 https://www.monclergroup.com/en/sustainability
18 https://www.earthday.org/a-closer-look-into-the-material-drivers-of-the-clothing-industry/
19 https://www.theguardian.com/us-news/2021/nov/29/fashion-industry-amazon-rainforest-deforestation
20 https://www.earthday.org/a-closer-look-into-the-material-drivers-of-the-clothing-industry/
21 https://www.stellamccartney.com/us/en/sustainability/sustainability-timeline.html
