Last month, I went to Parklife Festival in Manchester, a two-day festival known for its dance and electronic music and young fan base. Unsurprisingly, the main sponsor was Shein, a fast-fashion e-retailer famous for its ‘cheap and cheerful’ garments. During set breaks, large billboards advertising its products illuminated the stages as its primary target market – that is, Generation Z and Generation Alpha – ogled at the prospect of staying ‘on trend’ for less than £5. These series of events prompted me to think about how easily unsustainable shopping habits are planted into impressionable consumers – and more importantly – led me to question whether the sustainable investment community has the power to shift these habits.
Currently, the fashion industry is under immense pressure from the government, regulatory boards, and stakeholders. New sustainability rules in the EU and the US now require brands and manufacturers to strengthen their initiatives aimed at cutting greenhouse gas emissions and waste. For example, Switzerland’s Federal Act on Climate Protection Goals, Innovation and Strengthening Energy Security requires all companies to be net zero by 2050 – based on direct and indirect emissions – where companies must produce a transition plan to meet this target.
These new regulations put pressure on fast fashion retailers to alter their business models, which typically take advantage of Quick Response (QR) production and dynamic assortment planning. These pressures are largely prompted by the climate crisis. By 2030, more than $65bn (£50bn) of apparel exports and one million jobs are at risk of being wiped out by climate events such as flooding and extreme heat across continents, McKinsey & Company’s The State of Fashion 2024 report revealed.
Fashion retailers are relatively commonplace within fund managers’ portfolios, with some of the largest publicly-listed firms Nike, TJX Companies, Inditex and H&M generating a combined £163.6bn in revenue over the last year alone, according to data from Companies Market Cap.
Given this, how do investors encourage fashion companies to improve their sustainability progress, and how are the retailers themselves ensuring they stay ahead of the curve?
The fast-fashion industry: A case study
I vividly remember when Shein became popularised: it was the beginning of the coronavirus pandemic and my TikTok for-you page was filled with hauls of users wearing cheap yet fashionable clothing. Within weeks, all my friends were purchasing clothing typically found on the UK high street, but for a fraction of the price.
Since then, Shein has rocketed in popularity among Generation Z and Generation Alpha. Shein recorded sales of around $45bn (£35bn) in 2023 and was further valued at $66bn (£51bn) in a fundraising round last year, according to Reuters. Recently, the company filed paperwork taking it a step closer to listing on the London Stock Exchange, which the BBC reported could value the company at $64bn (£50bn).
Yet, stakeholder criticism – particularly of Shein’s working practices and environmental impact – has forced the company to shift its business model. Last month, the company announced it will invest $271m (£209m) over five years in the UK and Europe. This was in response to criticism of its unsustainable logistics strategy, which is based on exporting goods from China – specifically in the Guangzhou province – to the rest of the world.
Keeping track of human rights
“Any conversation about the just transition within fast fashion must put the workers at the front and centre,” Jessica Wan, social research lead at Greenwheel, said. Greenwheel, the research arm of Redwheel designed to inform the company’s sustainable investment solutions, has recently released a human rights due diligence tool for investors.
This tool highlights the importance of assessing human rights risks in investment decisions, and allows investors to “assess good from bad performance of human rights.”. It maps the international and voluntary frameworks companies follow for investors to understand the governance and policies, management systems, data and targets around human rights across their holdings. This includes the integration of human rights and business risks and priorities, public reporting on human rights, stakeholder engagement, and responses to adverse impacts and controversies.
Wan has worked with the United Nations (UN) and other global organisations, specifically researching human rights risks within factories, across the globe.
Wan stressed that the tool is not to “name and shame”, but to highlight the importance of what good practice looks like. It aims to champion open dialogue between investors, companies and stakeholders. What is important is that companies identify the risks addressed by its investors and work to mitigate these risks, as Wan summarised: “It is about how companies can do better in the future and to encourage them to report about what is learnt from the process.”`
Further, Wan explained how the climate crisis is heightening the pressure for companies to clamp down on human rights policies. Environmental risks become human rights risks because “environmental risks impact the local community. For example, if a factory is competing with local communities for water, it can lead to water scarcity, which affects the community’s right to using the water”.
This was echoed by McKinsey & Company’s The State of Fashion 2024 report, which suggests that “action by manufacturers must take the form of prioritising worker health and safety. This can be actioned through operational shifts such as offering more frequent breaks, rehydration amenities and proactive temperature monitoring of the factory floor, alongside capital investments in fan systems.”
This helps to improve worker retention rates because “due diligence and creating positive working conditions promotes long-term productivity.” Wan continued: “We have seen this in women’s empowerment programmes that promote healthy working environments, such as treating all with dignity and respect, which means workers are more motivated on the factory floors.” Overall, educating investors about the importance of human rights, and how to monitor these rights within its holdings, is a step closer to supporting the net zero transition.
Testing the waters
Similar to the shape of Greenwheel’s tool, PlanetTracker’s dashboard scans portfolios to track the level of water stress its holdings are exposed to. PlanetTracker is a non-for-profit that helps business align with sustainable practices, and the tool maps the location of almost 800 apparel factories across the globe. It considers the current level of water stress the factories are exposed to and how this is estimated to change over time.
Major fashion brands and retailers are being threatened by water stress, which is expected to increase in areas due to climate change, the company’s report, Ripple Effects, revealed. This leaves the fashion value chain especially vulnerable, particularly those that are exposed to the production of raw materials supplying manufacturers, such as cotton. This material is sensitive to both droughts and flooding, and in India – the world’s second-largest cotton exporter – extensive rainfall reduced its supply to the extent that the country began importing it. On the other hand, the fashion industry is the second most water-intensive industry in the world, consuming around 79 billion cubic metres of water per year.
The company noticed there “was limited conversation about water stress, especially in the transcripts of board meetings”. “For most, they either don’t think about water or they’re not sure how to start asking questions about it,” David Wielechowski, senior investment analyst at PlanetTracker explained. He added the tool encourages investors to track water stress and reduce its portfolios exposure to these regions.
This is in response to regulators who are starting to clamp down on green-labelled funds. “Investors in the apparel sector need consistent and comparable data to appropriately price water-related risks. There is a push to have more data and knowledge on the ways to protect companies from both reputational and regulatory hits,” Wielechowski said.
He added that stakeholder pressure implores companies to evidence their sustainability claims, and that “good data is critical to back up sustainability commitments”.
The investment price-tag of sustainable fashion
Swetha Ramachandran, manager of the Artemis Leading Consumer Brands fund, has built an extensive career investing in luxury goods, including fashion brands. Her portfolio is classified as an Article 8 fund and was launched in December 2023.
In terms of the straight investment case, Ramachandran explained that the world’s fashion brands benefit from several factors. The first is “the secular rise of the emerging middle class in Asia and other parts of the world”. “These companies are truly global because leading consumer companies do a lot of business in Asia – even when their shares are listed on stockmarkets in the US or Europe,” she said. “They receive a far greater share of their revenues from Asian consumers than their peers in other industries such as banking or telecommunications.”
Second, there has been a generational shift in consumer habits. “[These companies] benefit from the rise of younger generations who are brand-aware at a much earlier age today,” the fund manager continued. “Consumer preferences are also constantly evolving. Leading consumer businesses today are more than transactional– selling something physical – but are creating ‘experiences’ that aim to generate more loyalty from their customers and help them to remain relevant.
“The market is growing and has scope to grow much further. This means that if you chose the right brands this space offers an exciting source of long-term investment opportunities.”
A key part of the fund’s strategy is to tap into the renewed ‘buy less, buy better’ mentality – the antithesis of fast fashion. Does this new mentality mean fashion retailers could suffer financially, and will this preference help companies to better align themselves with net zero ambitions?
Ramachandran said that while it is “too early to tell, because consumer trade-down behaviour tends to rise in periods of high inflation”, industries are already suffering.
“Entry-level luxury has been challenged by the resale market. Here, you can buy a second-hand bag from a leading luxury manufacturer for the same price as a brand new product. Consumers are increasingly favouring the second-hand one from the stronger brand. In normal economic times this should see a sustained shift for less, but better.”
While the fund manager said “many leading brands focus on values rather than value”, she conceded that no industry is perfect, and a “continued commitment to transparency around supply chain and sourcing practices” is on the top of her sustainability wish list.
Overall, it is clear that the retail industry – including the fast-fashion industry – is progressing in the right direction. However, progress will only continue with the right investment tools, stakeholder pressure on companies, and the tightening of regulations which govern companies and investment decisions. The fashion industry can commit to sustainability practices with the guidance of the investment community, whose role, as Jessica Wan puts it, “is to help companies do better in the future.”
