What can the Silicon Valley Bank collapse teach us about fashion and creating a more sustainable industry? More than you might think. The bailout announced this week – which the U.S. government has justified by designating the bank as systemically important after the fact – highlights how privatized profits and socialized risks enable companies to take excessive risk believing they will be rescued by the government. As for how this relates to fashion: The current lack of regulation and the overarching market-incentive structure facilitates the growth-at-all-costs mindset that dominates the industry (and not coincidentally, that mirrors the venture capital approach to investment), while enabling industry players to avoid paying the full cost of what they produce.
While others analyze and debate the merits of the Silicon Valley Bank bailout, what went wrong and how it could have been prevented, the situation provides a unique opportunity to examine why – and how – fashion continues to fall behind its sustainability goals despite the never-ending stream of ESG initiatives.
Socialized Risks = Externalities
The fashion business relies heavily on the unaccounted-for externalities that the industry has created, the biggest of which – from an economic perspective – is the current supply chain model that the majority of apparel companies exploit. Born from a quest to find the lowest-cost providers, the complex and globally dispersed supply chain that is the norm in fashion sees garments travel as much as thousands of miles from fabric sourcing to final production before they ever reach the consumer. Every mile that a garment travels contributes to its emissions footprint, and as a result, the apparel industry’s cost of production rarely reflects the true environmental costs at play.
Neither brands nor the purchasing consumers are paying for these emissions, which means that the environment – and society at large – is paying for them, instead, and since no country imposes a carbon emissions tax on apparel, brands have no incentive to minimize the geographic spread of their supply chains, which would be one of easiest ways to decarbonize fashion’s value chain. (It is also an option that is rarely discussed.)
The majority of our clothing is produced in far-flung countries, such as China, Bangladesh, and Vietnam, with lax environmental laws and the dirtiest energy grids – to say nothing of these countries’ poor record on labor standards. Each garment’s carbon footprint is exacerbated by the fact that most garments are worn seven to ten times before they are disposed of, usually within three years of purchase at which point they may travel thousands more miles to be resold or landfilled.
Industry entities also do not pay for the waste they generate in the form of overproduction of poorly made synthetic clothing. The $15 million pledge by SHEIN to the Or Foundation to help clean up fashion’s waste represents just 0.02 percent of the Chinese fast fashion titan’s $64 billion dollar valuation, or 0.05 percent of estimated revenue from 2022 ($30 billion, or 0.001 percent of apparel industry’s $1.53 trillion total revenue.) In short, what fashion brands are voluntarily giving back or investing to clean up their messes rarely even amounts to a rounding error relative to their revenues.
All the while, the fashion industry’s profits remain concentrated among a relatively small group of founders, investors, and shareholders of big-name groups.
Herd Mentality = Poor Risk Management
As Bloomberg’s Matt Levine wrote in his first assessment of SVB’s collapse: “Nobody on Earth is more of a herd animal than Silicon Valley venture capitalists.” Except perhaps, the fashion industry and the venture funds that fund fashion startups – from the firms touting new technology that promises to “revolutionize” the industry by helping it to achieve its sustainability goals to the latest “sustainable” fashion/lifestyle brand. The tech providers all seem to use the same playbook, which involves a barrage of buzzwords to construct a smokescreen that obscures the reality that such tech-centric solutions have yet to achieve the scale required to address the volume of apparel that is consistently created. Mushrooms, for example, have been the industry darling of bio-based materials for some time, and every year, there seems to be a trendy tech concept that aims to help minimize waste and make fashion more efficient; this year’s focus, it seems, is on AI.
At the same time, there is the spate of so-called “sustainable” brands that have garnered headlines and venture capital over the last decade, and that have been scaled rapidly in order to achieve the triple-digit returns in the three- to five-year time frame that VCs require. Reformation and Everlane are among some of the many examples of the disconnect between fashion’s stated sustainability goals and business reality. The former, which had raised $37 million in funding as of 2019, aspires to be a “green” fast fashion brand – an oxymoron that should draw scrutiny the way H&M’s “Conscious Collection” has come under fire in false advertising litigation. The latter, another VC darling, has angled to be millennials’ version of The Gap, but with a “radical transparency” tagline to demonstrate their sustainability credentials.
In addition to adopting an aesthetic that is often barely distinguishable from other venture-backed brands (i.e., a mass-market take on Phoebe Philo’s Celine or The Row), many of the burgeoning brands in this segment put their own marketing spin on sustainability. Far too many “sustainable” brands tend to rely on vaguely defined and largely unregulated adjectives, such as “green” and “eco-friendly”, and third-party certifications like the B-corp certification – most of which have traditionally fallen into a legal gray area when it comes to enforceability.
Elsewhere in the market, companies like SHEIN exhibit enormous growth; SHEIN grew an estimated 840 percent between 2019 and 2021, or a whopping 1180 percent from 2019 to 2023 – after losing roughly 36 percent of its value between 2022 and 2023. Even with its value reportedly dropping from $100 billion to $64 billion over this period, it has still overtaken traditional fast fashion giants like H&M and Zara in terms of volume and revenue. Such eye-watering expansion is hardly a novelty, though, as scale is the name of the game in fashion, regardless of whether that growth is coming from Chinese ultra-fashion groups, investor-favored millennial brands, or some of the biggest names in the luxury realm. Ironically, the scale that the fashion industry most desperately needs is not increased output from virtually indistinguishable apparel and footwear brands, but a way to deal with the massive amount of externalities and waste it produces. However, the reality is that the lack of regulation and the overarching market-incentive structure prevents this from happening in any meaningful capacity.
In an ideal world, investors and shareholders would bear the bulk of the risks of their investments and the costs of what companies’ produce — not the government, taxpayers or the environment. Regulation helps ensure a full accounting of the costs and forces companies to manage the risks and potential externalities their business models create. This can be said for companies like SVB and fashion industry entities (and the damaging byproducts of their endless quests for growth), alike.
We are far from understanding exactly how the SBV collapse could have been averted, but most experts expect to see increased regulation and oversight on smaller, regional banks – because regulation is risk mitigation. As for fashion, given the significant environmental risks the industry generates with its current business model, it is likely also time for regulators and policymakers to adopt a higher level of scrutiny. As the fourth largest industry in the world by some estimates, it is not exactly frivolous.
Kristen Fanarakis is the founder of Los Angeles-made brand Senza Tempo. She spent over a decade working on Wall Street in foreign exchange investment, sales & trading, and currently works with the Center for Financial Policy in Washington, D.C.