Last week, Stella McCartney, the Act on Fashion Coalition, New York State Senator Alessandra Biaggi and Assembly Member Dr. Anna Kelles publicly unveiled proposed new legislation that focuses on cleaning up the fashion industry. If signed into law, the Fashion Sustainability and Social Accountability Act will call on apparel and footwear retailers with global revenues of at least $100 million that sell products in New York State to publicly make environmental and social disclosures, and set forth plans to improve upon the workings of their supply chains – or risk noncompliance status and the potential for monetary penalties of up to two percent of their annual revenues. 

Specifically, the “Fashion Act” (S7428/A8352) would require companies to map out at least 50 percent of their supply chain, identify “significant real or potential adverse environmental and social impacts,” and then disclose targets for prevention and improvement of those impacts. Companies would also have to disclose their material use (by material type); a quantitative baseline and reduction targets on energy and GHG emissions, water, and chemical management; and the wages of workers.

First introduced to the New York State Senate in October, the bill has found three New York Senate co-sponsors, as well as proponents in the fashion industry, with famed fashion designer Stella McCartney, for instance, stating that the legislation is “an example of a step towards a better, more regulated future.” In a report last week, New York Times fashion critic Vanessa Friedman called the proposed legislation a chance to hold “pretty much every large multinational fashion name, ranging from the very highest end – LVMH, Prada, Armani – to such fast-fashion giants as Shein and Boohoo” accountable “for their role in climate change.”

The Fashion Act – which aims to get “fashion retail sellers and manufacturers  to  disclose  environmental  and   social  due diligence policies” – is worthy of the many glowing headlines it has garnered since its public unveiling, as the fashion industry is sorely lacking when it comes to transparency about its occupants’ environmental impact and labor policies (topics that typically fall under the umbrella of Environmental, Social and Governance (“ESG”) reporting), despite being a significant driver of global greenhouse gas emissions. 

“Unlike other heavy polluting industries, such as the auto sector, fashion retailers and manufacturers operate in a regulatory-free vacuum,” the New Standards Institute stated in a release on Friday. “This has led to a global race to the bottom, where the companies that have the least regard for the environment and for workers have the greatest competitive edge.” 

Against this background, the industry is desperately in need of change. A number of industry initiatives and voluntary collectives have formed with the goal of cleaning-house, but in many cases, they have petered out or missed the mark in terms of what is actually in need of fixing. Getting brands to map out at least 50 percent of their supply chains and set science-based targets to reduce their impacts is an important endeavor, and ideally, the Fashion Act will kickstart a larger overhaul of the fashion/retail system. 

However, in order for such an industry-wide ESG reckoning to come into fruition, a number of foundational elements must be put into place first. 

From Uniform Data Standards to Reliable Audits

One of the most pressing roadblocks to implementing regulation in the fashion and apparel space (and every other industry when it comes to monitoring environmental and social factors) is the current lack of uniform data standards. Unlike financial reporting, there is neither an internationally agreed-upon standard to measure or calculate environmental and social factors, nor a process for auditing to ensure compliance against such a common standard.

The problem of data standardization and transparency is, of course, not a new one. Back in August 2020, for instance, Commissioner Allison Herren Lee of the U.S. Securities and Exchange Commission noted, “We are long past the point at which it can be credibly asserted that climate risk is not material. We also know today that investors are not getting this material information. The world’s largest asset managers, the largest pension funds, the largest insurers, and every major systemic bank seek disclosure of climate related financial risk.” 

As it currently stands, there are hundreds of different ESG ratings systems, such as those from Sustainalytics (a subsidiary of Morningstar), Morgan Stanley Capital International (“MSCI”), Bloomberg, and Institutional Shareholder Services. These firms use unique proprietary models to measure climate risk, human rights and social policy, corporate governance, and supply chain policy, primarily based on voluntary-provided information. A uniform data standard for reporting social and environmental data – paired with suggestions on the relevant data, calculations, and disclosures – is currently lacking to ensure a consistent format in the data collection and reporting process. (The Sustainability Accounting Standards Board’s Apparel, Accessories & Footwear standards are worth noting within the context of fashion/apparel space, as they comprehensively take into account an array of ESG targets.)

Because ESG ratings rely largely on voluntary and survey data provided by companies, themselves, the data is often incomplete, inconsistent, and lacking in rigor compared to companies’ financial data. It was precisely this voluntary data that enabled fast fashion company Boohoo to achieve a AAA ESG rating from MSCI in 2020.

While many consumers and investors want to view such ESG ratings with the same credibility as the company credit ratings that Moody’s or S&P assigns, there are critical differences that exist between these ratings. For example, credit ratings are based on precise, publicly available market information and companies’ audited financial statements, and are calculated using similar methodologies across the various rating agencies. Companies’ financial statements are compiled according to the strict and legally enforceable GAAP or IFRS guidelines and then audited by an independent auditor registered with the Public Company Accounting Board in the U.S. for compliance with those standards. Auditors then prepare a report that is filed with the Securities and Exchange Commission (in the U.S.), where omissions and errors are met with sanctions, fines, and potential jail time.

In lieu of a standard framework or industry-specific guidelines, and reliable audited data, each individual company is left to decide how it calculates its impact and risks, and how it tracks its progress in furtherance of ESG targets. In a best-case scenario, even if companies are honest with their data, the lack of a uniform reporting standard still leads to inconsistent comparisons across companies – a well-documented complaint from parties ranging from asset managers to regulators. In a worst-case type of scenario, this lack of standardization invites companies that do not like the results of their current methodologies or their progress towards certain targets to simply change how they calculate their impact or to exclude problematic suppliers and products altogether. 

Hardly a hypothetical issue, Brookings found that while more than 80 percent of major global companies report on some aspects of their social and environmental impacts, the data required to assess whether such ESG efforts have achieved a positive social and environmental impact is “often missing, incomplete, unreliable, or unstandardized.” 

More than that, industry-wide standardization is critical because corporations notoriously have a mixed track record when it comes to voluntary disclosures – and this happens across industries. Research from individuals at the Center of Economic Research at ETH Zurich, University of Zurich, and University of Erlangen-Nuremberg-Friedrich confirms that while voluntary disclosures have been hailed as an effective measure for better climate risk management, corporations tend to cherry pick their data when it comes to climate-related data and report non-material information.

Still yet, in an article for the Harvard Law School Forum on Corporate Governance, Timothy M. Doyle essentially asserts that ESG ratings do not really rate anything given that companies are making “select and unaudited disclosures,” and that even third parties’ ESG ratings can “vary dramatically … due to differences in methodology, subjective interpretation, or an individual agency’s agenda.” 

Without a standard framework or government mandated guidelines to calculate key environmental risks (in something of the same way as how banks or other highly regulated industries are given standards by the government, which sets the parameters and standards of key metrics like leverage or capitalization ratios), and given the overarching pattern of companies putting forth carefully curated information on the ESG front (and downplaying the negative aspects) of their operations in order to showcase themselves in their best light to consumers, investors, and regulators, greenwashing and gamesmanship scenarios are not difficult to imagine.

Not an Isolated Issue

Of course, the issue with data standardization, integrity, and transparency is not isolated to the fashion industry; it is a complex global market problem that regulators around the world are actively addressing with input from industry and the world’s leading experts in corporate finance and financial markets. Determining the right standard for each industry is what the SEC, the European Commission, and various other regulators around the world have spent years grappling with how to implement. The Global Reporting InitiativeTask Force for Climate Related Financial Disclosures, and Sustainability Accounting Standards Board have put forth the most widely accepted standards and are expected to be the benchmarks regulators will converge around to varying degrees. 

One such effort comes by way of the Corporate Sustainability Reporting Directive (“CSRD”), which the European Commission introduced in April 2021 in order to upgrade the 2014 non-financial reporting directive, and improve the coverage and reliability of sustainability reporting. When it comes into effect in 2023, the CSRD is expected to increase the number of companies that disclose sustainability information and require them to report their sustainability performance using EU-wide disclosure standards developed by the European Financial Reporting Advisory, a private association with strong links with the European Commission. (The CSRD will, nonetheless, give companies significant discretion on what and how to disclose, and imposes different requirements for companies that differ by sector and size.)

At the same time, the U.S. Securities and Exchange Commission is exploring a rule to adopt mandatory ESG disclosure rules that will apply to publicly listed companies. 

The general consensus among regulators appears to be that without standardized and accurate data, effective regulation is impossible, which is one reason why we have not seen more regulation in this realm. However, with rising ESG awareness and enduring calls from consumers and investors, alike, paired with dogged efforts from researchers, lawmakers and regulators, it appears as though the status quo is changing.

Ultimately, fashion is undoubtedly in need of greater regulation, and a state law that mandates greater transparency for the biggest players in the industry is a welcome start. 

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 works with the Center for Financial Policy in Washington, D.C.

We are a technology obsessed society and fashion brands know it. Back in 2007, the average consumer was spending about $1,200 per year on technology, a number that has grown significantly since, with the consumer tech market in the U.S., alone, slated to reach $461 billion this year. While consumers readily shell out on various premium tech gadgets and services (in 2019, the average U.S. household had 11 connected devices), most are far less willing to pay extra when it comes to sustainable garments and accessories. A survey from IBM and Morning Consult revealed that consumers would pay roughly $3 extra – or a total of $14 on average – for a sustainably-produced t-shirt. That is one dollar less than the hourly minimum wage in Los Angeles. 

This tech vs. t-shirt comparison may help explain why many companies’ efforts to create a “sustainable” fashion model center more heavily on novel – and marketable – technological advancements, such as using more recycled fabrics or adopting non-traditional materials like mushrooms, than on more foundational efforts that get to the heart of mass-market manufacturing operations. A steady stream of headlines not only suggest that these new technologies are the key to putting fashion on the path toward a more sustainable future; they also create the appearance of burgeoning progress. 

However, a closer look at these regularly-reported efforts tells a different story. 

Buzzy Tech & Marketable Initiatives

For one thing, despite widespread marketing, complete with often-glossy imagery, most of these “sustainability”-centric initiatives represent a miniscule amount of a company’s total product offering. Retail giant ASOS’s recycled capsule collection, for instance, which launched in September 2020, amounts to just 29 items out of the retailer’s 80,000 SKUs – or 0.03% of the company’s  product offering. In a similar vein, as part of its “comprehensive circularity strategy to advance sustainability goals,” Ralph Lauren revealed that it will offer Cradle to Cradle Certified™ products by 2025. The multi-national lifestyle brand – which generates $6.2 billion in annual revenues from roughly 15 different product lines producing everything from cashmere sweaters to its famous polo shirts and chinos – has not yet specified what items would fall under this certification scheme. It did, however, reveal that it has “set a goal to make [just] five iconic products” in connection with the Cradle to Cradle certification.

Still yet, H&M is one of the busiest companies when it comes to technology-related PR announcements – from its LOOOP machine to its long-running Conscious Collection. All the while, the Swedish fast fashion giant, which maintains the title of one of the largest global clothing retailers, churns out millions of garments every year, most of which are ready to be recycled after a few wears in exchange for a 15 percent credit towards a customer’s next purchase

Beyond the relatively small impact of companies’ sustainability initiatives compared to the might of the marketing that surrounds them, a more fundamental issue exists. A cursory read of any fashion sustainability report quickly reveals that most companies are relying almost exclusively on buzzy technology initiatives and/or carbon offsets to meet their sustainability goals, as opposed to reexamining their growth models. 

Basic business logic establishes that a company can grow its earnings by increasing volume, margins or some combination of the two. While brands that occupy the upper end of the fashion industry spectrum benefit significantly in many cases from beefed-up margins for things like branded eyewear and trademark-bearing coated canvas handbags, the industry as a whole has increasingly looked to volume to boost their earnings, particularly as mass-market margins have dropped. This has fueled a race to the bottom in both wages and quality, which is, of course, a critical part of fashion’s sustainability problem. 

It is not all doom and gloom. From a production point of view, there appear to be some outliers. Prada, for example – which was the first big-name luxury names to prioritize sustainability by linking its efforts to five-year 50 million-euro ($55 million) loan from Crédit Agricole Group – appears to be promising contender. In addition to the sustainability linked bond, the Milan-based group announced that it would stop doing markdowns in 2019 in order to better preserve margins, a process that likely sees it being more careful about how much is being produced each season. (And in fact, in an earnings call in March, Prada Group execs revealed that it was able to “avoid excess inventory,” and thus, markdowns, which in turn, “significantly improved” its price positioning.)

What about the data?

Consistent overproduction, the endless quest for scale, and the downward spiral of wages are key issues that stand out in  fashion’s quest to clean up its act, but  more than that, transparency continues to be a problem. Despite endless marketing around their sustainability efforts, in most cases, brands currently do not have to release data on their progress, nor do they have to prove how these technologies allow them to continue to increase their production while creating a net reduction in their total greenhouse gas emissions. 

Yet, that could be changing, something that would pose a real problem for fashion’s smoke and mirrors sustainability strategy. Investors and regulators – who are paying increasingly close attention to whether brands’ marketing matches their actions – care about the bottom line and materiality, not what creates the best PR story.

Acting SEC Commissioner Allison Lee recently called for public comment on a series of climate and ESG related disclosures given the “soaring” interest from investors because “companies are reporting in different ways ranging from traditional SEC filings to something that looks almost like an ad brochure.” With that in mind, “How can investors be confident that the information is reliable?,” she asked. Among the fifteen topics that the SEC is calling for input on what “quantified and measured information or metrics should be disclosed because it may be material to an investment or voting decision,” what “registrants [are] doing internally to evaluate or project climate scenarios, and what information from or about such internal evaluations should be disclosed to investors to inform investment and voting decisions.”

Days after Acting Commission Lee’s call for public comment, SEC Commissioner Caroline A. Crenshaw asserted in a statement to the Asset Management Committee on March 19 that “investors have different thoughts about what ‘sustainability’ means and how ESG factors inform their investment decisions.” As such, “The Commission’s role is to facilitate material disclosure to investors, [b]ut to be useful to investors, disclosures need to be meaningful. That’s particularly true for ESG-related disclosures, as they are too often inconsistent and incomparable.” 

“What we should be working toward,” she stated, “is a clear disclosure regime that yields consistent, comparable, reliable, and understandable ESG disclosures to investors.”

The fashion industry (and others) should be working towards a similar disclosure regime, one that is consistent, comparable, reliable and understandable. In other words: one that is transparent, which is precisely what fashion’s current sustainability plan is not. And still yet, the industry needs to acknowledge the fact that sustainability will never be achieved through technology, alone, no matter how enticing these endeavors may be. A small – but heavily advertised – recycled capsule collection from a fast fashion titan, here or certified circular series of items from a multi-billion dollar company, there, is mathematically immaterial. 

The general fashion press and consumers might not do the math, but investors and regulators will.

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 works with the Center for Financial Policy in Washington, D.C.