The U.S. Securities and Exchange Commission released proposed rules on Monday that would – if enacted – require publicly-listed companies to make disclosures that outline the effects of climate change on their business (and how they plan to manage these impacts) and that detail their greenhouse gas emissions. The official release of the proposed rules – and call for public comments about them – come after SEC Chair Gary Gensler announced in 2021 that the commission would use its statutory authority to draft climate-related rules and require companies to make corresponding disclosures, citing the demands of “investors representing trillions of dollars,” who are looking for “more consistent, comparable, and decision-useful info about the climate risk of the companies in which they invest.”

At a high level, the SEC’s proposal calls for changes that do not necessarily call on companies to change their overarching operations, but that would require them to report more information in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a “material impact on their business, results of operations, or financial condition,” and “certain climate-related financial statement metrics in a note to their audited financial statements.” According to the SEC, “The required information about climate-related risks also would include disclosure of [the various Scopes of a] registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.” 

Much of the proposed regulations are based on the Task Force on Climate-related Financial Disclosures, an existing framework that aims to help public companies and other organizations disclose climate-related risks and opportunities. (If the TCFD sounds familiar, that may be because it is has been adopted by a number of luxury goods groups, such as Kering, LVMH, Hermès, and Richemont, as well as mass-market entities like Uniqlo-owner Fast Retailing and Zara’s parent Inditex, among others; it is also standard that BlackRock CEO Larry Fink has backed in his annual letter to CEOs.)

Specifically, the proposed rule changes would require publicly-traded entities – and “international companies with operations in the U.S.,” per S&P Global – to disclose information about: “(1) [their] governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks [they] identified have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect [their] strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of [their] consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.”

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Sales for LVMH amounted to 64.2 billion euros ($71.55 billion) for the 2021 fiscal year, an increase of 44 percent compared to the year before and 20 percent compared to pre-pandemic 2019, the French luxury goods group reported on Thursday. Organic revenue growth was up by 36 percent and 14 percent compared to 2020 and 2019, with the group saying that its performance for the year “confirms a return to strong growth momentum following the severe disruption to the first half of 2020 resulting from the global pandemic,” and noting that “within the context of a gradual recovery from the health crisis,” it is “confident in its ability to maintain its current growth momentum.”

Delving into the performance of Fashion & Leather Goods over the course of 2021, Bernard Arnault-led LVMH revealed that its largest division “reached record levels,” with revenues totaling 30.8 billion euros ($34.32 billion) for the year – up from 21.2 billion euros and 22.2 billion euros in 2020 and 2019, respectively. Operating margins were up for 2021, as well, totaling 41.6 percent (from 33.9 percent and 33 percent in 2020 and 2019). These results were helped along by a strong fourth quarter, according to the group.

Louis Vuitton, Christian Dior, Fendi, Celine, and Loewe achieved “record levels of revenue and profitability,” while Marc Jacobs “also performed particularly well.” (The big name missing here is, of course, Givenchy.) Louis Vuitton and Dior, in particular, turned “an exceptional performance,” complete with enduring rises in profitability, which LVMH confirmed was “already at an exceptional level.” Specifically, Dior – which saw the success of its new Caro bag and its caning pattern, as well as strong demand for micro bags, and the launch of seasonal capsule collections – boasted “exceptional growth in all its product categories among local customers” over the course of the year. Meanwhile, demand for Louis Vuitton was driven by its “reinvention of iconic models,” along with new artistic collaborations.

Speaking of local customers, LVMH management stated during a post-release call with analysts that local customers “are getting more selective in terms of brand choice,” with the group attracting new local customers in Europe to compensate for the lack of Asian tourists. Also worth noting: LVMH management stated that under the watch of creative director Hedi Slimane and CEO Séverine Merle, Celine has one of the fastest growth rates in the industry.

In terms of Fashion & Leather Goods sales by region, LVMH said that sales in the United States and Asia – which account for the majority of revenue – rose “sharply” in 2021, followed by Europe, finally returned to growth in Q4 compared to 2019, and Japan “with more limited growth.” 

Turning to the Watches & Jewelry division, LVMH saw “a strong rebound of activity in own stores and the successful integration of Tiffany & Co.,” which helped to send revenues up by 167 percent in 2021 compared to 2020, and boosted profits from recurring operations almost six times compared to 2020 and up 128 percent compared to 2019. The division generated the bulk of its sales in Asia (excluding Japan) and the U.S., which LVMH says are “the best performing regions.” Tiffany, alone, saw “record performance in terms of revenue, profits and cash flow, and increased its global attractivity as a result of its high impact innovations and collaborations” during its first year under the LVMH umbrella. The New York-headquartered brand – which benefitted from “strong interest” in its Knot collection, and the rapid development of iconic lines T and HardWear – was also responsible for “increased intangible assets” and “increased inventories” for the division.

Elsewhere in the group, the U.S. was responsible for the greatest increase in Perfumes & Cosmetics sales, which grew by 27 percent in 2021 compared to 2020. LVMH specifically highlighted the “enormous success” of Dior’s Miss Dior and Sauvage fragrancesnoting that in 2021, Sauvage became the highest selling fragrance in the world (women’s and men’s lines, included), which is “a worldwide first for a male fragrance.” 

Selective Retailing, the division that houses the likes of Sephora and duty-free venture DFS, saw organic revenue rise by 18 percent compared to 2020 but was nonetheless, down by 18 percent compared to 2019 due to the impact of travel retail. While DFS suffered from “the very limited recovery in international travel, travel restrictions in China, and quarantine measures in Hong Kong,” not all was lost, as growing demand from local customers helped to boost sales at the seven T Gallerias outposts in Macao. Still yet, Sephora helped buoy the Selective Retailing division by “surpassing its 2019 level of activity, benefiting from the strong rebound in its stores and the continued momentum of its online sales.” 

In addition to growing e-commerce sales for Sephora, LVMH also pointed to Loewe and Marc Jacobs, stating that Loewe’s “online sales grew significantly” and Loewe enjoyed “a highly impressive surge in online sales.” In what is likely a nod at least in part to the role of e-commerce, LVMH states that “investments in [Celine’s] omnichannel strategy played a key role in the Maison’s new gains.”

As a whole, the group reported “continued strong growth of online sales alongside the gradual return of customers in stores,” noting that in terms of efforts, including continued online endeavors, it “made the choice to keep the distribution [of its major Maisons] highly selective, limit promotional offers and develop online sales through their own websites” in order to “preserve their exceptional image – a key element of their lasting appeal.” Going forward, LVMH says it expects to double-down on “the digitization of its Maisons to enrich customers’ experiences online and in stores.”

In a post earnings call on Thursday, LVMH chairman and CEO Bernard Arnault stated that he believes that the group “has enough wiggle room to raise prices” – which has been a common move across the luxury landscape over the past couple of years, in particular – “and protect its margins in an inflationary environment,” per Reuters. He cautioned, however, that management has to “remain reasonable” when it comes to boosting prices of the group’s offerings in the year ahead.

On the topic of group’s ambitions on the metaverse, LVMH does not appear as gung-ho as some of its rivals, with Arnault saying that LVMH “is not interested in selling 10 EUR virtual shoes,” noting that “at this stage, we are very much in the real world, selling real products.” On this same note, he further asserted, “We have to be wary of bubbles,” he said. “At the beginning of the internet, there were all sorts of things popping up and then the bubble burst. There may be relevant applications, but we have to see what universes might actually be profitable.” In terms of NFTs, in particular, Arnault stated that “it will be interesting to see how it generates profit, [as] NFTs are generating profits, and I’m sure this will have a positive effect if things are done properly.”

As for what the group is interested in is what Arnault called “more useful features in the future to support real life activities,” as indicated by LVMH’s recent expansion of the Aura Blockchain Consortium, which now includes Aura SaaS, a blockchain-based platform that aims to “help brands to address authenticity, ownership, warranty, transparency and traceability … [with] lower license and onboarding fees.”

BlackRock CEO Larry Fink released his annual letter to CEOs this week, asking recipients to tailor their environmental, social and governance (“ESG”) reports to ensure that they are “consistent with the Task Force on Climate-related Financial Disclosures” (“TCFD”), a framework that aims to help public companies and other organizations disclose climate-related risks and opportunities. As part of the company’s focus on “sustainability,” Fink says that BlackRock is “asking companies to set short-, medium-, and long-term targets for GHG reductions,” and to ensure that corresponding reports are in line with the TCFD, as the firm “believes these are essential tools for understanding a company’s ability to adapt for the future.” 

Fink’s call on companies to utilize uniform ESG disclosures for the benefit of investors “reflects a growing consensus among both prominent businesses (e.g., State Street) and regulators (e.g., U.S. Securities and Exchange Commission Chairman Gensler) that the disclosure framework outlined by the Financial Stability Board-created TCFD is the appropriate model to adopt,” says Mintz attorney Jacob Hupart. Given his position at the top of the world’s largest asset management firm, Fink and other powerful investors’ pushes for uniform disclosures are expected to impact “the reasoning and eventual implementation decision by regulators,” such as the SEC, which has not yet issued its rules on climate-related disclosures.

Among those that have moved to mandate the TCFD framework, the UK’s Financial Conduct Authority published a Policy Statement – and final rules and guidance – on climate-related financial disclosures for publicly-listed companies, which mandate that standard listed companies are required to include a statement in their annual financial report that sets out whether their disclosures are consistent with the TCFD, and if not, to explain why, beginning on or after January 1, 2022. The aim, according to the UK government: to ensure that companies “consider the risks and opportunities they face as a result of climate change.” 

Enduring calls for uniform reporting and looming crackdowns by regulators come as the amount of ESG disclosures included in SEC filings, for instance, has significantly increased in recent years. “This trend will no doubt continue once the SEC introduces its climate change rules,” according to Bass, Berry & Sims attorney Kevin Douglas. Additionally, he notes that “there has been a significant expansion in the scope of ESG disclosures being provided by many public companies (particularly large-cap companies) outside of SEC filings, including via corporate social responsibility or similar reports, and company website disclosures” – with such efforts being seen in the fashion industry, as brands seek to cater to rising consumer and investor interests. 

In fact, a number of notable fashion brands and groups – including Burberry, Kering, LVMH, H&M, Uniqlo-owner Fast Retailing, Hermès, Zara-owner Inditex, Richemont, and Tapestry – have voluntarily adopted the TCFD reporting guidelines in recent years, presumably due, at least in part, to pushes from shareholders to where to an accepted framework as part of their duty to such parties. Within the fashion space, Gucci owner Kering was a first-mover, along with ASICS Corp., both of which adopted the TCFD in June 2017, closely followed by Burberry and Marks & Spencer that same year. Luxury powerhouses LVMH, Hermès, and Richemont joined in December 2020. And more recently, Coach’s parent Tapestry, Inc. adopted TCPD standards in July 2021.

While the lineup of fashion-focused supporters of the TCFD includes some of the biggest names in the industry, it is, nonetheless, a very short list – making up roughly 1 percent of the nearly 2,000 companies that use the TCFD framework. Missing from this list are, of course, some of the biggest names in sportswear/activewear, as well as nearly all of the big-name Western retailers, among others, raising questions about why more brands have not opted to adopt the voluntary framework, and whether more will follow suit going forward amid pushes from influential investors and ahead of further regulatory action on the ESG reporting front.

Ultimately, if companies “already feel compelled by investor demands to issue TCFD disclosures,” Hupart asserts that “the imposition of similar regulatory requirements may not inspire as much resistance as would be provoked by other types of climate disclosures.” 

Burberry provided insight on its enduring effort to move upmarket by doing away with markdowns in a Q3 conference call on Wednesday. The British brand – which reported a 5 percent increase in sales to 723 million pounds ($985 million) for the three-month period ending in December – revealed that while its sales have not not surpassed pre-pandemic levels, momentum is building. The group pointed to a 36 percent increase in full price sales compared to the same quarter last year and a 10 percent rise over the previous quarter, “with all product categories growing by double digits, helped by flagship stores that were attracting a new generation of Burberry customers.” 

In a statement on Wednesday, Burberry Chair Gerry Murphy stated that “full-price sales continued to grow at a double-digit percentage compared with two years ago, accelerating from the previous quarter and reflecting a higher quality business.” He noted that the company’s “focus categories outerwear and leather goods performed strongly as we continued to attract new, younger consumers to the brand.” Full price outerwear and leather goods sales grew by 38 percent and 29 percent, respectively, compared to the same quarter in 2020, with the brand benefiting from sales of its “new elevated check range in Birch Brown colorway,” for instance, as well as the introduction of its “crossbody, tote and SLG versions as part of [its] Winter collection.”

Beyond outerwear and leather goods, CFO Julie Brown highlighted sales of footwear, namely, men’s sneakers, particularly among younger consumers in the U.S., which proved to be a strong region in terms of full-price sales, along with Mainland China. (“Burberry does not see any slowdown of demand in China yet, with near-term headwinds caused by regional covid-19 lockdown,” per Bernstein.) Burberry reported that “full-price comparable store sales were driven by continued strong performance in the Americas, a material sequential improvement in Asia Pacific as COVID-19 restrictions eased and improving trends in EMEIA despite an ongoing lack of tourism.” 

On the digital front Burberry’s management noted that full price sales were up by “high double-digits” across its e-commerce channels during Q3, and the brand achieved its “highest level of earned reach to date on Instagram driven by brand activations including pop-up on Jeju Island coupled with strong momentum on TikTok.” In terms of the metaverse, Burberry said that its partnership with Mythical Games this summer to release a limited NFT collection within the Blankos Block Party game was a success, with the digital tokens selling out within 30 seconds. (The NFTs released in August consisted of 750 tokens representing Sharky B, which were sold for $300, 1,500 Jetpack NFTs that were priced at $100, and $50 Pool Shoes and $25 Arm Band NFTs, which were not limited in terms of supply and were offered up for a two-week period.)

Seemingly foreshadowing more efforts within this realm, Burberry said it views the metaverse as “a great opportunity to connect with the next generation of consumers.” 

As for management, Burberry is in between CEOs at the moment, with Marco Gobbetti, who joined in the brand in 2016 and spearheaded its move more upmarket, recently moved to the same role at Ferragamo, which is in need to a significant revamp from a marketing/positioning point of view. His successor Jonathan Akeroyd, who is moving on from the CEO job at Versace, is slated to begin his tenure in April. In a note in June, Bernstein analyst Luca Solca stated that while “Burberry is in a far better position than when Marco took responsibility for it,” the “jury is still out on Burberry’s continuing momentum.”

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