The Fashion Industry Might Be Next in Line for ESG-Related Scrutiny

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The Fashion Industry Might Be Next in Line for ESG-Related Scrutiny

In the last several years, climate litigation and stakeholder activism in the Environmental, Social, and Governance (“ESG”) space has focused almost exclusively on the energy and resources sector and its risks and shortfalls. However, with ESG-related litigation globally on ...

April 20, 2022 - By Claire Smith, Olivia Back

The Fashion Industry Might Be Next in Line for ESG-Related Scrutiny

Image : Unsplash

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The Fashion Industry Might Be Next in Line for ESG-Related Scrutiny

In the last several years, climate litigation and stakeholder activism in the Environmental, Social, and Governance (“ESG”) space has focused almost exclusively on the energy and resources sector and its risks and shortfalls. However, with ESG-related litigation globally on the rise and as COP26 and the latest Intergovernmental Panel on Climate Change Sixth Assessment Report emphasized, with an ever-increasing urgency to reach net zero sooner rather than later, other industries, such as fashion, are likely to feel the full impact of ESG expectations and risks soon.

At first glance, the fashion industry and the mining industry do not share much in common.  Dig a bit deeper, though, and you will find that both industries are “high risk” when it comes to ESG. The following factors contribute to the fashion industry being one of the industries in which arguably ESG-related risks are most prevalent:

– The fashion industry has a track record of serious exploitation of marginalized groups in its supply chains and a disregard for labor laws.  Well-known examples of this include the Tazreen Fashions factory fire and the collapse of the Rana Plaza building, both in Bangladesh, which cumulatively resulted in the deaths of thousands of garment workers.  

– Many fashion businesses operate based on a model and corporate purpose that is driven by high margins. Fast fashion practices – which focus on quickly and inexpensively producing high volumes of “on trend” clothing – has resulted in large-scale, long-lasting environmental impacts, including deforestation and damage to eco-systems.  

– A significant issue for the fashion industry is waste, which generated during the production process, as well as at the end-of-life stage of an item of clothing. Statistically, we are buying more clothes than ever before, and discarding this clothing more often. Unwanted (and usually non-recyclable or biodegradable) textiles and clothing items are creating significant waste issues, particularly for developing countries, such as Ghana, that accept the West’s exported used clothing items.  

– Many textile manufacturing processes are also water-intensive and utilize harmful chemicals and dyes, which are causing significant contamination of waterways. 

– Lastly, the fashion industry has a history of “trust issues,” as supply chains have lacked transparency and traceability.

As a whole, the European Environment Agency found that textile consumption in Europe, alone, has on average the fourth highest impacts on the environment and climate (behind only food, housing and transport). 

“Washing” Claims

With the foregoing in mind, companies are globally feeling the pressure from stakeholders – from consumers and employees to regulators and investors – to make certain ESG commitments. In August 2021, for instance, we noted the rise of net zero pledges and discussed how companies can ensure their pledges are robust and effective. In particular, there is a universal pre-occupation with limiting the rise of global temperatures and working towards a net zero carbon economy and most companies, including fashion companies, have already voluntarily made decarbonization commitments. For example, the H&M Group has committed to reducing its scope 1 and 2 greenhouse gas emissions by 40 percent before 2030, and reducing its scope 3 GHG emissions from purchased raw materials, fabric production, and garments by 59 percent per product before 2030. ASOS has a target of net zero emissions by 2030. Meanwhile, Inditex, the Spanish retail giant that owns brands such as Zara, recently moved its net zero emissions target a decade earlier, to 2040.

When a company gives a misleading impression to the public – via for example, public statements and policies regarding how environmentally friendly or consistent with a certain environmental position its products, business model, and/or practices are, it is engaging in “greenwashing.” This is significant, as making a commitment without a proper basis, can amount to misleading and deceptive conduct under consumer protection laws, including Australian Consumer Laws. In Australia, it can also amount to a breach by the company’s directors or officers of section 180 of the Corporations Act, if it can be established that they did not exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in the circumstances.

Both the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission have recently publicly stated that they will be taking action against all forms of greenwashing as a priority. At the same time, pending proceedings in Federal Court, in which an activist shareholder group is taking action against energy company Santos over claims in its annual report that it has a credible pathway to net-zero, also highlights the growing scrutiny of ESG claims by an ever-growing community of interested stakeholders.  

Not limited to environmental issues, the pandemic – which has caused widespread operational disruptions and high rates of job vacancies in the fashion industry – has brought to focus more sharply certain ESG and social issues, including the rights of garment workers and diversity and inclusion, that companies should be prioritizing. Unsurprisingly, ESG-commentators are also observing the rise of “social-washing,” “purpose-washing,” and “ESG-washing,” which occur when companies make statements or implement policies that have the effect of misleading the public into believing a company is more socially responsible than it actually is. 

The Rise of the Conscious & Disruptive Consumer

Consumers are beginning to show their disapproval of certain practices within the fashion industry by voting with their dollars. At COP26, the rise of the conscious consumer was discussed, and it was noted that consumers are beginning to make deliberate purchasing decisions which are informed by ESG objectives.  40 percent of consumers in Australia, for instance, believe a company’s social and environmental efforts are very or extremely important when purchasing products or services, according to Finder Green’s 2021 Consumer Report. Other reports also indicate that second-hand clothing markets will likely overtake fast fashion in global sales in the coming years as a result of shifts in consumer values and corresponding purchasing behaviors. 

In the 2022 State of Fashion published by BoF and McKinsey, it was noted that “[…] fashion companies will need to ensure they are acting in the interests of all stakeholders — including customers, employees, contractors, investors and wider society. Many brands will push harder on circular business models, greener materials, and more sustainable technologies.” In this same vein, some of the new initiatives emerging in the fashion industry, particularly to deal with the systematic overproduction and overconsumption, include: the rise of rental, resale and refurbishment models; the roll-out of closed-loop recycling systems which decreases the production and use of virgin raw materials; the use of digital “product passports” which “contain coded information that can add value, support supply chain transparency and ensure authentication;” and digital fashion, which allows consumers to own non-physical, digital items of clothing. 

The same report forecasted that in light of growing ESG concerns, “[d]igital and sustainability will offer the fashion some of the biggest opportunities for growth, while supply chain pressures will challenge the industry in 2022.” 

All the while, government bodies around the world are also responding to the impact of the fashion industry. Most recently, the European Commission has recently presented a package of European Green Deal” proposals “to make sustainable products the norm in the EU, boost circular business models and empower consumers for the green transition.” 

Claire Smith is a specialist in environment, planning and climate change law at Clayton Utz

Olivia Back is an environment and planning lawyer at Clayton Utz.

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