‘Unravelling the Threads’: Mapping ESG Risks in the Apparel Industry
The rise of ESG is reflected by society becoming more conscious of the impacts of their decisions on their social and physical environment, highlighted by investors’ growing desire to align their investments with their values. The apparel industry, responsible for 10 percent of annual global carbon emissions, significant water consumption, waste generation, and human rights infringements, finds itself at a critical juncture. Controversies such as the 2013 Rana Plaza disaster in Bangladesh, where 1,100 workers lost their lives, illuminated the stark social and environmental violations inherent in apparel supply chains, eliciting intensified consumer and investor scrutiny towards the industry’s sustainability performance. In response to this evolution in stakeholder awareness, this article will critically evaluate some of the challenges that lie ahead for the apparel industry as sustainability becomes an industry staple.
The Demand for Radical Transparency
The apparel industry is no stranger to greenwashing – the deceptive practice of making misleading claims about their environmental credentials to appear more sustainable to consumers. Largely owing to a shift in consumer attitudes, in favour of sustainable fashion, exhibited by changes in purchasing patterns. Research indicates that the industry experiences a prevalent trust deficit, attributed to the ‘selective and unbalanced’ reporting on their sustainability endeavours. This poses a major risk for the apparel industry as failure to increase transparency could result in significantly reduced customer loyalty and growing negative brand perceptions.
Supply-chain transparency is pivotal both for demonstrating concrete steps towards sustainability to consumers and for distinguishing authentic efforts from mere greenwashing. Any hurdles encountered in achieving sustainability goals, when communicated transparently, should not be seen as a lack of commitment, but as indicators of areas requiring innovative solutions. This in turn provides a more comprehensive insight into a company's journey towards integrating ESG principles into their strategy.
As greenwashing practices are being brought to light, researchers have investigated the financial impacts on companies. A decade-long study tracking 7,365 companies in various countries found that consumers penalise companies for greenwashing, resulting in a sales decline of 9% on average. This highlights the bitter financial consequences of greenwashing other than damage to brand image.
Furthermore, voluntary disclosures are increasingly being supplemented with inspection and penalties for inaccurate sustainability information to prevent companies from profiting under dubious sustainability claims. A case in point is the recent action taken by the Dutch regulator against fashion retailer H&M and sporting goods chain Decathlon. After an investigation, both companies committed to remove certain sustainability labels and enhance the substantiation of future sustainability claims. Additionally, they agreed to donate €400,000 and €500,000 respectively to sustainable causes as amends for previous unclear sustainability assertions. A Stanford publication found that accurate reporting of environmental impacts and emissions bolsters investor confidence in a company's strategy, leading to an increase in valuation and long term success. Hence, it is vital for the industry to adopt transparency, or brace itself for adverse impacts on its long-term performance.
The road towards transparency
In order to successfully generate a sustainable competitive advantage, a first step for the apparel industry is to clearly assess and specify their environmental claims and ambitions, rather than using vague terms such as ‘green’ or ‘eco-friendly’. This is especially crucial for companies like Levi Strauss and Nike, that cater to a younger demographic.
In this process, relying solely on trade associations ‘as the arbiters of sustainability or eco-impact scoring’ can be problematic as it legitimises the cycle of greenwashing and raises potential conflicts of interest. This is particularly evident when the Sustainable Apparel Coalition’s (SAC) – a trade association including brands like H&M and ASOS established the Higg Material Sustainability Index, that came under scrutiny after H&M used the index in their scorecard system, resulting in the dissemination of inaccurate information. While the SAC has since paused the use of consumer-facing transparency scorecards, in light of a complaint by the Norwegian Consumer Authority, the incident has raised pertinent questions on the validity of various metrics employed to determine the sustainability of garments, as well as criticisms that the index neglects the full environmental impact of the product and favours synthetic materials made from fossil fuels.
Instead, it is advisable that companies align their sustainability reporting with internationally recognised standards, which enable comparability and allow stakeholders to make more informed decisions. This includes standards and systems including the The Task Force on Climate-related Financial Disclosures (TCFD) and Carbon Disclosure Project for climate-related reporting, but also more sector-specific standards such as the recently launched GRI Textiles and Apparel Standards. Additionally, third-party sustainable supply chain certification schemes such as bluesign, ECOCERT, and the various ISO certifications, can provide risk management solutions and comprehensive expertise while also functioning as a reputable marketing asset, increasing customer confidence and trust.
However, although increased transparency has its merits, firms face the intricate task of balancing to weigh up their financial costs. The industry's fixation on costs frequently comes at the expense of supply chain transparency, given the significant resources and specialised expertise required for comprehensive reporting. A KPMG study has revealed that only 19 percent of respondents have full visibility of all stakeholders within their supply chain, while only 15 percent have complete material traceability, highlighting the importance of cost-effective and collaborative solutions. While certification schemes can provide assistance, broader economy-wide measures, including mandatory reporting standards and policy incentives such as taxes compelling corporations to internalise social costs, are vital.
Navigating the Circular Maze: road to a circular economy
Apart from the complexities of implementing and marketing sustainability initiatives at the production stage, significant hurdles persist when a garment reaches its end of life. In 2015, global textile waste amounted to 92 million tons, with projections forecasting a 62% surge by 2030. Moreover, a study by UNEP found that every second, the equivalent of one garbage truck filled with clothes is incinerated or landfilled. A step forward in reducing waste in a linear economy is the implementation of Extended Producer Responsibility (EPR) rules for textiles that stress the ‘end of life’ stage of a product, facilitating the collective systems and infrastructure for the reusing and recycling of textile waste.
While the implementation of EPR rules can divert unwanted apparel from incineration or landfill, the limitations of EPR lies in the fact that it is unable to address the root causes of the system that generates mass waste. According to a McKinsey report, fashion manufacturers are introducing new apparel lines more frequently to satisfy consumers' demand for novelty. The inevitable consequence is overproduction, leading to a situation in which approximately 40 percent of fashion items are sold at a discount. There will be a pressing need to transition into circular business models that place less emphasis on product turnover, as well as policy initiatives that foster a climate that encourages businesses to adopt best practices while safeguarding consumer interests. The implementation of EPR requires an industry-led approach, in conjunction with eco-modulation and existing eco-design frameworks like the Ecodesign for Sustainable Products Regulation. This will ensure that the industry can be judged against the same parameters, while also incentivising sustainable design choices and discouraging designs that are harmful or difficult to recycle.
Overall, in the face of challenges such as greenwashing, demand for radical transparency, and the need to transition to a circular economy, the apparel industry stands at a critical crossroads. Addressing these challenges from an industry-led approach, working closely with policymakers will not only shape their corporate legacy but also determine the future of our planet. It is a pivotal moment that calls for decisive action and responsible choices.