ESG Investing

The Fashion Industry Turns Up ESG Efforts as Pressure Increases

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Consumers and investors are not the only ones playing a big role in shaping sustainability trends in the fashion industry. The sector’s substantial impact on the climate—comprising as much as 10% of annual global carbon emissions—has necessitated government agencies to step in as well.

The sector also faces other ESG challenges, from exploitive labor practices to excessive waste from frequent product development cycles. With that in mind, regulators, shareholders and advocates have been stepping up pressure on the industry to adopt ESG principles and further reduce its weighty carbon footprint—and are finding some success in doing so.

Industry Actions

A growing number of fashion companies have started to respond to these pressures. In the past spring, luxury fashion company Saks hired its first senior vice president of ESG. Neiman Marcus produced its first ESG report, which presents both their accomplishments so far and their strategy for the next three years. Apparel rental pioneer Rent the Runway also revealed its long- and short-term impact strategy, which included measures such as ending the new production of half a million garments by 2026 and offsetting emissions from shipping.

There have also been efforts to help provide companies with methodologies for evaluating the effectiveness of their ESG strategies. For example, NYU Stern Center for Sustainable Business worked with a group of apparel companies to assess the benefits such firms can experience through sustainable business practices. The research pinpointed eight key strategies, such as improving waste management and focusing on circular economy approaches. More than 60 activities are underway to implement those strategies.

Agencies are stepping up their regulation of the sector, perhaps inspiring some fashion companies to get ahead of the regulatory curve while they can.

Government Regulation

At the same time, US and EU agencies are increasing their influence within the fashion industry in stepping up their regulation of the sector.

In some cases, these efforts target all businesses. In March, for example, the U.S. Securities and Exchange Commission (SEC) proposed rules on environmentally related risk disclosures for all public businesses. This rule requires companies to report their carbon emissions and other relevant information about the effect of climate change on their operations both when they first register with the agency and in annual reporting. The move would be the first time the SEC has mandated such standardized requirements for companies.

In other instances, the focus is on fashion. The state of New York drafted the Fashion Sustainability and Social Accountability Act in October, requiring that fashion companies disclose their environmental and social impact with plans for improving those metrics. Only certain businesses—large apparel and footwear companies operating in New York with revenues of more than $100 million—would be subject to provisions. If passed, the bill could push other fashion companies to review their sustainable practices.

Other efforts are underway in Europe to address labor issues, another significant ESG challenge that the fashion industry faces. In February, the European Commission proposed a directive mandating that companies conduct sustainability-focused due diligence aimed at curbing fashion industry supply chain abuses. It requires large companies to assess their supply chain partners to ensure they comply with human rights and sustainability measures. Those requirements would extend to certain companies outside the EU.

A Powerful Combination

Ultimately, pressure from government agencies, along with consumers and investors, could prove to be a combination too powerful for the fashion industry to ignore. Judging by recent efforts, they seem to be catching on, providing investors with more opportunities to enhance their impact on climate and support sustainability trends in the fashion industry.

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