Who should be changing fast fashion?

Fast fashion is a relatively new term in investors’ lexicons and has brought several profitable and fast-growing brands to the market. However, fast-fashion brands have also faced their fair share of scandals, inviting criticism from consumers and activist groups alike.

Many criticisms are levelled at these business models and how they treat workers. For instance, online retail giant Boohoo faced a modern slavery investigation after it emerged it was paying workers less than the minimum wage in order to maximise margins in the fiercely competitive and fast-moving market.

They have made their money on the throwaway culture, producing and selling clothes at very low prices but also very low quality

Angela Winchester, 2020 Trustees

Yet revenues soared by 41 per cent to £1.7bn in the year ending February 2021 as consumers switched to online retailers. UK sales leapt 39 per cent, while figures across all territories were strong.

For investors looking to embrace environmental, social and governance criteria, the case of Boohoo raises questions around where the responsibility to change corporate behaviours lies, and whether investor-led initiatives can have an impact.

Putting S before E

When considering the ESG implications of the fast-fashion industry, there is an inherent tilt towards the environmental aspects of the company in question, rather than the societal factors, says Angela Winchester, trustee director at 2020 Trustees. 

She says that the “burning platform of climate emergency” and “more advanced” data and metrics gives precedent for potential investors to consider the environmental factors of an investment ahead of societal attributes. 

But in the case of Boohoo and other fast-fashion brands, the societal impacts of the industry are profound and result in stakeholders turning their attentions “to the social issues in ESG,” alongside the environmental impacts, Winchester says.

But fast-fashion brands “have a potential double hit in terms of ESG impact,” she adds, with the duality of environmental and societal impacts being closely interlinked.

“They have made their money on the throwaway culture, producing and selling clothes at very low prices but also very low quality, which uses up environmental resources as they are discarded often after weeks of wear rather than months or years,” Winchester says. 

“Another issue that arises from their business models is the use of cheap labour in the supply chain, using suppliers that underpay workers, don’t allow union recognition, and in many cases are breaching human rights.” 

This is something Winchester says touches on at least three of the UN’s Sustainable Development Goals.

Echoing this sentiment is Pete Smith, principal and senior investment consultant at Barnett Waddingham, who points specifically towards SDG eight. This goal highlights decent work and economic growth, and aims to address poor working practices and modern slavery.

“It is almost universal that clients wishing to address climate change also have a wider set of ESG beliefs, and within these a strong focus on the ‘S’, which could encompass the drive towards SDG eight,” he says.

Investor initiatives

In 2020, the Treasury-backed Asset Management Taskforce published its call for a strengthening of active stewardship for UK companies, stating that a “wider adoption across the asset management sector and the broader investment chain” would result in more robust stewardship practices and improved sustainability-linked outcomes.

“Stewardship policies are moving in the right direction,” says Kerra Pringle, partnerships executive at Tumelo, a technology company that promotes transparent stewardship by collecting investors’ vote preference data for asset managers to use in shareholder resolutions.

“Shareholder resolutions around fast fashion are not uncommon, and asset managers are increasingly looking to the asset owners for their perspective when making voting decisions. This is something investors should absolutely take advantage of and ensure that their views are known by voting decision-makers.”

But pressure from a range of sources, as well as broad shifts towards sustainability across the industry, have encouraged fashion brands to review their own green strategies. Both Boohoo and Primark have made announcements on upcoming sustainability strategies, potentially putting the fashion industry on track to make widespread ESG improvements. 

Pension power

The fast-fashion industry poses a dilemma for the pensions industry as to whether or not it should be engaged with via stewardship, or excluded altogether. 

Winchester says that there is a “general consensus” on the value of active stewardship, and in terms of protecting “the long-term returns for members and investors, using stewardship, is likely to reap the long-term benefits”, rather than an exclusionary approach.

She adds that only if there is repeatedly no progress would the company then be excluded from the portfolio. 

For trustees, this means regular dialogue with investment consultants and managers to oversee and provide challenge to the inclusion of companies in the portfolio. Winchester says there is also precedent “to ask questions in relation to stewardship activity to encourage the companies in question to make changes”.  

“It is only by making these supply chain issues transparent and engaging with investee companies that a view can be formed as to whether the company is committed to and is showing meaningful progress towards making the necessary changes,” she adds.