Investment Institute
Environmental

Why sustainable fashion could be in style for responsible investors

  • 12 January 2023 (7 min read)

Key points

  • The fashion industry is responsible for as much as 10% of global carbon emissions
  • Companies are harnessing innovations, new technology and more responsible processes to become more sustainable
  • This, alongside new policies and regulations, is creating potential investment opportunities

Fashion is one of the biggest industries in the world, generating around $2.5trn in annual sales but at the same time, it is thought to be responsible for a sizeable 10% of annual global carbon emissions – more than all international flights and maritime shipping combined.1

No surprise then that it was high on the agenda at the United Nations (UN) climate change conference COP27. At the event, The Global Fashion Agenda - a non-profit organisation for sustainability in fashion - launched an industry consultation, together with the UN, on climate targets – with one of its aims to create a range of measurable metrics.2

As consumers, we are increasingly making more environmentally conscious choices and when it comes to buying clothes, more and more people want to know where garments are made and that workers are treated fairly.

And they are spending their money accordingly: the sustainable fashion market is expected to grow from $6.9bn of sales in 2021 to $10.3bn in 2026.3

But for investors it is vital to identify companies at the forefront of low carbon processes, technological innovation and social responsibility – those creating potentially appealing investment opportunities, as fast fashion gives way to sustainable style.

And we believe this warrants investors’ attention as it’s been estimated that the financing of innovations in the fashion sector in response to sustainability challenges could be worth between $20bn and $30bn a year.4

Fashion’s environmental and social impact

The climate impact of fashion runs throughout the whole value chain, from raw materials to the end of a product’s lifespan.

Studies show that it takes 3,781 litres of water to make a pair of jeans – from growing cotton to delivering the final product to the store.5

Every year the industry uses 93 billion cubic metres of water – enough to meet the total consumption needs of five million people. And as much as 20% of industrial water pollution globally has been attributed to the dyeing and treatment of textiles.6

In an era of ‘fast fashion’ it may not surprise that the average number of times a garment is worn has decreased 36% compared to 15 years ago.7 When clothes are thrown away, 73% will be burned or buried in landfill.8

A ‘circular economy’ model for fashion – based on the idea of ‘reuse, repair, recycle’ - could address some of these issues, and could be worth $700bn by 2030, according to the Ellen MacArthur Foundation.9

While this may appear at first glance counterproductive for companies in the business of making and selling new clothes, there is money to be made in resale, rental, and using recycled clothing to make more garments.

And we must not forget the social aspect. The clothing and textile industry today employs some 300 million people across the value chain, a large proportion of them women.10 Businesses need to consider issues ranging from health and safety to fair wages and more, and investors increasingly want to see evidence of this throughout the supply chain.

Innovations making a positive impact

While many companies in the sector report on sustainability targets, there have been some headline-grabbing announcements such as when the founder of outdoor clothing retailer Patagonia declared that all future profits from the privately held company would be used to help combat climate change.11

Less dramatically, but none the less important, we are already seeing companies in the fashion value chain using renewable energy to power factories and warehouses; opting for more sustainable raw materials and more environmentally friendly processes such as using less water to dye cotton.

New technologies such as blockchain are also being harnessed – a consortium consisting of LVMH, Prada and Cartier has created a way of giving products a digital identity, allowing them – and customers – to track a product’s lifespan from the raw materials through to second-hand sales.12

But for the industry as a whole there is still some way to go, as evidenced by two recent surveys. The Business of Fashion Sustainability Index 2002, covering 30 of the fashion sector’s biggest companies, suggests that “there is less evidence that targets are translating into action”.13 And the Fashion Transparency Index found that 50% of major brands still disclose no information about their supply chains.14

Policy developments could give investors more clarity

Policymakers and regulators have a key role to play in driving sustainability in the fashion sector. Regulators have clamped down recently on companies that are believed to have been involved in greenwashing.

Meanwhile industry initiatives such as the UN Alliance for Sustainable Fashion and the Fashion Industry Charter for Climate Action are among those aiming to coordinate action across the industry.15

There are further developments in the pipeline that could give investors more clarity – and could affect the path of sustainability in the fashion industry.

A new US bill proposed last year would require clothing and footwear companies with revenues of over $100m, specifically in New York, to disclose environmental performance and climate targets.16 The Fashion Sustainability and Social Accountability Act is expected to be debated this year - if passed, it could pave the way for similar regulations elsewhere in the US. Elsewhere, the UN and GFA consultation launched at COP27 is expected to publish its targets in June.17

Identifying the sustainability leaders

The fashion industry is undoubtedly a contributor to climate change, and a change in consumer behaviour is needed – and already partly underway. We are also seeing encouraging moves from policymakers and industry bodies as well as clothing manufacturers and retailers themselves. This is giving investors greater reassurance, and measurable targets they can assess, as well as creating potential investment opportunities.

But there is a clear need for further investment in innovation and new processes and manufacturing techniques, which would provide additional opportunities for investors. Companies will increasingly need to adapt their business models, whether that is manufacturing or the way that clothes are designed to last longer and be more easily recyclable.

For clothing manufacturers and retailers, it is becoming increasingly important to demonstrate a commitment to sustainability and a consideration of environmental, social and governance (ESG) issues. We believe that those who are ESG leaders have a competitive advantage in terms of appeal to consumers and potential to grow sales and could face fewer ESG-related risks.

Identifying such companies – and engaging with them on this transition – is key, and as sustainability becomes a core part of fashion rather than just a niche, we see an increasing scope for potential opportunities for responsible investors.

References to companies are for illustrative purposes only and should not be viewed as investment recommendations.

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