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December 15, 2021

Investors facing up to the social costs of fast fashion

By Hannah Godfrey

Fast fashion is big business but often negatively associated with workers’ rights issues. Can interested investors successfully ensure they are not contributing to poor working conditions?

Fast fashion is an industry widely associated with labour and human rights abuses, with stories of low pay, health and safety issues in sweatshops, long hours in poor working conditions, and even child labour being relatively commonplace.

At the centre of fast fashion’s social and governance problems is the business model’s supply chain. Fast-fashion houses use complicated and long supply chains so shoppers can have access to the latest trends at lightning speed.

These supply chains rely heavily on developing nations like Vietnam and Turkey. However, as online fashion giant Boohoo found out in 2020, having a UK-based supply chain does not guarantee workers will not be exploited in the quest to make fast, cheap clothing.

Avoid or engage?

Supply chains can be sprawling, complex and opaque. This means it can be tough for investors to know for certain that they are not contributing to the social issues associated with them, notes Ellie Raeburn, trainee portfolio manager at King & Shaxson Asset Management.

“Investors will struggle to confidently ensure their portfolios are not contributing to poor working conditions if they are invested in any type of fast fashion,” she says.

Raeburn adds that companies with the most audited supply chains and convincing morals will provide more comfort to an investor, but following environmental, social and governance scores alone will not bring solid reassurance.

Instead, she suggests the best way for investors to know they are not contributing to poor working conditions in fast fashion could be to avoid the industry altogether.

“In our opinion, fast-fashion companies don’t need to be included in portfolios. When you look past ESG data and take into consideration qualitative research, there are numerous ESG issues, and at the highest level is the fact it encourages unsustainable consumption,” Raeburn says.

Other experts take a different stance and advocate the engagement approach.

Manon Salomez, ESG analyst at Mirova, an investment firm that focuses on environmental and social impact, says that asset owners can work with fast-fashion companies through their engagement actions in the hope of raising expectations and fulfilling best practices.

“At Mirova, we expect and encourage companies in this sector to be transparent on measures taken to ensure adequate working conditions throughout the process, from raw materials harvesting or production to the manufacturing process,” she notes.

“We encourage more transparency on the supplier code of conduct, the list of suppliers and the different initiatives to promote fair working terms and conditions at the factory level.”

Mirova analysts also ask companies to take part in multi-stakeholder collaborations to address issues associated with poor social and governance practices in fast fashion. Salomez says this means acknowledging where a company may indirectly pressure suppliers beyond their limits.

“This includes aggressive negotiation tactics, placing last-minute changes to orders, and giving orders above factories’ physical capabilities,” Salomez adds.

Danni Hewson, a financial analyst at investment platform AJ Bell, suggests concerned investors should look at brand statements for clues on the social and governance practices of a fast-fashion business. This can include if a company has committed to at least paying minimum wage, or if they award staff for ESG-positive steps.

“It’s incredibly difficult for investors to ensure their portfolios aren’t contributing to poor working conditions because of the nature of the industry,” she adds.

Lack of data

Unlike the ‘E’ in ESG, data on social and governance factors can be difficult to quantify. This can be problematic in fast fashion, where business practices can already be opaque.

“What’s really needed is a global standard and a global monitoring programme,” Hewson continues. “Just ditching fast fashion from ESG portfolios is not the answer, but they need to be scrutinised all the way from field to frock.”

Raeburn says it could be argued that there is not sufficient data to ensure a particular fast-fashion supply chain is void of various ESG issues. However, she says data is evolving, and qualitative analysis is also key to an investment decision.

“It’s important you look beyond the data and take into account other sources of information to perform qualitative analysis; for example, comments from charities and pressure groups,” she adds.

This kind of analysis will be reliant on companies being transparent and publishing more information for analysts, and can mean improving their own internal insights, according to Salomez.

Asset owners need to address fast-fashion environmental impact

“A lot remains to be done internally by fast-fashion companies, because some of them don’t even have the capacity to track the supply chain up to the raw material harvesting,” she notes. “Responsible investors have now understood the materiality of the issue, and many of them have raised voices to tackle the issue. [However], we are far from seeing concrete actions. We still need to truly tackle the existing sustainability risk occurring in the industry.”

Fast fashion has grown by becoming the cheap option for consumers but, as the picture around supply chain risks continues to become clearer, investors may need to ask themselves more questions about who is paying the real costs for these businesses.

This article originally appeared on Pensions-expert.com

A service from the Financial Times