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New York’s catch-all fashion act aims to enforce global change

By Fatima Benkhaled

The proposed bill has strong support, and could force retailers to sign up to a new standard on sustainability disclosures in order to continue selling in the US state

Around 200 global fashion retailers could be hit with new sustainability rules once the New York fashion act is passed, according to lawmakers sponsoring the bill, which could lead to companies adapting their worldwide ESG frameworks to satisfy state authorities.

The Fashion Sustainability and Social Accountability Act was introduced in January by New York state senator Alessandra Biaggi and assemblywoman Anna R. Kelles and is progressing through the state legislature. It targets fashion companies doing business in New York with $100mn or more in annual revenue, in line with the state’s target of reducing its greenhouse emissions by 85 per cent by 2050.

Companies would have to map out 50 per cent of their supply chains across all tiers of production and publish an annual report on compliance and due diligence measures put in place, along with disclosure of progress against science-based environmental and social impact reduction targets.

Failure to comply would result in a 2 per cent fine of a company’s annual revenue above $450mn, with companies given 12 months to comply upon enactment and up to 18 months to implement impact disclosures.

While the New York bill only has authority in its jurisdiction, New York’s status as a key retail hub and the bill’s international ambitions could force a global standard on sustainability in the sector, in concert with other regulatory efforts, such as the EU’s newly launched sustainable textile strategy.

According to data provider Refinitiv, out of 380 retail companies headquartered in New York only 37 had a global revenue of $100mn plus. An estimate of the volumes of revenue captured by the bill for all 37 totalled $43.3bn.

However, when looking at the brands that operate in New York, Kelles put the number of businesses that could be directly impacted at 200. “Part of the process we are looking at right now to include in the language is the process of identification of the businesses that would be held accountable,” she says.

The current lack of clarity could, however, add a layer of complexity for companies with existing sustainability frameworks. Richard Morrison, research fellow at think-tank the Competitive Enterprise Institute, says: “Affected companies will need to make significant expenditures of time trying to figure out what will actually constitute sufficient compliance in the first place – phrases in the bill like ‘potential adverse impacts’ are vague.”

He adds: “Complying with [the fashion act] could require such large firms to toss out and rewrite their global environmental, social and governance [ESG], corporate social responsibility, and sustainability procedures just to satisfy New York state authorities.”

While New York waits for lawmakers to iron out the final details of the bill and pass it, the European Commission’s Strategy for Sustainable and Circular Textiles creates further risks for fashion retailers still dependent on fossil fuel-derived synthetics and their investors. According to the 2021 report Synthetics Anonymous by not-for-profit Changing Markets Foundation, the production of synthetic fibres accounts for 1.35 per cent of global oil consumption – more than the annual oil consumption of Spain.

When analysing the 15 worst performing brands – which have minimum-to-no transparency about their use of synthetic fibres and/or that failed to engage with the issue entirely – 11 were headquartered in the US or Canada.

Lawmakers argue demands are reasonable

With $2.5tn in pre-pandemic revenues according to McKinsey, the industry’s vast environmental impact – fuelled by social media and the influencer economy – and its global presence pose a sizeable challenge for pro-sustainability lawmakers. In response, New York hopes to leverage its $1.7tn GDP and status as an indispensable fashion market to bring the sector into line.

According to Kelles: “The bill will have a very significant impact on fashion houses’ transparency and disclosure. For the first time [the bill] is clearly outlining an enforcement mechanism that would have revenue consequences. The revenue consequences will only be realised if the corporations do not meet the criteria that is clearly laid out in the legislation.”

The bill has garnered the support of the industry’s sustainability leaders, including the designer Stella McCartney, the New Standard Institute, the Natural Resources Defense Council and the New York City Environmental Justice Alliance.

“This acceleration of effort to understand supply chains linked to social and environmental issues is a step in the right direction,” says Anita McBain, Citi’s head of ESG research for Europe, Middle East and Africa. Noting that the maximum fine for non-compliant companies “is not only financially material but could result in negative headlines, which future ESG-focused investors might regard unfavourably.”

New York state senator John Liu, a co-sponsor of the bill, says: “The bill is incremental, it emphasises disclosure. Disclosure is important on all levels in corporate America, it allows the public, consumers and potential clients to understand how the company operates.”

Implications for financial markets

According to the 2022 State of Fashion survey by Business of Fashion and McKinsey, 87 per cent of fashion executives expect supply chain disruptions to have a negative impact on margins next year.

While think-tanks such as the Competitive Enterprise Institute highlight the bill’s compliance cost to firms, its sponsors say it will help companies to mitigate supply chain risk and protect consumers.

Liu says: “This bill is consumer driven and has the potential to create a [more] widespread impact than shareholder-driven initiatives. If companies choose not to follow the guidelines – with regard to simple disclosure as well as meeting the very gentle and gradual targets – then [the fine] comes out of a profit margin that is rather generous. The profit margin enjoyed by the fashion industry is substantial. The incidence of the fine will fall largely on the producers rather than the consumers.”

He adds: “The point of this bill is to set ESG targets and have some way of enforcing compliance by companies that want to do business in this very large and lucrative marketplace. New York is a 20 million-people market, I do not think anyone would want to leave this market on the table.”

Morrison, however, does not agree. “Fines of that size could potentially be quite large, and the cost of paying them would absolutely be passed on to customers, making clothing more expensive,” he says. “Less capital at the firm’s disposal can also mean lower wages for workers; smaller marketing budgets; less money for R&D; fewer investments in new and existing facilities; lower dividends for shareholders; and even fewer philanthropic and ESG-themed programmes.”

Fines would also likely eat into free cashflow available to repay creditors or pay dividends to shareholders, especially with a growing number of fashion companies choosing to link the terms of their debt issuance to their performance on ESG metrics. Burberry launched its second sustainability-linked bond in January as part of a push for green financing in the sector, only four years after the UK company was hit by scandal for burning excess stock.

Jason Halper, partner at US law firm Cadwaladers says the impact on sustainable capital markets will depend on the type of debt instrument since use-of-proceeds bonds are tied to a particular green project and therefore unlikely to be impacted by the company’s wider performance metrics. But as sustainable finance products develop, regulation such as the New York fashion bill could have broader consequences. “On the other hand, there are sustainability bonds where the coupon is tied to ESG targets; you can see those impacted, as it could impact the companies’ borrowing costs,” says Halper.

A service from the Financial Times