Environmental, Social, and Governance (ESG) is a framework designed to enable organisations and countries to assess how far they are with their sustainability goals. It is a collection of non-financial factors that evaluates the robustness of an organisation’s governance mechanism and its competence to effectively manage its environmental and social impacts. The goal of ESG is to encapsulate all the non-financial risks and opportunities immanent to a company’s day-to-day activities. Investors are increasingly using these non-financial factors as part of their analysis procedure to identify material risks and growth opportunities.
Numerous institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), the United Nations Principles for Responsible Investment, and the United Nations Sustainable Development Goals, are working to form standards and define materiality to facilitate the amalgamation of these factors into the investment process. Ratings have also boomed over the last decade. Morgan Stanley Capital International (MSCI) and specialist firms such as Sustainalytics have been joined by traditional credit rating agencies such as Moody’s Analytics and S&P Global. Craig Huber of Huber Research Partners, an equity analyst who covers MSCI, told the Financial Times in 2019 that the “global market for ESG ratings is currently worth about $200 million and could grow to $500 million within five years.”1 The influence of these frameworks and rating agencies is such that they may shape regulations to come.
According to the World Bank, the fashion industry is responsible for 10 per cent of annual global carbon emissions, which is more than all international flights and maritime shipping combined. Textiles are the fourth highest-pressure category for the use of primary resources and water, after food, housing, and transport.2 The textiles industry consumes approximately 215 trillion litres of water per year, with chemicals, cleansing agents, and microfibers being released in the ocean.3 Areas of social focus in the textile industry include working hours, structure and diversity in leadership, fair wages, job security, gender and race discrimination, safe and hygienic working conditions, grievance reporting, and supply chain management.
Companies in the textile and apparel industry are raising their ESG initiatives in response to growing government action and rising pressure from consumers and investors across the globe. A conscious and effective ESG policy, therefore, has become a priority for many fashion brands and is becoming increasingly important for shareholders, investors, and customers.
The textiles and apparel industry is accountable for many environmentally harmful practices as well as emissions contributing to climate change. Textile and apparel sales have more than doubled globally in the past 20 years. In 2016, the per capita consumption of apparel fibres was more than 30 kg in the United States and Europe.4 Simultaneously, the number of times a garment is used before disposing of also decreased by 36 per cent from 2000 to 2016.5 This results in an immense amount of textile waste, i.e., up to 85 per cent of textiles go into landfills each year. That’s enough to fill the Sydney harbour annually.6
Cotton is an enormously water-intensive material. The production of one cotton T-shirt requires 2,700 litres of water, which is equal to the amount one person would drink in 2.5 years.4 Cotton farming requires more pesticides and fertilisers than any other single crop. On average, a farmer uses around 360 pounds of fertilisers per acre of the cotton field every year. Most of these nitrates are then transformed into nitrous oxide, a greenhouse gas 300 times more harmful than CO2.
The global consumption of synthetic yarns and fibres increased from a few thousand tonnes in 1940 to more than 60 million tonnes in 2018, and it continues to rise. Synthetic textiles impact the environment and climate throughout their life cycle. In addition, between 200,000 and 500,000 tonnes of microplastics from the textile industry enter the marine environment every year. They are non-biodegradable and can take up to 200 years to break down. Furthermore, washing synthetic textiles (such as polyester, nylon, and acrylic) is a major contributor to microfibers entering the oceans. It is estimated that each year 0.5 million tonnes of plastic microfibers are released into the oceans from the simple act of washing synthetic textiles. According to Ellen MacArthur Foundation, at a global level, the production of synthetic fibres consumes approximately 1 per cent of crude oil production i.e., 48 million tonnes per year) which makes the industry highly reliable on non-renewable resources. On average, European households consume about 13 million tonnes of textile products (clothing, footwear, and household textiles). Synthetic fibres, such as polyester and nylon, make up about 60 per cent of clothing and 70 per cent of household textiles.
Some leading brands have answered this call and are working to create synthetic fibre alternatives and develop more eco-friendly manufacturing and dyeing processes. Technology and research are playing a key role in making the industry more sustainable. Sports shoes and apparel are made from materials obtained from plastic dumped into the ocean. Fish skins and natural dyes are being used in place of harmful chemicals. Backpacks and purses are being made from the discarded canvas, and furs are being substituted by fruit skin. Some companies have a return policy so they can recycle the consumers’ clothing after they have worn out.
Consumer awareness is prompting responsible consumption. Major brands are investing in ecologically sustainable sourcing practices and circular design and manufacturing. Major fashion brands are proudly displaying recycled PET on their labels, along with the amount of water consumed in the production of their clothing. Global players are targeting significant portions of their sourcing to be from recycled materials. For example, ASOS has launched its ‘Fashion with Integrity’ (FWI) 2030 programme, committing to achieve Net Zero across the full value chain by 2030. Meanwhile, Inditex has also committed to reaching Net Zero in 2040 through the reduction of carbon emissions across the supply chain and across all other areas of its business. It has also pledged to reduce the consumption of water across the supply chain by 25 per cent by 2025 to help deliver a positive impact on local environments, particularly for marine and freshwater habitats and nearby communities.
United Nations Framework Convention on Climate Change (UNFCCC): The UNFCCC Fashion Industry Charter for Climate Action sets targets to decarbonise the supply chain and halve greenhouse gas emissions by 2030 and achieve net zero emissions no later than 2050 or set Science Based Targets (SBTs), an initiative that lays out a roadmap to reduce emissions in line with the Paris Agreement. The Fashion Charter also spells out targets for securing 100 per cent of electricity from renewable sources with minimal other environmental or social impacts, for owned and operated emissions by 2030, and places heightened emphasis on brands needing to work with their suppliers to reduce emissions—particularly important considering that most emissions (~96 per cent) come from the fashion supply chain.7
With increasing globalisation, fashion brands are working hard to ensure their global corporate standards for health, safety, labour rights, sustainability, quality of product, etc are adhered to and maintained throughout their supply chain. Gap Inc in partnership with ILO’s Better Work has established programmes to improve worker representation and leadership involvement. These cover issues such as workplace cooperation, supervisory skills, and empowering women. Better Work is a flagship programme of the International Labour Organisation (ILO), jointly run with the World Bank Group’s International Finance Corporation. Better Work brings diverse groups together – governments, global brands, factory owners, and unions and workers – to improve working conditions in the textiles industry and make the sector more competitive.
Inditex has also partnered with many organisations including IndustriALL, the international trade union federation, with whom they have a pioneering Global Framework Agreement to achieve strong industrial relations and worker satisfaction.
With increasing interest in sustainability and how businesses impact society’s development, Corporate Social Responsibility (CSR) is becoming more critical than ever. Every enterprise, whether large or small, can benefit from discovering ways to give back to society and engage in CSR activities beyond employment creation and profit generation. CSR is the commitment of a business to contribute to sustainable economic development by working with the employees, local community, and society at large to improve their lives in ways that are good for business and development.
Fashion brands have become very involved in promoting their CSR campaigns through various media platforms. They have employed a wide range of communication techniques to promote their corporate social responsibility campaigns further. For example, Adidas, a major sports fashion brand, has been very vocal about its CSR campaigns. Its CSR policy aims to give back to the society from which it draws its resources by extending a helping hand to the needy and the underprivileged. Through its CSR initiatives, Adidas pledges to enhance value creation in society, from its services, conduct and initiatives, and to promote sustained growth of the society, in fulfilment of its role as a Socially Responsible Corporate.
Adidas has collaborated with other brands and non-profits to reduce its overall environmental and social impact. Two of the most popular collaborations are the Adidas by Stella McCartney collection and Adidas’ partnership with Parley for the Oceans. The partnership with Stella McCartney specialised in producing as minimum waste as possible and reusing any remaining fabric. Stella McCartney is also a well-known brand for its CSR tactics. The collaboration has experienced great success and has been applauded for its mission. Adidas teamed up with Parley to create a wide range of products using recycled plastics from the ocean. The most impressive product released was a shoe made entirely from recycled plastic. Both collaborations were heavily promoted and established a positive brand image.8
Volunteering : Corporate volunteerism is a workplace-supported initiative that supports and encourages the workforce to participate and volunteer their time and resources. The company can design and implement its activities and encourage enthusiastic employees to participate. Employees can also be offered paid volunteer time offs (VTOs) and work with community non-profits, charities, fundraisers, or other initiatives. According to the 2018 Employee Benefits Report issued by the Society for HR Management, nearly one in four organisations in the US are using VTO to parlay CSR into a competitive advantage for the company.9
A Delloite study, based on a survey of 1,000 full- and part-time employees who had volunteered over the previous 12 months found that 89 per cent of employees think that creating a culture that encourages volunteering can help employers boost employee morale, workplace atmosphere, and brand perception.10
Creating a culture of volunteerism within the company not only improves the productivity of the employees but also improves the overall community. When employees feel good about being at work, they tend to work harder and take pride in their company. The research revealed that employers that encourage and promote volunteering boost employee morale, critical thinking, problem-solving, improve the workplace atmosphere, and enhance the perception of their brand.
Fair Labour : The global fashion industry is allying with international standards, laws, regulations, auditing, and certification systems that exist to protect human rights and ensure decent working conditions. For example, Puma, with regard to social responsibility, has launched multiple initiatives under the Reform platform to promote universal equality. The company strongly believes that people should be treated equally irrespective of their gender, age, skin colour, religious believes, sexual orientation or any other factor. Together with its brand ambassadors and partner organisations, Puma has been promoting universal equality and wants to do it part in fighting any form of discrimination in sports and society as a whole. Puma has set up a comprehensive list of targets, the 10FOR25, which seeks to make the company as a whole and its products more sustainable. The targets include commitments on topics such as climate, human rights, biodiversity, and circularity.
Puma worked with a factory partner in Vietnam to detect the origin of wage violations’ problems related to working hours and compensation. As the sole buyer, Puma was able to make quick improvements in manufacturing setup. As recommended by Better Work, the factory upgraded its policies to a pay and incentive system that was more transparent and equitable, thereby raising worker wages and reducing excessive overtime.
Women Empowerment : Empowerment programmes are being extended to communities, such as the UN Resilience Fund for Women, which aims to raise and disburse at least $10 million to women-led organisations. The Resilience Fund is a joint initiative of BSR, the United Nations Foundation’s Universal Access Project, and Women Win/Win-Win Strategies in close collaboration with founding corporate partners and investors such as Gap Foundation, PVH Foundation, H&M Foundation, the VF Foundation, and the Ralph Lauren Corporate Foundation to support women workers in global supply chains.
Meanwhile, more than 3,000 companies have signed on to the Women’s Empowerment Principles (WEPs). And many companies are taking steps specifically to address gender equality in their supply chain.11 For instance, Kering, owner of luxury brands Balenciaga, Bottega Veneta, Gucci, Alexander McQueen, and Yves Saint Laurent, partnered with BSR to review the workplace gender equality policies and practices of 189 suppliers and the perceptions and experiences of 880 workers in their Italian luxury supply chain.12
Ethics in the workplace is defined as the moral code that guides the behaviour of employees concerning what is right and wrong regarding conduct and decision making. Ethical decision making in the workplace considers the individual employee’s best interest and considers the best interest of those impacted. It is important to understand that ethical behaviour in the workplace can stimulate positive employee behaviour that leads to the growth of the whole organisation, whereas unethical behaviour in the workplace can inspire damaging headlines that lead to organisational demise.
The “G” in ESG pertains to the governance factors of decision making, from policymaking to the distribution of rights and responsibilities among different participants in corporations, including the board of directors, managers, shareholders, and stakeholders. Governance factors specify the rules and procedures for nations and companies and enable investors to check for appropriate governance practices as they would for environmental and social factors. Risk management, the role and composition of boards of directors, and how corporate performance is measured are core elements of corporate governance structures. ESG governance criteria ensure that a company uses accurate and transparent accounting methods and pursues both integrity and diversity in selecting its leadership.
Corporate governance estimates how a company uses policies and regulations to inform business decisions, compliance, and meet stakeholders’ demands. Corporate governance failures such as corruption and bribery, excessive executive pay, or relentless lobbying can cause reputational harm and loss of trust. Companies in every sector, including apparel, are required to make strong efforts to enhance their performance across all the three ESG measures. Good corporate governance not only improves profitability but also increases a firms’ overall economic performance.
Transparency and Disclosure : Since western clothing brands (for example, Gap, PVH, H&M, etc) source their products from developing countries like Bangladesh, India, Vietnam, etc, they tend to be concerned about the safety records and working conditions of the garment factories. Heightened levels of concern would imply that various stakeholders expect accountability and transparency about corporate governance. Thus, it becomes necessary for organisations to disclose their social and environmental-related governance information to satisfy stakeholders and keep a track of how these disclosure practices change over time.
Textile and apparel companies are pouring investment into digital technologies that allow unique identifiers and other digital information to be added to products by using a combination of technologies centred around blockchain and supported by radio frequency identification (RFID), QR codes, and near-field communication (NFC). These technologies are helping companies to identify and tackle significant problems in the textiles and apparel industries such as greenwashing and the need for more responsible and transparent business practices amid rising consumer engagement with climate change and labour conditions in the textile industry. For example, Yoox Net-A-Porter and Pangaia, the global online luxury and fashion brands, partnered with EON to launch Digital IDs to help accelerate greater transparency, traceability, and circularity in the industry. Unique Digital IDs are virtual certificates that can be used to record each item’s history – telling its story from manufacture through use, resale, reuse, and recycling. This technology will enable buyers and shareholders to easily check an individual clothing’s authenticity, provenance, history, and repair so that they can last for longer and encourage a circular mindset.
Similarly, Reformation has partnered with blockchain platform FibreTrace to give customers QR-code access to information on the lifecycles of its denim garments, while TS Designs uses QR-enabled passports to certify apparel that are made in the US. Initiatives such as the European Commission’s European Data Space for Smart Circular Applications and the American Apparel and Footwear Association (AAFA)’s call for the digitisation of apparel and footwear labelling are also supporting these kinds of efforts.
The Aura Blockchain Consortium, a shared private platform, was launched in April 2021 by companies LVMH, Prada Group, and Cartier, part of Richemont. Together with the OTB Group that joined in October 2021 and Mercedes-Benz in May 2022, it aims to develop the applications of blockchain technology and raise the standards of luxury by leveraging unique codes to provide authenticated product records, including ownership history, product authenticity data and origin of raw materials. When consumers buy products, they receive an encrypted certificate containing information about the production process.
Meanwhile, IBM and luxury and fashion non-fungible token (NFT) platform Arianee have announced their collaboration to provide digital passports for collectible and valuable goods, enriched with blockchain-based provenance. Arianee’s mission is to transform the way individuals own and consume luxury and fashion, empowering brands and owners by giving digital life to physical products, experiences, or communities through NFTs. IBM and Arianee both have the ambition to combine their blockchain and business leadership in the luxury and fashion industries to offer the most complete solution for brands, linking Supply Chain visibility with brand-consumer engagement enabling greater transparency, and data privacy and ultimately unlocking trust in the circular economy. IBM will provide integration services to ensure interconnectivity between traceability platforms based on the IBM Blockchain Platform, client ERP software, and Arianee’s solution.
The Fashion Sustainability and Social Accountability Act : A landmark proposed bill in New York state was presented on January 5, 2022. The Fashion Act, if passed, would make New York the first US state to pass a law that would hold fashion companies responsible for their role in climate change and other human rights impacts. Given the international nature of fashion companies, growing consumer demand for transparency and sustainability from fashion companies, and increasing legislation surrounding human rights and sustainability, it is likely that New York’s Fashion Act will set a trend. This act would require fashion retail sellers and manufacturers to publicly disclose their environmental and social impacts and to set out targets to reduce those impacts.13
However, not all retail brands will be subject to the legislation. Only clothing and footwear companies operating in New York, with global revenues that exceed $100 million would be subject to provisions, ensuring that the focus remains on the leading fashion companies, whose environmental and social impact is surely high.
Directive on Corporate Sustainability Due Diligence (CSRD) : The European Union (EU) is set to adopt the CSRD in October 2022, amending the previously applicable Non-Financial Reporting Directive (NFRD). The CSRD supports the European Green Deal, a set of policy measures intended to combat the climate crisis by transforming the EU into a modern, resource-efficient, and competitive economy, with no net emissions of greenhouse gases by 2050. The aim of this directive is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address the adverse impacts of their actions, including in their value chains inside and outside Europe. By 2025/2026, mid-to-large-sized companies that operate in the EU will be required to establish mandatory due diligence on human rights and environmental risks across their full value chain. While CSRD applies to a relatively small set of companies for now – companies with over 500 employees and that exceed €150 million in net turnover worldwide, and companies operating in high-impact sectors with over 250 employees and a net turnover of €40 million worldwide – the legislation is slated to impact small and medium enterprises by 2026, and many additional US companies that generate revenue in the EU will also be required to comply.14
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