'Fast fashion’ promises cheap, on-trend clothing that can be thrown away when the next style or trend is created. To meet demand, often spurred on by social media ‘influencers’, clothes are produced rapidly, typically in poorer countries with cheap labour and less stringent regulations such as Bangladesh or Cambodia and delivered quickly to retailers to supply to consumers. Cheaper, poorer-quality materials are used with garments only required to last a few outings.
It’s hard to see how this business model can be deemed sustainable. Vast quantities of resources, both in terms of materials, energy, water and labour go into producing items only for them to be discarded and replaced in a short time frame. According to the Fixing Fashion report, a cross-party analysis published by the UK Parliament in 2019, textile production contributes more to climate change than international aviation and shipping combined. Garments are generally made of polyester, which is oil-based, or cotton, which is water-intensive to grow and reliant on agrochemicals. In addition, labour costs in the industry have been progressively squeezed in pursuit of profits, and this has raised concerns over working conditions, pay and health & safety.
The fast fashion industry has been under increasing scrutiny in recent months partly due to the disruptive impact of Covid-19 on global supply chains and the acceleration of e-commerce during lockdown. Then, in July, the media spotlight turned on Boohoo and the alleged exploitative working conditions of a supplier factory in Leicester. Reports stated that manufacturing continued during lockdown, and that no additional hygiene or social distancing measures were in place. The stories also alleged workers earned as little as £3.50 an hour, well under half the UK minimum wage.
Boohoo was highly rated by some of the ‘ESG’ rating agencies that assess companies for their environmental, social and governance credentials. Indeed, several funds labelled as ‘ethical’ or ‘sustainable’ counted the company amongst their holdings. This certainly seems odd given recent events and underlines the need for socially responsible investors to conduct thorough due diligence on companies rather than relying on widely available headline ratings or a small number of key metrics.
EdenTree, managers of EdenTree Amity International, points out, “The Boohoo story proved the importance of due diligence and having 'red lines' for responsible and sustainable fund managers”. Meanwhile, Seb Beloe, co-manager of WHEB Sustainability Fund, notes Boohoo “had an impressive set of targets on a range of social and environmental issues. On the critical issue of supply-chain transparency, however, it was sadly lacking.”
Boohoo stands accused of not providing the information that would have allowed investors and customers to trace the origin of its clothes. While the company scored well on other elements of ESG analysis, it’s what it didn’t provide rather than what it did that led to controversy.
Fund manager views
The clothing companies held in EdenTree’s Funds, including M&S, Hugo Boss, NEXT, N Brown, Adidas and Nike, do not subscribe to the fast fashion model, and the fund managers are comfortable with the management of social and environmental impacts, feeling they have a better balance between responsible business and sustainability than pure fast fashion brands and retailers.
They expect investee companies to have strong supply chain management, in terms of water use, emissions, chemical usage, workers’ rights, pay, as well as close relationships with suppliers, strong audit processes, and robust remediation procedures where necessary. They also consider ‘circularity’: how companies seek to reduce, reuse, and recycle products, and how easy it is for customers to return or recycle unwanted items.
Elsewhere, BNY Mellon, managers of the BNY Mellon Sustainable Real Return Fund, has undertaken a review of ESG practices in the fashion industry and excluded Primark owner Associated British Foods from its sustainable portfolios. As a sustainability-themed investor focused on solutions, WHEB has no exposure to apparel retail and prioritises their own research and due diligence over impact and ESG ratings.
The major lesson we can take from the Boohoo controversy is that relying on ESG ratings alone has some disadvantages. The handful of rating agencies often don’t agree on various issues, and simple scorings are the sum of various measurements and judgements on a multitude of factors. It’s possible to score poorly in one area but have a decent score overall, plus dangers could lie in factors that aren’t part of the score at all.
Some would go further. As WHEB’s Seb Beloe puts it, “ESG research can provide a critical insight into the fundamental quality of a business. ESG ratings, by contrast, are subject to a range of methodological and observational biases that make them, at best, a distraction.”
Certainly, we would agree that an experienced fund manager can add a further dimension to the ESG research process, help make the difficult decisions and be fully accountable for them. These issues are important. The Boohoo share price fell by a third in the aftermath of the Leicester news, illustrating that investors can be hit in the pocket if they get things wrong.
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