Fast fashion – no longer in vogue
Transformation Insight: the consumer products sector
- Clothing sector causes significant environmental damage
Supply chain issues and transparency problems lead to controversies and reputational damage
Consumers play a part in determining the success of the transformation strategy
Fast fashion: a trend that hasn’t (yet) gone out of vogue
Do you like to shop on a whim and pay low prices? Is your wardrobe well stocked with the latest t-shirts, trousers and dresses? If so, you are contributing to the economic success of the fast fashion industry.
Boosted by a growing and increasingly fashion-conscious middle class in the newly industrialising countries and by the upsurge in online retail, fast fashion is an important driver of growth within the clothing industry. It is one of the reasons why the future prospects of the fashion sector remain positive.
As shown in figure 1, revenue generated from the sale of clothing and shoes is forecast to grow by 5 per cent a year from 2019, reaching US$ 3.3 trillion by 2030 (chart on left). The quantity of clothing consumed will also increase between 2015 and 2030 by a total of 63 per cent (chart on right).
But there are environmental and social downsides to this economic success story, which often go unnoticed by the wider public. Fast fashion in particular, which is known for its rapid adoption of the latest fashion trends, short production cycles and low-cost mass production, is massively increasing the ecological footprint of the entire clothing industry. There is growing criticism of the industry and of fast fashion in particular – not only from sustainability-conscious consumers and investors but also from regulatory bodies – because of their vast consumption of resources, combined with problematic supply chains and often poor working conditions. Admittedly these criticisms have not managed to curb the growth so far, but the many controversies and debates are beginning to damage the long-term prospects of this fashion trend.
Producers have a range of environmental problems to solve
Across the entire garment sector value chain, from the selection of raw materials to production, transport and final disposal, transformation is required from an ecological perspective. Figure 2 shows that the industry’s water consumption, its greenhouse gas emissions and the quantity of waste it produces will all continue to rise sharply up to 2030.
Water consumption: The fashion industry is already responsible for around 10 per cent of global industrial water consumption. According to figure 2, consumption will increase by 50 per cent in the period from 2015 to 2030 (chart on the left). Considering the scarcity of water in many areas where the fashion industry has production facilities, the absolute level of consumption and the dependency of the sector on this resource are problematic. The water-intensive nature of cotton production is primarily responsible for this immense demand. But if that wasn’t enough, the garment manufacturing process also causes a huge amount of water pollution. According to a World Bank study, around 20 per cent of global water contamination stems from the treatment and processing of textiles.
Greenhouse gas emissions: The clothing industry is also responsible for around 8 per cent of global greenhouse gas emissions, according to a 2020 research report from Barclays. One of the reasons why absolute emissions are so high during the production of textiles is that fossil fuels account for an above-average proportion of the energy mix of the countries in which textiles are typically manufactured. If the growth in emissions continues (see figure 2, centre chart), the clothing sector alone could account for 25 per cent of the world’s entire carbon budget by 2050.1
Waste & wastage: In 2015, the fashion industry was responsible for 92 million tonnes of waste. This amounts to around 4 per cent of all the waste produced in the world. By 2030, it is estimated that the absolute quantity will have risen to 148 million tonnes (figure 2, chart on right). This increase is due to the growing demand for ever more (fast) fashion and the trend towards keeping garments for a very short time before throwing them out. The average consumer now buys 60 per cent more garments than they did 15 years ago. Estimates suggest that 50 per cent of fast fashion clothing ends up in the bin after just one year. The increase in the volume of waste is also ‘aided’ by the fact that currently only around 1 per cent of garments are recycled. One damaging side effect of this is that microfibres and microplastics – especially from synthetic fabrics (particularly polyester) – find their way via landfill into rivers and oceans where they accumulate in ever higher concentrations. Also: even though demand is strong, the sector still produces too many garments. This overproduction is a problem because the clothes are also rarely recycled and are often incinerated or otherwise destroyed. The Ellen MacArthur Foundation estimates that the annual loss of value through wastage and waste in connection with clothing may be as high as US$ 500 billion.
Controversies surrounding supply chains and working conditions are damaging
As well as the environmental problems, the fashion industry is also facing other challenges. A large proportion of textile production – especially in the fast fashion sector – takes place in the emerging economies. This is for cost reasons, but also because of the lower regulatory standards. Although such production decisions are understandable from a commercial perspective, the social risks they entail should not be underestimated and are increasingly attracting the attention of consumers, investors and regulators. Workers employed in the emerging markets are often badly paid, tend to have fewer workers rights and are exposed to harmful environmental influences. Child labour is still a problem in some countries. And there is growing public awareness of the issue of the systematic exploitation and oppression of whole sections of the population, such as in the Chinese region of Xinjiang. Critical questions have been asked about the production conditions of certain textile companies in this region, which has traditionally occupied an important role in textile manufacturing. The companies concerned had to justify themselves and provide detailed information about their individual supply chains.
The nub of the problem is that supply chains, especially in the fashion industry, are long and complex. The large number of input factors and the often small-scale work steps make transparent analysis difficult and mean it can be hard to obtain comprehensive information about whether the relevant suppliers are operating correctly and sustainably. Supply chains can basically be divided into three parts:
Tier 1: Suppliers and producers with whom there is a (preferably) direct relationship. According to surveys by the Fashion Revolution organisation, this segment has seen an increase in transparency in recent years. In 2021, as many as 47 per cent of fashion labels provided a list of these suppliers – compared to just 40 per cent in 2020.2
Tier 2: This section contains supplier companies that are involved in garment processing and which carry out process steps such as bleaching, dying and embroidery. According to the report referred to above, however, only 27 per cent of fashion companies provide Tier 2 lists.
Tier 3: Evidence of where the actual raw materials – such as cotton or leather – come from is even less transparent. Only 11 per cent of companies are able to show where their raw materials are sourced.
The detrimental impact on the environment is not the only factor behind the emergence of various initiatives in recent years seeking to bring about a transformation in the fashion industry. The unacceptable working conditions and virtually uncontrollable supply chains have also played their part. Various organisations such as the Better Cotton Initiative3 (BCI) and the Fashion Industry Charter for Climate Action4 (part of the United Nations Framework Convention on Climate Change – UNFCCC) have objectives that include reducing carbon emissions and improving production standards across the whole value chain. But the agreements are often not (sufficiently) binding on the companies in the sector. This is now beginning to change. For example, after lengthy negotiations, the Supply Chain Due Diligence Act (LkSG)5 was passed in Germany in summer 2021 following a number of problems and abuses at individual companies – not just in the fashion sector. For the first time, German companies above a certain size in every sector will have to carry out comprehensive due diligence on their supply chains. Heavy fines can be imposed in the event of any violations. Other legislation in the pipeline – for example at EU level – will increase the scope and importance of this issue – including for the fashion sector.
The consumer is (also) key
Various surveys and studies show that the issue of sustainability is becoming more relevant in fashion purchase decisions. According to a 2020 study by the IBM Institute for Business Value in association with the US National Retail Foundation, more than 70 per cent of consumers said that sustainability was important to them. A recent analysis published by research organisation Stifel in 2021 found the same: more than 80 per cent of consumers of lifestyle fashion items said it was important for companies in this segment to behave in a sustainable way. Two thirds are even willing to pay more for this. Admittedly, these findings are not yet fully reflected in actual consumer behaviour, but they should not be underestimated by fashion companies. Experience from other sectors has shown that the trend towards greater sustainability in consumer decisions is fundamentally very strong.6 It is true that shopping habits – especially among younger groups – have been shaped by the booming online retail trade, a constant stream of new fashion trends and affordable prices. But this customer group in particular is very receptive to sustainable trends and products.
Multi-layered transformation requires precise analysis
The transformation processes required from an ESG perspective in the fashion industry are complex. This makes the analysis and assessment carried out by investors ahead of an investment decision challenging. The assessment criteria (KPIs) and questions examined and assessed at Union Investment in this context can be divided into the following categories: strategy, investment and governance. In addition to more general criteria, the analysis focuses on the following, sector-specific KPIs:
Compatibility of brand perception and sustainability (KPI 1): How high is the proportion of sustainable products7 and is the brand associated with sustainability? How will the strategy develop over time? For example, Adidas has announced that by 2025, nine out of ten of its products will be sustainable.
Environment-related reduction targets (KPI 2): What measures and targets are being defined to reduce the ecological footprint? Are there specific plans to reduce the use of plastic? For example, Adidas claims that since 2020, around 70 per cent of the polyester it uses is recycled and from 2024 only recycled material will be used.
Monitoring of the supply chains (KPI 3): What measures and targets are being put in place to ensure compliance with environmental and social standards? Is there sufficient transparency across all areas (Tier 1 to 3)? Example: Hugo Boss received external validation when it was awarded ‘Supplier Engagement Leader’ in 2020.8
Investment to improve working conditions (KPI 4): What is the expenditure required to achieve the targets from KPI 2? In addition to expanding the company’s own human capital, employees at suppliers should also be trained on an ongoing basis and working conditions should be monitored and improved.
Quality comes at a cost
The results of such analysis are essential for making informed investment decisions and for obtaining useful information on capital market risks and opportunities for the individual companies.
The long and complex supply chains in the fashion industry – and thus also in the fast fashion segment – present a risk from a capital market perspective. Firstly, failures and disruptions to the supply chain can lead to potential production stoppages and loss of revenue. Secondly, if abuses within the supply chain are discovered, there is now a risk of financially onerous penalties being imposed by the regulator. And they also create the risk of reputational damage in the perception of the general public. In the media-sensitive fashion industry, this can also cause a sudden drop in demand. But above all, investors – and not just those who are sustainability-oriented – are becoming increasingly sensitive to such controversies and are factoring them into their investment decisions. For example, in 2020, British firm Boohoo had to admit that a supplier in Leicester (UK) had been paying less than the minimum wage and that the working conditions generally were poor. Not only did this news have a negative impact on the company’s share price, it also damaged relationships with important retailers. So the growing sensitivity of investors and consumers to sustainability issues is having an impact. In addition, fast fashion operates on tight margins – there is little flexibility to offset loss of revenue caused by scandals or because of rising input costs and manufacturing costs. In a 2017 report9, the Global Fashion Agenda organisation estimated that fashion companies could see their profit margins shrink by around three percentage points by 2030 if they do not make changes. The cost to the industry as a whole would be billions in lost profits.
The opportunities associated with a successful transformation of course stem from the avoidance of the aforementioned risks. This requires a better environmental footprint10 across the entire value chain and greater alertness to the potential for reputational damage. Combined with increased transparency in respect of the sustainable footprint of their own fashion label, transformation provides companies with the potential to stand out from the competition, which is something that should also be rewarded by the markets. And companies that are willing to change may also be able to improve their market prospects and brand perception by innovating and adapting their business model:
Alternative materials: The use of sustainable, alternative raw materials can reduce the use of polyester and cotton, and mitigate the environmental problems associated with these input materials. Examples include fibres produced from natural materials. The Austrian firm Lenzing uses fibres made from cellulose (from wood pulp) in its production. Large fashion chains such as Inditex and H&M are already using this material for parts of their collections.
Second-hand: Demand for used garments is growing. That is good news for the environment, as it helps to slow the growth of the clothing waste mountain. According to the thredUP 2021 Resale Report, 52.6 million people around the world sold second-hand items of clothing in 2020 – compared to just 36.2 million the year before.11 Strong growth is expected in the coming years in terms of both quantity and revenue, with the latter forecast to rise from US$ 36 billion globally in 2021 to up to US$ 77 billion in 2025. By way of comparison, the report predicts that fast fashion will be worth (only) US$ 40 billion in 2030, while the second-hand market will be worth US$ 84 billion. The Swedish company Nakdcom One World AB is one company hoping to profit from this trend. Both sustainable fast fashion and second-hand goods are bought and sold on its platform. Successfully. Several investment companies have taken a stake in the company – they want to invest in a pioneer in the field of sustainable fashion.
Recycling: At present, less than 1 per cent of textile waste is reprocessed. One reason for the low rate is the complexity of the recycling process, with the reprocessing of textiles that contain more than one type of fibre being particularly difficult. But solutions are beginning to emerge. The UK company ‘worn again technologies’ has developed a process that can also reprocess and reuse mixed fibres. The process is still in the early stages of development and capacity is still limited, but the company is receiving support from industry giants such as H&M and Kering. Similar approaches are being followed by the start-up firm Circ, whose partners include Patagonia. Support is being offered by the fashion companies because they want to invest in these innovative technologies at an early stage and to thereby secure capacity for reprocessed materials in the long term. Using such material can make the fashion companies’ own product ranges much more sustainable and improve customer perception, because reprocessed materials have a far smaller environmental footprint than new fibres. To encourage this trend, H&M has been operating a scheme since 2013 where it takes back old clothing for reprocessing and reuse.
Conclusion and outlook
Fast fashion still has many fans. That is why it remains a fast-growing and successful part of the business for many fashion companies. But harm to the environment, non-transparent supply chains, and working conditions that are increasingly viewed as problematic are giving more and more consumers and investors pause for thought.
Combined with more stringent regulation such as the German Supply Chain Due Diligence Act, this could cause fast fashion to fall out of favour. The affordable prices remain an attraction. But surveys show that sustainability is becoming more important even when it comes to fashion. The potential to put the fast fashion business model under pressure is already there.
Companies in the fashion sector need to be quick to anticipate the change that is being triggered by the debate around sustainability so that in the long term they do not lose customers and put their market position at risk. Larger and more diversified fashion companies are likely to fare better during this difficult transformation. They will be better able to afford the use of innovative technologies, the development of new business models and the parallel establishment of truly sustainable fashion lines. The upheaval may be a burden in the short term, but it will pay off as volumes rise and economies of scale take effect. If consumers are also educated about the positive side effects of their product choices in a transparent and credible way, it will also be possible to command higher prices for more sustainable and better quality clothing.
Union Investment is supporting the efforts to drive through transformation in the fashion industry. Using its own independent assessment system, it can identify companies that are leading the pack in terms of switching to more sustainable production and establishing themselves in the ‘slow/sustainable fashion’ sector. Once again: pioneers of this new trend will have a sustainable edge – including from the capital markets’ perspective.
- 1 See report from the Ellen MacArthur Foundation: A New Textiles Economy.
- 2 See also the Fashion Transparency Index 2021 published by Fashion Revolution, which is actively seeking to help bring about change within the fashion industry and aims to educate and mobilise people, companies and policymakers in this area.
- 3 One of the aims of the BCI is to improve sustainability in production, especially for cotton; see also the BCI website.
- 4 For the precise wording and for a comprehensive list of targets see Fashion Industry Charter for Climate Action.
- 5 For the precise wording of the Act and key FAQs see the German Federal Ministry for Economic Cooperation and Development (BMZ) website.
- 6 See, for example, the debates about electric vehicles, air travel and eating meat, and the changing consumer behaviour in these areas.
- 7 Products are described as sustainable if they have been made from natural, renewable or recycled materials and can be reprocessed or reused.
- 8 Hugo Boss received the award from the independent non-profit organisation Carbon Disclosure Project (CDP) for its commitment to climate action in the supply chain.
- 9 Global Fashion Agenda (in association with BCG): Pulse of the Fashion Industry.
- 10 In the report referred to in footnote 9, it is estimated that worldwide, up to €110 billion in environment-related costs alone could be avoided by 2030 if the fashion sector succeeds in reducing its environmental footprint.
- 11 For further information on the subject of the second-hand trade see the complete thredUP report.
Mathias Christmann, Dijana Lind
As at: 19 August 2021