Buyer's remorse: is the fashion industry next in line for ESG-related scrutiny and activism?

By Claire Smith, Olivia Back
14 Apr 2022
Fashion companies must remain alive to the growing scrutiny of greenwashing and social-washing as well as the changing expectations of stakeholders when it comes to ESG, particularly those of the conscious and disruptive consumer.

In the last several years, climate justice litigation and stakeholder activism in the ESG space has focused almost exclusively on the energy and resources sector and its ESG risks and shortfalls; however, with ESG-related litigation globally on the rise and, as COP26 and the latest IPCC Sixth Assessment Report emphasised, an ever-increasing urgency to reach net zero sooner rather than later, other industries, such as the fashion industry, are likely to feel the full impact of ESG expectations and risks soon.

Why the fashion industry?

At first glance, the fashion industry and the mining industry do not share much in common.  Dig a bit deeper, however, and you will find that both industries are "high risk" when it comes to ESG.

The following factors contribute to the fashion industry, being one of the industries in which arguably "E" (environmental), "S" (social) and "G" (governance) risks are most prevalent:

  • this industry has a track record of serious exploitation of marginalised groups in its supply chains and a disregard for labour laws.  Well-known examples of this include the Tazreen Fashions factory fire and the collapse of the Rana Plaza building, both in Bangladesh, which cumulatively resulted in the death of thousands of garment workers. 
  • many fashion businesses operate based on a model and corporate purpose which is driven by profit.  Fast fashion practices – which focus on producing high volumes of "on trend" clothing quickly and inexpensively – has resulted in harmful social practices and large-scale, long-lasting environmental impacts, including deforestation and damage to eco-systems. 
  • a significant issue for the fashion industry is waste, generated during the production process as well as at the end-of-life stage of an item of clothing.  Statistically, we are buying more clothes than ever before but discarding our clothes more often.  Unwanted (and usually non-recyclable or biodegradable) textiles and clothing items are creating significant waste issues, particularly for developing countries, such as Ghana, that accept the West's exported used clothing items. 
  • many textile manufacturing processes are also water-intensive and utilise harmful chemicals and dyes, which are causing significant contamination of waterways.
  • lastly, this industry has a history of "trust issues", having lacked transparency and traceability.

According to the European Environment Agency, textile consumption in Europe has on average the fourth highest impacts on the environment and climate (behind only food, housing and transport).

"Washing" claims

Companies are globally feeling the pressure from stakeholders (including consumers, employees, regulators and investors) to make certain ESG commitments. 

In August 2021, we wrote on the topic of net zero pledges and how companies can ensure their pledges are robust and effective.

In particular, there is a universal pre-occupation with limiting the rise of global temperatures and working towards a net zero carbon economy and most companies, including fashion companies, have already voluntarily made decarbonisation commitments.  For example, the H&M Group has committed to reducing its scope 1 and 2 greenhouse gas emissions by 40% before 2030, and reducing its scope 3 GHG emissions from purchased raw materials, fabric production and garments by 59% per product before 2030.  ASOS has a target of net zero emissions by 2030.  Inditex, the Spanish company that owns brands such as Zara, has also recently moved its net zero emissions target a decade earlier, to 2040.

When a company gives a misleading impression to the public, via, for example, public statements and policies regarding how environmentally friendly or consistent with a certain environmental position its products, business model, and/or practices are, it is engaging in "greenwashing". 

Importantly, making a commitment without a proper basis, can amount to misleading and deceptive conduct under Australian Consumer Laws.  It can also be a breach by the company's directors or officers of section 180 of the Corporations Act if it can be established that they did not exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in the circumstances.

Both ASIC and ACCC have recently publicly stated that they will be taking action against all forms of greenwashing as a priority. The pending Santos proceedings in the Federal Court, in which an activist shareholder group is taking action against Santos over claims in its annual report to have a credible pathway to net-zero, also highlights the growing scrutiny of ESG claims by an ever-growing community of interested stakeholders.  For more information have a read of our recent article, 'Regulators join forces to fight greenwashing in 2022'.

ESG-commentators are now also observing the rise of "social-washing", "purpose-washing" and "ESG-washing", which occurs when companies makes statements or implement policies that have the effect of misleading the public into believing a company is more socially responsible than it actually is.  The pandemic, causing widespread operational disruptions and high rates of job vacancies in the fashion industry, however, has brought to focus more sharply certain social issues, including the rights of garment workers and diversity and inclusion, that companies should be prioritising.

The rise of the conscious and disruptive consumer, digital fashion and other initiatives

Consumers are beginning to show their disapproval of certain practices within the fashion industry by voting with their dollars.

At COP26, the rise of the conscious consumer was discussed.  It was noted that consumers are beginning to make deliberate purchasing decisions which are informed by ESG objectives.  40% of consumers in Australia believe a company's social and environmental efforts are very or extremely important when purchasing products or services (Finder Green Consumer Report, 2021).  Reports also indicate that second-hand clothing markets will likely overtake fast fashion in global sales in the coming years.

In 'The State of Fashion 2022' published by the Business of Fashion and McKinsey, it was noted that "[…] fashion companies will need to ensure they are acting in the interests of all stakeholders — including customers, employees, contractors, investors and wider society. Many brands will push harder on circular business models, greener materials and more sustainable technologies".

Some of the new initiatives emerging in the fashion industry, particularly to deal with the systematic overproduction and overconsumption, include:

  • the rise of rental, resale and refurbishment models;
  • the roll-out of closed-loop recycling systems which decreases the production and use of virgin raw materials;
  • the use of digital "product passports" which "contain coded information that can add value, support supply chain transparency and ensure authentication" (The State of Fashion 2022);
  • "digital fashion" which allows consumers to own non-physical, digital items of clothing.

In The State of Fashion it was forecasted that "[d]igital and sustainability will offer fashion’s biggest opportunities for growth, while supply chain pressures will challenge the industry in 2022".

Around the world, government bodies are also responding to the impact of the fashion industry.  The European Commission has recently presented a package of "European Green Deal" proposals "to make sustainable products the norm in the EU, boost circular business models and empower consumers for the green transition".

We've also written about the new developments and initiatives emerging in both the private and public sectors as well as increased Government funding to deal with Australia's significant textile waste problem.

Watch this space

Demand for clothes – particularly those that are on-trend – will inevitably continue to increase as we hopefully transition to a more just world where people have a higher standard of living and more of the global population lives above the poverty line.

Fashion companies must remain alive to the growing scrutiny of greenwashing and social-washing as well as the changing expectations of stakeholders when it comes to ESG, particularly those of the conscious and disruptive consumer.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.