Fashion industry faces new ESG challenge

Claire Smith, Olivia Back and Lauren Parnaby
24 Jun 2022
Time to read: 3 minutes

Fashion companies now need to look beyond net zero targets as stakeholders push for more "nature positive" commitments, including action on animal welfare and biodiversity.

In April this year, we outlinined some of the key ESG-related issues for fashion companies, particularly the growing scrutiny by regulators and consumers of greenwashing and "social-washing" as well as changing expectations when it comes how companies are responding to and managing climate change impacts and risks.

This article explores new ESG issues facing the industry as momentum for change gathers pace.

Net zero is no longer enough

For about six months now, ESG commentators have pointed to a shift in focus of the ESG agenda from net zero – arguably now a mandatory "hygiene factor" for businesses – to a focus on being "nature positive".

Whereas net zero refers to the net reduction of a company's carbon emissions (whether covering just scope 1 and 2 or also including scope 3 emissions), nature positive is about "economic activity that improves the state of nature, partly to help boost its contribution to society" (Australian Financial Review, "Nature positive is the new net zero", 6 May 2022).

Separate to greenhouse gas emissions and climate change, nature positive action is concerned with addressing other environmental issues such as soil, air and water quality and conservation, the health of oceans and eco-systems, and protecting and conserving natural resources. The World Economic Forum has estimated more than half of the world’s GDP is “moderately or highly dependent on nature and its ecosystem services” (World Economic Forum, ‘Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy’, Report, 2020).

Setting nature positive commitments and targets is considered more complicated than net zero targets, as highlighted in an AFR article which noted that "finding ways to measure efforts to improve the natural environment are fiendishly complicated, but experts warn that pressure from investors and consumers to combat centuries of environmental degradation is moving fast".

Animal welfare as an ESG issue

Animal welfare has been a high-profile concern for the fashion industry for many years. However, it is now being characterised as an ESG issue, with a poor record impacting a company's ability to source finance, for example.

Companies around the world, as well as banks, other lenders and investors are now considering adopting animal welfare policies in relation to all sectors. For example, in 2019, NAB adopted a set of “Animal Welfare Principles” outlining, amongst other things, its expectations in relation to animal welfare and requirements for financing certain animal-related activities.

The environmental impact and carbon intensity of animal agriculture has been well documented. In particular, animal agriculture emits more greenhouse gases than the global transport sector and is considered by some researchers as the main driver of biodiversity loss (Boscardin, 2018). It is also a sector that will likely be significantly impacted by climate change events, including droughts and floods, but can also play an important role in future emission reduction and biodiversity conservation efforts.

Debate has also emerged around the ethics and environmental credentials of synthetic and natural materials. Wool, for example, has historically been considered a sustainable and environmentally responsible material, given its biodegradable and natural qualities. However, the manufacturing of wool is also water-intensive and has resulted in some cases in land degradation, deforestation and contamination of water ways. Some major fashion brands, including Adidas and Hugo Boss, have committed to ending their use of mulesed-wool by 2030 (in Hugo Boss’s case, by 2025).

To avoid the use of animal products, some brands are opting for synthetic materials such as "vegan leather" and microplastics. However, these products are generally petroleum-based (though some vegan leathers are made from plant-based materials) and have been criticised for the environmental harm that they cause during their entire lifecycle, including on the health of oceans, waterways and biodiversity.

Future regulation and different types of greenwashing claims

At present, regulators in Australia are focused on scrutinising net zero claims. Similarly, most ESG-related legal action globally is based on the impacts and commitments of companies in respect of climate change, rather than the impact of their operations or business model on biodiversity and eco-systems.

Arguably, (at least in Australia), the key present risk for fashion companies in not being nature positive is damage to brand and reputation. Stakeholders, including consumers, are leading the push for stronger nature positive commitments from fashion brands and are not satisfied with only pledges relating to climate change. For example, the H&M Group has been criticised for committing to halving its carbon footprint across its supply chain by 2030, while at the same time, double its production.

A key problem in Australia is the amount of clothing textile waste that is still ending up in landfill. Addressing textile waste is on the Federal Minister of Environment's priority list for 2021-22 and the Australian Fashion Council is making concerted efforts to bring together fashion designers, manufacturers, retailers, charities and the recycling sector to help tackle this issue. In addition to potential future product stewardship schemes for textile waste, it will be interesting to see in the future if clothing labelled as "sustainable", "environmental" or "green" is targeted by regulators or activists for greenwashing. It is important, therefore, for fashion brands that are taking steps to incorporate "nature positive" actions into their operations are clear on what consumers and other stakeholders expect in this regard.

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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.