Hands up who would be surprised to find Boohoo is held by sustainable funds? The fast fashion company faced accusations of modern slavery in 2020 after an investigation found workers at a supplier in Leicester were paid just £3.50 an hour. Last year, it declared its “agenda for change” programme, put in place to deal with the issues, was a success.
But in an ESG case of whack-a-mole, the Competition and Markets Authority said last year that it was investigating Boohoo, along with Asos and Asda, over their claims of eco-friendliness or “greenwashing”.
Boohoo and Asos are held by a number of sustainable funds, both actively managed and trackers. Legal & General holds both in its Future World ESG UK index fund, for example, while BlackRock holds both in its ACS World Small Cap ESG screened equity tracker fund — based on the MSCI index of the same name.
Why might this be? Fast fashion is not an obvious choice for sustainable investors, to put it mildly. The industry contributes about 10 per cent of global emissions, according to the Ellen MacArthur Foundation, a charity that campaigns against waste and pollution. And it hasn’t made very impressive steps towards cutting these emissions. In the past 15 years, clothing production has doubled, but the lifetime of the clothes we buy has fallen by 40 per cent — largely due to fast fashion. More than half of fast fashion items are estimated to be ditched in less than a year — largely to landfill or incinerators.
One reason is the way ESG or sustainable indices are currently constructed. They tend to cut out the most obvious polluters, based on a not particularly clear or uniform system of rating companies based on their ESG scores. Strip out the more egregious oil and gas offenders and defence stocks, and an ESG tracker contains the rest. But those are not likely to be sustainable companies as such — a fact that is becoming increasingly clear to retail investors and which the UK regulator will set new rules on this summer.
It’s not at all clear that fashion companies deserve to fall in the “less egregious” category. Sure, they can make themselves look better than oil and gas companies by talking a good game about sustainability, organic cotton, recycled polyester. Both luxury and fast-fashion companies brandish their sustainable lines. But the facts are stark.
Less than 1 per cent of clothes are recycled into new clothes. The textiles industry relies mostly on non-renewable resources, including oil, to make synthetic fibres, as well as chemicals in dyes and fertilisers to grow cotton.
But getting information is a problem. Analysts say that working out how sustainable fashion companies are is a massive headache. Robert-Alexandre Poujade, an ESG analyst at BNP Paribas, says that while with oil and gas companies you can measure CO₂ intensity — the amount of emissions per unit of energy — this makes less sense for the fashion industry. One issue is supply chains: the industry relies on cheap labour around the world, often through third party suppliers without much transparency. Even when supply chains are “reshored”, as with Boohoo, this doesn’t mean that labour issues go away.
A report last month from UN Climate Change and CDP found that while more fashion companies are reporting their progress on climate initiatives, there was still a lot more work to be done. Ninety-nine fashion companies have signed up to the industry charter for climate action, which commits them to net zero by 2050. But the steps they’ve taken don’t look hugely impressive. Just 45 per cent are compliant with setting public climate targets needed to keep global warming below 1.5°C. Even on the pretty basic standard of disclosing climate information, just 89 per cent are doing this.
But the elephant in the room is the reliance of the fashion industry on constant consumption. Richard Wielechowski, head of textiles at non-profit financial think-tank Planet Tracker, says: “A lot of the time they say sustainable and what they really mean is less bad.”
For sustainable consumers, the answer to this is easy enough: consume less. Even buying “sustainably made” items is fraught with peril — recycled polyester clothes are marketed as sustainable, but they will still shed microplastics when washed and ultimately end up in landfill. A top produced with lower carbon emissions might end up being bad for biodiversity as it was produced using chemical fertilisers.
Wielechowski says: “I really think that’s confusing for consumers; you shouldn’t need a degree in ecology to understand what a sustainable T-shirt is.”
For investors, the solution is less clear. One option is to look for innovative companies that are trying to address the more serious sustainability issues. French company Carbios produces textiles and plastic bottles from textile waste — existing recycled polyester is mostly made from plastic bottles. Others are making clothes from banana skins and other food waste. The question is how scalable these companies will be — and investing at earlier stages naturally carries more risk.
Some take the view that it is worth engaging positively with the big fashion companies. This was the reason for Fidelity’s holding in Boohoo, which it sold in November. Fidelity said it “engaged extensively with Boohoo, focusing on increasing sustainability in its supply chains, including additional disclosures on raw material targets, water usage and improvement in human rights”. But they added: “While there is evidence of the company improving on these matters, we decided to exit the stock from the fund in November 2022.”
Positive engagement is fine if investors actually do it: but the struggling global economy and the war in Ukraine have been used by some to justify less engagement. Last year, investors voted for just 27 per cent of environmental and social proposals from US shareholders, down from 36 per cent in the previous year, according to ISS data.
Investors have a role to play here, therefore, by pushing fashion companies to do more. More positive engagement is needed just to get them to do the basics of recycling more and using less energy. Stopping using coal-fired power stations as an energy source for textile factories is an obvious win. Wielechowski says data will become more and more important: if you’re backing a company whose sustainability data is unreliable, that will run into regulatory issues. Tie executive compensation to sustainability targets: a report out next week from Planet Tracker identifies the winners and losers on this measure.
Boohoo and other companies have made improvements, but the bar for sustainable credentials in the fashion industry is too low. Investors should push for it to be higher.
Alice Ross is an FT contributor. Her book, “Investing to Save the Planet”, is published by Penguin Business. Twitter: @aliceemross