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Why ‘E’ and ‘S’ in ESG Need a Lot More Attention, Experts Say

If the fashion industry’s environmental and social commitments look a little underdressed, it might be because brands and retailers are “neglecting” the “E” and the “S” of ESG in favor of corporate governance, new research has found.

Of the 1,198 ESG proposals submitted to the annual shareholder meetings of 350 publicly listed apparel and footwear purveyors since 2015, 87 percent dove into corporate governance issues, according to Planet Tracker, a non-profit financial think tank based in London. In contrast, only 11 percent and 2 percent homed in on social and environmental causes.

While E and S speak for themselves, G is the aspect of ESG that is least known to the average person on the street, said Richard Wielechowski, senior investment analyst of textiles at Planet Tracker and co-author of the report. It’s also arguably the “most dull,” he said, since it involves the day-to-day running of the back office, from the approval of auditors to the remuneration of the board, that shareholders have to agree on just to keep things chugging along.

Good governance is important—without it, companies are more likely to be “doing naughty things” on the E and the S because there‘s no one standing in the way of damaging decisions, Wielechowski said. But to see it weighed this disproportionately? He was not so much surprised as “disappointed” because that means the fashion industry’s walk isn’t quite lining up with its talk. And there has been a lot of talk.

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“None of the proposals [included] keywords that we were looking for around fiber and fiber mix, polyester, plastics, biodiversity, deforestation: some of the things that brands, etc., spend a lot of time talking about but yet aren’t coming up at these AGMs,” Wielechowski told Sourcing Journal, using an acronym for annual general meetings. “So I think there is a disparity between what they’re saying and then what really needs to happen in the long term.”

Certainly, no one’s bringing up the elephant in the room: degrowth, both a concept and a movement that argues that curtailing consumption is the only way humanity will find its way out of the climate crisis. Current trends in fashion consumption, fast fashion in particular, cannot be maintained if a fair and just transition to climate neutrality is the goal, the Hot or Cool Institute, a public interest think tank from Berlin, warned in December. For businesses whose entire reason for being is generating growth and promoting consumption, however, degrowth might as well be a four-letter word.

“I’ve yet to hear any textile company come up with some sort of model where they’re going to become truly sustainable, where they’re going to move away from growth being the end all of the entire business model,” Wielechowski said. “And it’s hard for this industry—how is that ever going to be sustainable? You need to have some sort of change in the way we’re thinking.”

That’s not to say that there hasn’t been progress since 2015. Overall, more companies are setting science-based or net-zero targets. But with the swings, there remain misses, especially when bringing votes to the table is a pivotal way for investors to help shape the way a brand or retailer tackles key environmental and social challenges and hold it—and the broader industry—accountable for the results.

“One thing we mentioned in the report is that you don’t see these targets typically reflected in any sort of management remuneration,” Wielechowski said. “Brutally, if you’ve got a choice between selling a million more dresses or hitting your green target, and the million more dresses get you an extra $100,000 and the green target gets you nothing, I think most people are going to sell the million more and say, well, damn the consequences of overconsumption.”

So far, only a handful of fashion firms have linked executive pay to ESG performance. Nike and Zegna bosses have to shore up climate efforts to get a bigger payday. So does the management of Zalando, which says that its remuneration system “creates an incentive for results-oriented and sustainable corporate management.” Boohoo Group put a similar strategy in place in place after British lawmakers asked the e-tail giant in 2021 to “put its money where its mouth is” when it comes to rooting out supply chain abuses.

“The CFO of Zalando is the first we’ve come across where there’s a definite sort of penalty if she misses her environmental targets,” Wielechowski said. These kinds of incentives (or disincentives) are essential, he added, because they fuel the momentum that these targets require.

Equally if not more crucial? Bringing environmental and social goals to a shareholder vote so that investors are just as engaged in these matters.

“I think that’s the most important element that we would like to see,” Wielechowski said. “Because some of these changes do require investment and having the targets out there, making them part of the formal discussion with people who are major shareholders so they’re [being talked about] as well, will help…get everyone on board with the transition that’s needed.”

Investors, after all, are thinking about these topics, too. Scrutiny everywhere is growing and they, like everyone else with a stake in the matter, would appreciate more visibility.

“You are seeing a pressure on the investors more broadly to know what their investments mean, just from a regulatory point of view,” Wielechowski said. “I think there’s definitely a market trend so you are seeing more retail investors maybe trying to invest with a lens of obviously still a positive return but also a positive impact on the planet or society.”

There’s also reputational risk to consider. Boohoo’s stock price, he pointed out, took a beating after allegations about sweatshop labor in Leicester turned out to be mostly true, and “it hasn’t come back.” Investors “legitimately have a worry there,” Wielechowski said.

If brands and retailers are finding it difficult to figure out where to concentrate their corporate attention, Planet Tracker recommends two “priority areas”: supply chain investment and fiber mix.

Zeroing in on the supply chain is a no-brainer. Most of a company’s impact happens in the production phases, even if this tends to be “hidden away” from the consumer, Wielechowski said. Brands and retailers don’t tend to own their own manufacturing plants, which is why so many net-zero goals revolve around switching stores to renewable energy or using electric delivery vehicles.

“They’re not actually dealing with the use of a lot of nasty chemicals in the wet processing stage; they’re not dealing with the greenhouse gas emissions associated with the production of different textile types,” he added. “So I think that supply chain investment is something that is clearly needed if the industry as a whole is to make a move to a more green [state]. All the capital is sitting [with] the brands—that’s where the most money is—and they need to really work with their suppliers to help them make the change.”

Fiber choice is another obvious locus as the drumbeat over fashion’s reliance on petrochemicals, and their attendant health and ecological concerns, crescendoes to deafening roar.

“You’ve got to ask how an industry that’s currently addicted to virgin fossil-fuel derived synthetics can really be sustainable in the long term,” Wielechowski said. “So it needs to make that change to either recycled synthetics or, I think ideally, just away from the fossil fuel-based thing entirely, and try and find a more circular fiber mix.”

But whether you call it philanthropy, CSR, ESG or something else altogether, there’s no escaping what it represents: a necessary responsibility, he said, even if the tug of war between good intentions and fiduciary responsibility is starting to fray both ends. In the end, it’s the same rope.

“I would say that any sensible investor making a long-term investment has to think ESG even without calling it that because it’s so important to the risks, to the outlook, to the reputation of the company,” Wielechowski added. “If you’re not thinking about these things, then they can come back and bite you later, and you will really miss out.”