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Why Zara’s Parent Got a ‘Very Low’ Rating on ESG

Is Inditex a sustainable retailer? Not everyone can agree.

While the Zara, Bershka and Pull&Bear parent frequently tops environmental, social and governance (ESG) ratings, including the S&P Global’s Dow Jones Sustainability Index, a recent negative score by a leading agency could knock the Spanish retailer, the world’s largest apparel purveyor by sales, down a few notches in the eyes of socially conscious investors.

Earlier this month, Standard Ethics awarded Inditex with a grade of E-, which translates to “very low” and is just one step above an F.

While the conglomerate has “made some positive steps in its corporate governance and governance of sustainability models,” Standard Ethics would like to see Inditex’s “progressive alignment” with sustainability indicators provided by the United Nations, Organisation for Economic Co-operation and Development and the European Union extend from its own operations further into its entire production and supply chain, “where there are more practical issues to be dealt with,” a spokesperson told Sourcing Journal.

“Future implementations in the areas of ESG risk management and control within a supply chain as complex and articulated as that of the Spanish group could lead to rating improvements,” Standard Ethics said.

Inditex did not respond to a request for comment.

Like many fast-fashion chains, Inditex has faced mounting pressure to curb its environmental footprint, which is significant just based on the prodigious volume of clothing it churns out every season. Zara, which accounts for 70 percent of Inditex’s output, releases an average of 500 new designs every week, or more than 20,000 a year. According to Inditex’s 2019 annual report, the company as a whole generated 1.5 billion items of clothing in 2018.

There have been a few well-defined wins: Inditex said it achieved zero discharge of hazardous chemicals in the manufacture of its products last year. As of this year, 30 percent of Zara’s lineup touts at least one lower-impact material or process through its Join Life label-within-a-label.

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More improvements are forthcoming, the conglomerate has said. By 2025, all of its brands will use only organic, sustainable or recycled cotton, linen and polyester, and renewable energy will account for at least 80 percent of the energy consumed by its distribution centers, offices and stores. Its facilities, it has promised, will produce zero landfill waste.

The strategy, for the most part, worked. In 2019, Bank of America Merrill Lynch (now known as Bank of America Securities) listed the Spanish firm among the top three preferred companies by sustainable funds in Europe.

But Inditex has also courted its share of controversy. It has faced allegations that it sources from factories that pay their workers poverty wages, discriminate against union members or harbor links to forced labor. In March, Spanish employees accused the company of “disguised layoffs” despite committing to safeguard jobs. (Inditex has denied all such reports.)

Sucharita Kodali, a retail industry analyst at Forrester, says Standard Ethics’ dismal grade is unlikely to have much of an impact on Inditex’s performance.

“It will have no impact for now unless it is widely publicized,” Kodali told Sourcing Journal. “There needs to be an entire ecosystem of journalists, consumers, advocates, activists and politicians who agree on a taxonomy and agree to boycott or penalize companies that score poorly. In a vacuum, it’s hard to know how bad this is—how do they compare to other brands?”

One problem with ESG ratings, she noted, is the lack of standardization, which makes apples-to-apples comparisons between companies challenging. “Even the [U.S. Securities and Exchange Commission] is trying to put standardization around ESG disclosures which will impact what companies report and it should give consumers a way to compare companies with one another,” she said. “But unless this poor scoring negative impacts investors, consumers, suppliers or employees—or it forces them to incur more taxes or penalties—nothing will happen.”

Divya Demato, CEO of San Francisco sustainability consultancy GoodOps, said she isn’t surprised by the low score.

“In order to make significant progress on ESG targets, the company needs to transform from just being an efficient operation into being an ethical operation,” she told Sourcing Journal. ”Without placing environmental impact and labor rights at the core of production, Inditex, like many other fast-fashion brands, will continue to fall behind.”

Key stakeholders, like consumers and investors, she said, will lose patience if the conglomerate’s progress continues to stall.

”Sustainability is more than a verbal commitment; it requires bold and transparent action that can be executed within a global infrastructure,” Demato said. ”Inditex has all the right pieces in order to deliver meaningful impact, they just need to prioritize it.”

Indeed, Inditex’s E- grade could be a signal that the concept of fast fashion, with its dependence on high volumes, and rapid turnarounds, is intrinsically at odds with the “fewer but better” ethos sustainability advocates preach. A report by investment firm UBS Monday said fast-fashion labels could see their revenues tumble between 10 percent to 30 percent over the next five to 10 years.

“The compounding effect of consumers buying fewer items but also shifting the purchases they do continue to make to items that they perceive to be more sustainable could be severe,” the report noted. “Whether the garment is conventionally produced with a significant environmental footprint, the cotton used in a T-shirt is organic, the polyester in a fleece is recycled, or the garment or shoe is vegan (which, incidentally, often means plastic) becomes largely insignificant when set against the sheer quantity of items produced and discarded.”

While businesses have options in responding to these shifts, UBS said, “we see changes in consumer behavior as being more powerful than companies’ ability to respond.”

Investment company Moody’s, too, said last week, that fast fashion, mid-price and small discount firms with limited resources are most at risk of changing consumer habits, which are veering toward products that benefit people and planet.

“Changing behavior among environmentally conscious and socially aware consumers will put more competitive pressure on global fashion brands to adapt to sustainability measures,” analyst Guillaume Leglise wrote in a note. “Longer-term, environmental and social factors will put the apparel industry’s profitability at risk.”