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Weekend Analysis

ESG’s big test: Fast fashion, and a $100B fashion juggernaut

The global fashion and apparel industry isn’t exactly a poster child for business sustainability, but could ESG investors drive change in the environmentally harmful industry?

Memo to ESG investors: Buy into opportunities in the fashion industry at your own peril.

If you’re seeking a portfolio of companies that manage risk around issues like environmental degradation and treatment of workers, you may want to look elsewhere. The global fashion and apparel industry isn’t exactly a poster child for business sustainability.

Fast fashion, the segment that rapidly pumps out low-priced trendy clothing, is under fire for production practices linked to water pollution and worker exploitation. Now, the industry is getting fresh attention amid word that one of its biggest stars, China’s Shein, is raising new capital at a reported $100 billion valuation.

Some corners of the clothing industry are downright ESG nightmares, but few segments sport a higher-risk profile than the so-called fast-fashion category. Shein and other massive brands like Zara and H&M are enjoying runaway growth selling fashionable—and low-priced—garb that bursts onto market in extremely quick, frequent product development cycles. Thus the fast-fashion moniker.

Churning out thousands of short-lived styles using cheap materials at global scale has created financial powerhouses. They’re big hits with investors, but the Earth and workers are taking some hits of their own.

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This is about much more than production practices per se. Critics of fast fashion deride the industry as purveyors of waste—primarily based on the notion that their business model promotes wasteful consumerism: Clothing gets snatched up at a low price and quickly makes its way to trash dumps.

“The main problem is the throwaway culture of this industry,” said Garik Himebaugh, CEO and founder of Eco-Stylist, a startup that helps apparel consumers make sustainable spending decisions. “If you only wear it once and then just throw it away, that culture is the antithesis of sustainability because all those clothes just end up in the trash.”

Shein (it’s pronounced SHE-in) is the fast-fashion darling of the moment. The company reportedly is in talks with existing backers like Tiger Global and new investor General Atlantic to raise $1 billion in a deal valuing Shein at $100 billion.

Shein officials didn’t respond to two requests for comment on its practices, but the company acknowledges the clock is ticking and change must happen. “Environmental sustainability is one of the sectors where the fashion industry needs urgent transformation,” Shein says on its website. It also says it is taking steps to reduce water use and cut down on waste in its supply chain, but its means for accountability are unclear.

For an investor committing to ESG standards, why invest in this kind of company?

General Atlantic, a growth equity investor, has been vocal recently about its climate tech investment thesis. Last year the firm started a climate-focused fund called BeyondNetZero, and just this week named as its CEO Lance Uggla, the former chair and CEO of IHS Markit. A spokesperson for General Atlantic declined to comment. According to a statement on its website, the firm’s credo on sustainability is, “Our role is to drive global growth, responsibly.”

Companies making and selling apparel have long had some of the worst actors when it comes to environmental practices and labor conditions. While improvements have been made at some companies, sweatshops and pollution may be occurring on an even larger scale in fast fashion thanks to its hyper-growth rates and faster product cycles.

For investors, however, one real change may be the emergence of the ESG school of thought.

Investors wield great potential influence if they genuinely view capital deployment through the lens of environmental, social and governance concerns. Shun the bad actors enough and deprive them of funding, and you might get some of them to clean up their acts. This works up to a point.

Investors that back a company that has a high-risk ESG profile are in a position to drive change inside that business by using their expertise and their financial clout. Once on the inside, investors can insist on setting new standards for good conduct, along with a system of transparency for measuring progress against those standards and committing to improvements when they fall short. This approach is detailed in a recent PitchBook analyst note on ESG, impact and greenwashing in PE and VC.

“No brand is perfect,” said Himebaugh, “That isn’t the goal.”

For fast-fashion companies, paying more attention to issues like fair wages and clean water only goes so far when the business model relies so heavily on a throwaway consumer culture. And touting the affordability of clothing for a broader demographic of the market has a disingenuous ring for companies that subject their workers to pitiful wages or bad working conditions.

What remains is that the fast-fashion business model relies heavily on practices that are costly to the planet—all in the name of cashing in on up-to-the-minute apparel trends and bringing these to a world of consumers eager to be fashionable.

“Getting styles out quickly sounds great,” said Himebaugh. “But when we realize the costs of that, then maybe it’s not as great as it sounds.”

Featured image of British media personality Georgia Toffolo at a Shein event by Antony Jones/Getty Images

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