Alterations at the fast fashion industry
Charlotte Nisbet, Governance and Responsible Investment Analyst, and Ama Seery, ESG analyst on the Global Sustainable Equity Team, explore the environmental damage associated with the fast fashion trade and how some companies are changing the shape of the industry.
Key takeaways:
- The fashion industry is one of the largest contributors to environmental damage, accounting for up to 10% of global greenhouse gas emissions.
- A number of major companies are challenging the ‘take‑make‑dispose’ model by reusing and reselling unwanted apparel. In fact, the trainer resale market has been on the rise with the market estimated to be valued at US$2bn in 2019 and US$6bn by 2025.
- Adidas and Nike have invested in developing circular business models to make their products more sustainable, with the first fully recyclable running shoe to be launched in 2021.
Recognising the issue
Most consumers are now aware that the fashion industry is one of the largest contributors to environmental damage; intensive energy and water use make it an industry that is quickly becoming wholly unsustainable. Every second, the equivalent of one garbage truck of textiles is landfilled or burnt and it is estimated that around US$500 billion in value is lost each year due to clothing that is hardly worn or not recycled.1
The problem has only become worse over the years with the rise of fast fashion stores, which have become a huge part of the way we consume fashion; being offered more clothes, more often and at a much lower price point. The negative impact on the environment is overcasting the fast fashion industry — no surprise when the sector accounts for c10% of the global greenhouse gas (GHG) emissions, which is higher than international flights and maritime shipping combined.2
However, there are many exciting opportunities to invest in brands and technologies that are adapting and putting sustainability at the core of their business models. The outbreak of COVID-19 and how companies emerge from the crisis is now a focal point for investors and the fast fashion industry will have a role to play in how it adapts to tackle some of its practices to minimise the impact on the environment.
Future of retail — resale?
The fast fashion industry has created a ‘take-make-dispose’ model that is now entrenched in global societies. It is estimated that production has approximately doubled in the past 15 years, which has seen a direct correlation with the decline in usage per item of clothing. In turn, this has set the industry on a negative environmental trajectory, and could use more than 26% of the world’s carbon budget by 2050 according to the Ellen MacArthur Foundation.
A striking trend that has been on the rise over the past ten years, which looks to combat some of the disposal issues in the retail fashion industry, is the resale market. The second hand apparel market in the US was reported to be a US$24 billion industry in 2018 and online thrift store thredUP has estimated that this will reach US$51 billion by 2023.3
The trainer resale market in particular has been on the rise. In North America, it is estimated to be valued at $2bn in 2019 and $6bn by 2025, according to investment bank Cowen & Co. Within this resale market, there is a large market for worn items. A good example of this is the site GOAT.com, a platform for selling shoes, where sellers send in trainers, which are authenticated, cleaned and then hosted on the website. There are many other second-hand platforms that have been created to support the resale market which is largely supported by millennials and Gen Z.
The resale market plays an important role in the sustainability of the apparel market as it helps to extend the life of a product. Importantly, it relies on high quality products that can withstand multiple periods of wear over a long horizon. This points to the design and production of higher quality clothes and shoes by apparel companies such as Nike and Adidas, which can provide customers and businesses with an attractive opportunity to resell products rather than see them as disposable items, which adds to the wastage issues we see today in the industry.
Creating a circular business model
Many companies have risen to the challenge and pioneered change in their business models to try and make their products more sustainable.
As part of the Global Sustainable Equity Strategy’s environmental, social and governance (ESG) analysis, we look at the life cycle of a company’s product and how they look to employ a circular economy model. Within our ‘Quality of Life’ theme we currently invest in sporting goods and apparel companies Adidas and Nike, two of the most popular resale brands. The garments they produce encourage people to lead healthy and active lifestyles, an essential part of human health and wellbeing. We believe the high-quality product design and patented technologies produced by Adidas and Nike are key drivers of the high brand equity and customer loyalty. These companies have invested in research and development (R&D) and technology to create more circular business models. We continually engage with these companies to understand how they plan to invest in creating more sustainable products and how they are working towards reaching their ambitious sustainability targets, which will be increasingly important as manufacturing restarts once the global lockdown eases.
Adidas has been working to increase the use of more sustainable materials in its production and products while driving towards ‘closed‑loop’ solutions. The company announced that from 2024 onwards it would use only recycled polyester in every product and on every application where a solution exists. Futurecraft Loop, the first fully recyclable running shoe, is due to be launched in 2021.
Nike, has similarly been working on creating a more circular business model with many of its core products using upcycled (reused) materials. All the core polyester yarn for the Flyknit shoes are 100% recycled polyester and Nike has diverted more than 4 billion plastic bottles from landfills by using recycled polyester. Sustainability is not a new trend for Nike; Nike Grind was launched in 1992, where surplus manufacturing materials and athletic footwear are taken and used to create new footwear and apparel, as well as sports surfaces.
A collective responsibility
There are many obstacles for investors in the retail sector as the industry faces increased regulation, scrutiny on textile waste and higher raw material costs, which impact profitability. However, if the industry is able to address both the environmental and social issues, it could release over US$170bn of untapped value annually.4
As consumers, we can be responsible by showing retailers that we want sustainably made clothes and shoes, and as investors, we can be responsible by picking the best in class stocks, which put circular business models at the heart of their business models and innovate to create a more sustainable retail environment.
Footnotes:
1 Ellen MacArthur Foundation, A new textiles economy: Redesigning fashion’s future, (2017, http://www.ellenmacarthurfoundation.org/publications).
2 UNEP ‘Fashion’s tiny hidden secret’ (2019, https://www.unenvironment.org/news-and-stories/story/fashions-tiny-hidden-secret).
3 BCG and Global Fashion Agenda, ‘Pulse of Fashion Industry’, 2017, https://globalfashionagenda.com/wp-content/uploads/2017/05/Pulse-of-the-Fashion-Industry_2017.pdf
4 Boston Publishing Group and Global Fashion Agenda. “Pulse of the Fashion Industry.” 2017.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- The Fund follows a sustainable investment approach, which may cause it to be overweight and/or underweight in certain sectors and thus perform differently than funds that have a similar objective but which do not integrate sustainable investment criteria when selecting securities.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.