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 athletic shoe resale market has been on the rise, with the market estimated to be valued at $2 billion in 2019 and $6 billion 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.

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 burned, and it is estimated that around $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 – by being offered more clothes more often and at a much lower price point. The negative impact on the environment is overshadowing the fast fashion industry – no surprise, given that the sector accounts for roughly 10% of 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 could have a key role to play in minimizing the impact of its practices on the environment.

Future of Retail – Sale?

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, and there has been a direct correlation between the increase in production and the decline in usage per item of clothing. In turn, this has set the industry on a negative environmental trajectory, with the industry potentially using 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 10 years, which looks to combat some of the disposal issues in the retail fashion industry, is the resale market. The secondhand apparel market in the U.S. was reported to be a $24 billion industry in 2018, and online thrift store thredUP has estimated that this will reach $51 billion by 2023.3

The athletic shoe resale market in particular has been on the rise. In North America, it was estimated to be valued at $2 billion in 2019 and to reach $6 billion by 2025, according to investment bank Cowen & Co. The resale market plays an important role in the sustainability of the apparel market. This points to the design and production by Nike and Adidas of higher-quality clothes and shoes, which could provide customers and businesses with an attractive opportunity to resell products rather than see them as disposable items that add to the wastage issues we see today in the industry.

Creating a Circular Business Model

In looking at the lifecycle of a company’s products and how those companies employ a circular economy model, we have found that many companies have risen to the challenge and pioneered change in their business models in an effort to make their products more sustainable.

For example, sporting goods and apparel companies Adidas and Nike are two of the most popular resale brands. The garments these companies produce encourage people to lead healthy and active lifestyles, an essential part of human health and well-being. We believe the high-quality product design and patented technologies produced by Adidas and Nike are key drivers of the companies’ 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 toward 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 toward “closed‑loop” solutions. The company announced that from 2024 onward, 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 company’s Flyknit shoes is 100% recycled polyester, and Nike has diverted more than four billion plastic bottles from landfills by using recycled polyester. Sustainability is not a new trend for Nike; Nike Grind, launched in 1992, uses surplus manufacturing materials 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 $170 billion of untapped value annually.4

In our view, we think consumers can be responsible by showing retailers that we want sustainably made clothes and shoes. As investors, we can be responsible by picking best-in-class stocks that embrace circular business models and innovate to create a more sustainable retail environment.

 

1“A new textiles economy: Redesigning fashion’s future.” Ellen MacArthur Foundation, 2017.

2“Fashion’s tiny hidden secret.” UN Environment Programme (UNEP), 2019.

3CNBC. “Fast-fashion retailers like Zara and H&M have a new threat: the $24 billion used clothes market.” March 19, 2019.

4Boston Publishing Group and Global Fashion Agenda. “Pulse of the Fashion Industry.” 2017.