Investing in sustainable fashion: companies, trends and ESG

Investing in sustainable fashion: companies, trends and ESG

The fashion industry is one of the worst polluters in the world, but many people are still unaware of its impact. In recent years, the phenomenon of fast fashion has transformed the way we consume clothing and has caused untold waste and emissions in the process.

Yet, as awareness of climate change increases, there is a noticeable shift in consumer preferences. Wanting to be kinder to the planet, consumers are turning to eco-friendly and sustainable fabrics, reusing and recycling clothes, and becoming more aware of where our clothes come from.

To improve the bad reputation of the fashion industry, four areas of social and environmental destruction require change.

  • The massive extraction of raw materials.

  • Textile manufacturing.

  • Dyeing, printing, washing and color finishing.

  • Biodegradability and recyclability.

Why is sustainability in fashion important?

Sustainability in fashion is increasingly important as awareness of climate change highlights the damage caused by the industry.

Environmental, social and corporate governance (ESG) is an overarching theme guiding companies towards a more transparent way of working. It also causes investors to be more selective in the companies in which they invest.

Socially responsible investing is on the rise, and investors are using ESG scores to help them understand how sustainable the company looks over the long term.

Negative press is the enemy of the investor

British fast fashion e-commerce star Boohoo fell out of favor in 2020 after a Sunday Times expose alleging workers at one of its Leicester factories were paid £3.50 an hour and worked in less than acceptable conditions.

Its stock price fell about 55% in response. Since then, Boohoo stock has seen extreme volatility but is ultimately below its low caused by the scandal. Nevertheless, Boohoo tries to defend itself. It recently appointed an ESG expert to its board. This story highlights the importance of maintaining good corporate governance and enduring values.

Another example of less than stellar performance is Chinese fast fashion brand Shein. Web design agency Rouge Media recently analyzed over 30 of the UK’s biggest fast fashion retailers and named Shein the ‘most manipulative’ company in the industry. The study found that Shein’s website was inundated with marketing tactics to entice people to spend more and keep coming back.

Meanwhile, the eco-friendly shoe brand all the birds (BIRD) is preparing to go public in the coming months. For now, he has not set a date. But her path to success is in question as durability alone may not be enough to set her apart from the industry greats.

In effect, Nike (NYSE: NKE), Adidas (OTCQX: ADDYY), Ethletic, Genesis, Rothy’s, TOMS, On, Puma, Woden, Baabuk, Tommy Hilfiger and Zara and many others, offer a range of sustainable products and direct-to-consumer marketing channels.

Zara has been fighting for three years to create a more responsible future. Considered the founder of fast fashion (in 1990), the brand is no stranger to its share of criticism. But it is also paving the way for a better future.

Indeed, its parent company Inditex (BME:ITX), was named the most sustainable retailer by the Dow Jones Sustainability Index from 2016 to 2018. Since the pandemic hit, the company has faced increasing challenges with store closures and supply chain issues. Not to be discouraged, Inditex is accelerating its sustainability goals, with a new goal of achieving net zero emissions by 2040, ten years ahead of schedule.

ESG rating and reporting is accelerating

According to the Governance & Accountability Institute, the proportion of S&P500 companies reporting on their ESG performance have grown from less than 20% in 2011 to 90% in 2019. And the content of their ESG reports has increased significantly during this time.

Now, more than ever, this applies to the fashion industry.

With the start of COP26, fashion is expected to be in the spotlight as demand for emissions reduction increases.

It will also highlight the need for companies to strive to achieve sustainability goals or lose consumer trust. Either way, profits are likely to suffer because the road to sustainability will not be cheap.

Companies to monitor sustainably

Companies operating in textile-to-textile recycling include:

Evrnu is a company that claims to be on the road to commercializing its recycling technology.

Infinite Fiber Society transforms cellulose waste into a cotton-like fiber. Its clients include Patagonia, H&M Group and Bestseller.

Welding of natural fibers recycles cotton, wool and other fibers into a synthetic fabric replacement. He works with Ralph Lauren to market.

Circular systems transforms post-industrial textile waste into recycled cotton.

circ transforms pre- and post-consumer textile waste into new polyester. Its partners include H&M, Girlfriend Collective and Madewell.

Meanwhile, The Better Cotton Initiative (BCI) encourages companies to opt for sustainable materials. For example, fashion brand Rip Curl (a Kathmandu Holdings company) is taking the BCI initiative to achieve 65% sustainable cotton by 2025.

The Factory of the Mills is a venture capital firm that invests in tech-style startups around the world. Along with Algalife and Evrnu, Mango Materials is another investment, creating a biodegradable polyester replacement.

Other innovations in the fashion industry are also gaining momentum.

Using sustainable bast fibers such as flax, hemp, jute and ramie requires little irrigation or treatment to produce, and the impact on the soil is low.

Enzymatic detergents are biodegradable and can break down molecules in hard-to-remove stains such as blood and grease. Design improvements reduce wash temperatures, reducing the energy needed to wash clothes.

Invest in fast fashion alternatives

While some of the companies mentioned here are in their infancy and therefore still private, several of them are progressing through funding rounds. This means investors should keep an eye out for potential IPO opportunities.

Meanwhile, another way to fight fast fashion is recycling and renting clothes. The following listed companies have made headlines in recent years.

Rent the track (NASDAQ: RENT) began trading on October 27. The IPO launched at its highest price, but shares ended the session down 8%. Founded in 2008, Rent the Runway is a fashion rental platform offering members a subscription service.

posh mark (NASDAQ: POSH) sells used clothing. Its stock price has crashed more than 75% since its IPO in January.

The RealReal, Inc.(NASDAQ: REAL) sells authenticated pre-owned consignment luxury goods. It operates an online marketplace and physical stores. REAL stock is down 55% since its IPO in June 2019.

ThredUp (NASDAQ: TDUP), all of which sell used clothing and other accessories. TDUP stock is up 7% since its March IPO.

Redesign is still privately owned but is gradually increasing its footprint. Its disruptive Resale-as-a-Service (RaaS) technology connects brands to second-hand markets. Reflaunt raised $2.7 million in a pre-Series A funding round from luxury investors in February.

Can resale fashion be profitable?

While these second-hand clothing stores promote the cyclical economy, they face an uphill battle to attract consumers and investors.

This can be seen in their declining stock prices. They also struggle to make a profit. Rent the Runway has reported more than $150 million in losses in each of the past two years.

But that may not be an accurate representation of their future given the impact of COVID-19 and global supply chain disruptions on retail.

Indeed, a global report by market research firm GlobalData reveals that the second-hand clothing market is growing 11 times faster than traditional retail. And projections show it will be worth around $84 billion by 2030, more than double the size of the fast fashion industry.

Some major players throw their hats in the ring. Etsy (NASDAQ:ETSY) bought peer-to-peer social e-commerce store Depop for $1.6 billion. Levi’s launched a second-hand site and Gucci recently launched a luxury second-hand online store. More, ASOS (LON: ASC) has invested in luxury resale and allows second-hand clothing to be sold on the ASOS marketplace.

There’s certainly a lot going on in the fashion world, and ESG is disrupting the industry with a vengeance.

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