ESG & Fashion Industry: A Path Towards Sustainability

What is ESG?

Environmental, Social, and Governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

ESG in the Fashion Industry

The fashion industry, known for its significant environmental footprint, is increasingly aligning with ESG principles. This alignment is driven by the need to address critical issues such as carbon emissions, water usage, waste management, and labor practices. Here is how ESG and the fashion industry intersect:

1. Environmental Impact: The fashion industry is responsible for 8-10% of global carbon emissions and significant water consumption. Sustainable fashion aims to reduce this impact through the use of eco-friendly materials, recycling, and circular economy practices.

2. Social Responsibility: Ensuring fair labor practices and improving working conditions in supply chains are crucial. Brands are increasingly focusing on transparency and ethical sourcing.

3. Governance: Strong governance practices ensure that companies adhere to ethical standards and are accountable to their stakeholders.

   
   

Global ESG Regulations in Fashion

Several laws and regulations worldwide impact the fashion industry’s ESG reporting and practices:

1. EU Corporate Sustainability Reporting Directive (CSRD): Effective from January 2023, this directive extends non-financial reporting requirements to more companies, aiming to standardize sustainability reporting.

2. EU Corporate Sustainability Due Diligence Directive (CSDDD): Mandates due diligence on environmental and human rights impacts for companies operating in the EU.

3. New York Fashion Act: Proposes environmental and human rights due diligence for fashion sellers in New York.

4. EU Forced Labour Regulation: Prohibits products made with forced labor from being sold in the EU market.

5. US Uyghur Forced Labor Prevention Act: Requires fashion brands to prove their goods are not associated with forced labor.

   
   

NOTA BENE: ESG Reporting Requirements in the EU

Fashion companies in the EU must adhere to several ESG reporting requirements:

1. CSRD: Requires companies to report on environmental, social, and governance impacts using European Sustainability Reporting Standards.

2. CSDDD: Companies must conduct due diligence on their operations and supply chains to ensure social and environmental responsibility.

3. Sustainability-linked Loans: Companies can take out loans linked to their sustainability performance, which requires regular reporting on their ESG metrics.

   
   

Prada Group’s Impact Report for 2022 as an example

The Prada Group has been a pioneer in integrating sustainability into its business model. Here are some highlights from their latest sustainability report:

• Sustainability Strategy: Prada has committed to converting all virgin nylon into regenerated nylon

• Carbon Footprint: The company measures its carbon footprint and has set emission reduction targets approved by the Science-Based Targets Initiative (SBTi).

• Diversity and Inclusion: Prada has established a Diversity and Inclusion Advisory Council and appointed a Chief Diversity, Equity, and Inclusion Officer.

• Sustainability-linked Loans: Prada has signed several sustainability-linked loan agreements, which tie their financial terms to the company’s sustainability performance.

  
  

LVMH’s latest Social and Environmental Responsibility Report for 2022 highlights several key areas of focus:

1. Environmental Responsibility: LVMH has made significant strides in reducing its environmental impact. This includes a plan to cut energy consumption by 10% and reduce greenhouse gas emissions from energy consumption by 11% between October 2022 and October 20231. The Group also aims to cut scope 3 emissions by 15%1.

2. Social Responsibility: The report emphasizes the importance of diversity and inclusion. LVMH has rolled out a global Diversity & Inclusion roadmap with objectives such as reaching 50% women in key positions and increasing the proportion of people with disabilities to 2% of the global workforce2.

3. Cultural Commitment: LVMH continues to support cultural initiatives and the preservation of craftsmanship through programs like the Métiers d’Excellence, which aims to pass on unique savoir-faire to future generations2.

4. Sustainable Development: LVMH’s Sustainable Development roadmap, “Our Committed Journey,” outlines its ambition to become the first regenerative luxury brand.

The fashion industry’s alignment with ESG principles is crucial for its sustainable future. Through stringent regulations, pioneering efforts by leading brands, and comprehensive reporting requirements, the industry is making significant strides towards reducing its environmental impact and improving social governance. The Prada Group’s commitment to sustainability exemplifies how fashion companies can lead by example in this transformative journey. LVHM follows with the implementation of various changes to stay competitive while staying luxury brand.

However, irrespective of the positive changes that have been implemented, it is imperative to maintain vigilance and closely monitor whether these changes are sufficient to offset the overall negative impact that these brands continue to have on society by conducting their core business activities. Furthermore, it is essential to ascertain the depth of their commitment to effecting meaningful change on a global scale.

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