Investing in Sustainable Fashion: Companies, Trends & ESG

By Kirsteen Mackay

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The fashion industry is under increasing scrutiny of its mass emitting supply chain operations. Innovations are gaining traction among biotech startups.

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

Still, as climate change awareness grows, there comes a notable shift in consumer preferences. With a desire to be kinder to the planet, consumers are looking towards environmentally friendly and sustainable fabrics, reusing and recycling clothes and becoming more conscious of where our clothes come from.

To improve on the bad reputation of the fashion industry, there are four areas of social and environmental destruction demanding change.

  • The mass extraction of raw materials.

  • Textile production.

  • Dyeing, printing, washing and finishing the colors.

  • Biodegradability and recyclability.

Why is sustainability in fashion important?

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

Environmental, Social and Corporate Governance (ESG) is an overarching theme guiding companies to a more transparent way of working. It's also leading investors to be choosier in the companies they put their money in.

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

Negative press is the enemy of the investor

The UK's fast-fashion e-commerce star Boohoo fell from grace in 2020 after an expose by the Sunday Times alleged workers at one of its Leicester factories were being paid £3.50 an hour and working in less than acceptable conditions.

Its share price plummeted around 55% in response. Since then, Boohoo stock has experienced extreme volatility but is ultimately below its scandal-inflicted low. Nevertheless, Boohoo is attempting to fight back. It recently appointed an ESG expert to its board. This story highlights the importance of maintaining good corporate governance and sustainable values.

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

Meanwhile, eco-friendly footwear brand Allbirds (BIRD) is preparing to IPO in the coming months. As yet, it has not set a date. But its path to success is in question as sustainability alone may not be enough to set it apart from the industry greats.

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

Zara has been fighting to create a more responsible future for the past three years. Considered the founder of fast fashion (in 1990), the brand is no stranger to its fair share of criticism. But it's also paving the way to 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 mounting challenges with store closures and supply chain problems. Not to be deterred, Inditex is accelerating its sustainability targets, with a new aim to achieve net-zero emissions by 2040, ten years earlier than previously planned.

ESG scoring and reporting is accelerating

According to the Governance & Accountability Institute, the proportion of S&P 500 firms reporting on their ESG performance surged from under 20% in 2011 to 90% by 2019. And the contents of their ESG reports have grown drastically during this time.

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

With COP26 getting underway, fashion is expected to come under the spotlight as demand to reduce emissions heightens.

This will also highlight the need for companies to strive for sustainability goals or lose consumer trust. In either case, profits are likely to take a hit as the road to sustainability will not come cheap.

Companies to watch in sustainable fashion

Companies operating in the textile-to-textile recycling arena include:

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

Infinited Fiber Company turns cellulose waste into a cotton-like fiber. Its customers include Patagonia, H&M Group and Bestseller.

Natural Fiber Welding is recycling cotton, wool and other fibers into a man-made fabric replacement. It is working with Ralph Lauren to commercialize.

Circular Systems processes ​post-industrial textile waste into recycled cotton.

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

Meanwhile, The Better Cotton Initiative (BCI) is encouraging businesses to opt for sustainable materials. For instance, fashion brand Rip Curl (a Kathmandu Holdings company) is taking the BCI's lead to get to 65% sustainable cotton by 2025.

The Mills Fabrica is a venture capital firm investing in techstyle 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 traction.

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

Enzymatic detergents are biodegradable and can break down molecules in hard-to-remove stains such as blood and fat. Improvements in design reduce the washing temperatures, reducing the energy required to wash clothes.

Investing in fast fashion alternatives

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

In the meantime, another way to combat fast fashion is recycling and renting clothes. The following publicly-listed companies have hit the headlines in recent years.

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

Poshmark (NASDAQ: POSH) sells secondhand clothing. Its share price has collapsed over 75% since its IPO in January.

The RealReal, Inc.(NASDAQ: REAL) sells authenticated consigned luxury goods secondhand. 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 secondhand clothing and other accessories. TDUP stock is up 7% since its IPO in March.

Reflaunt is still a private company but gradually growing its footprint. Its disruptive Resale-as-a-Service (RaaS) technology connects brands to secondhand marketplaces. Reflaunt raised $2.7 million in a pre-series A funding round from luxury investors in February.

Can resale fashion be profitable?

While these secondhand clothing stores promote the cyclical economy, they're facing an uphill battle in getting consumers and investors on board.

This can be seen in their sliding share prices. They're also struggling to turn a profit. Rent the Runway reported over $150 million in losses in each of the past two years.

But this may not be a fair depiction of their future considering the impact COVID-19 and global supply chain disruptions have had on retail.

Indeed, a global report by market research firm GlobalData finds the secondhand 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 fast fashion industry.

Some major players are throwing their hats into the ring. Etsy (NASDAQ: ETSY) bought peer-to-peer social e-commerce store Depop for $1.6 billion. Levi's launched a secondhand site, and Gucci recently launched a luxury secondhand online store. Plus, ASOS (LON: ASC) invested in luxury resale and permits the sale of secondhand clothing on the ASOS marketplace.

There's certainly a lot going on in the world of fashion, and ESG is disrupting the sector with a vengeance.

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In this article:

Topics:
Apparel Retail
ESG
Industries:
Consumer Discretionary

Author: Kirsteen Mackay

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.