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According to the World Bank, the fashion industry is responsible for 10% of annual global carbon emissions, which is more than all international flights and maritime shipping combined.1 In addition to the impact on global warming, consumers and investors in fashion companies are also scrutinizing the sector’s fast pace of production, labor practices, pollution and biodiversity impact.
To unpack how investors who prioritize environmental, social and governance (ESG) factors can assess sustainability in the fashion industry, Morgan Stanley spoke with Calvert Research & Management’s Hellen Mbugua, Director of Research, and Kara Huang, who cover the Apparel and Retail sectors at the firm’s Investment Management division. They discussed the biggest sustainability challenges that fashion companies and their supply chains face and innovations that could make the biggest differences in mitigating issues such as climate change and waste.
Hellen Mbugua: The way we think about sustainable fashion is by looking at every stage in the supply chain: design, material procurement, processing and production,2 transportation, distribution, end of life, and understanding companies’ initiatives. The financially material factors are assessed based on impact to natural capital—how polluting and intense the water usage and carbon emissions are during processing; labor—balancing the positive, such as poverty alleviation,3 while ensuring fair labor practices; and waste management at the pre/post-consumer stage, are all important.
Kara Huang: Apparel companies typically miss the mark in addressing core environmental issues directly, mainly due to the industry’s reliance on overproduction for growth. Because of that, I’d be hesitant to call any apparel company “sustainable.” Perhaps a handful are leading the charge, those that, as Hellen said, mitigate the environmental footprint at every stage of the apparel value chain, or those that either don’t rely on production (like resale) or pure-play sustainable brands that leverage circular textiles.
KH: The first step for many companies is to implement recycling programs. They might disclose the percentage or amount of clothing that gets recycled, goes to landfills, gets sold or shipped to other countries. They might keep track of this progress to demonstrate an initial level of commitment to sustainability. A large parent fashion company recently spoke about how it’s ramping up circularity efforts by integrating durability at the design and material procurement stage, as well as offering repair services. Companies can implement these strategies without completely altering business models.
HM: But with larger brands, so much is being produced that recycling doesn’t even make a dent. Some of the worst actors are dropping thousands of new products per day because the more they produce, the more they will likely sell, and more money they will likely make, and acceleration of consumerism more so in the West is not being addressed. The number of times an item is worn has been cut in half in the last decade, according to the Ellen MacArthur Foundation.4 China carries the highest risk on the post-consumer waste problem. The aspirational middle class in China, combined with a boom in e-commerce, has turned the country into the world’s biggest fashion market, overtaking the U.S. in 2019. There’s only one apparel company that’s been vocal about consumerism—they market their clothing as that which can be worn for longer to mitigate the environmental impacts of apparel production and consumption. This is akin to the stakeholder capitalism that we have seen in other industries. Companies exist within a complex, global economic system that is influenced—explicitly and implicitly—by ESG factors.
KH: The consumer is pretty mixed. A typical consumer is not uniform in their purchasing behavior. They might be buying from both a fast-fashion company and a more circularity-minded one. Consumer sentiment versus actual purchasing behavior is a really interesting point of discussion. We know Millennials and Gen-Zs tend to prefer more sustainable goods, but because of where price points are, and the race to the bottom in fast fashion, I’m not sure that the drastic change in behavior we’d like to see has come to fruition yet.
HM: It depends on the market. In resale for instance, in some markets, wearing second-hand clothes is taking off, in others there is a stigma in wearing old or second-hand clothes. We expected to see the resale market decelerate during the pandemic in the U.S. due to health concerns. However, the opposite occurred. The fact that most sales occurred online benefited tailwinds for the sector—value, variety and sustainability. For new items, like any new industry or trend, sustainable fashion is still grappling with high price points and how to make sustainable products that are affordable. Just because a product is sustainable, it does not make it impervious to market factors influencing price—labor costs, raw material cost, etc.
KH: I’m probably most excited about digital traceability and how it can increase transparency in the supply chain. With emerging blockchain projects from both start-ups and large-caps, the future is heading towards widespread and traceable supplier disclosure. Granular supply chain data is known to be difficult to access, especially in the garment industry, with a lot stored in physical documents and unorganized spreadsheets. This technology could also enable brands to trace their supply chains from raw material to finished good and monitor suppliers for compliance. Companies can thus strategically target potential risks in their supply chains. Some firms are also working on unique digital passports that are tied to a specific garment. This might be a QR code or RFID that presents to both consumers and companies where something was manufactured, what the materials are, how many times it’s been owned by someone, and end-of-life information such as the most effective recycling practice. We’re in the first innings; this digital infrastructure will take an incredible amount of investment and time.
HM: The digital opportunity in e-commerce, as well as in the digitization of business processes and operations, is likely the greatest opportunity for the industry. In addition to what Kara listed, 3D printing is another interesting area—digital printing would enable designers to take their ideas from concept to garment in a much faster time frame and open new avenues of creativity. The global digital textile printing market is projected to grow at a compound annual growth rate of 19.1% from 2020 to 2027.5 Although digital printing fits the fast-fashion “see-now, buy-now” mold well, there is an opportunity for it to help eliminate the use of hazardous chemicals, increase resource efficiency and reduce waste during the design stage of the supply chain as well. It could encourage more vs. less production, but it could also eliminate the use of chemicals, increase efficiency, reduce waste and encourage the use of alternative materials.
KH: Exploring upcycling and next-generation textiles will also be essential. There are some companies that have made commitments to using recycled polyester (rPET) in products, typically by utilizing plastic waste from water bottles. Though a great reuse story, an issue is that when washed, recycled polyester may release micro-plastics into the ocean. Otherwise, companies may choose to increase adoption of certified responsible animal or plant fibers, or regenerative fibers. However, the cost of third-party certification can be a hurdle, especially for farmers.
1 The World Bank, How Much Do Our Wardrobes Cost to the Environment?, September 23, 2019, https://www.worldbank.org/en/news/feature/2019/09/23/costo-moda-medio-ambiente
2 Production involves cutting sewing, buttonholing, gluing, etc. Processing includes spinning, weaving, dyeing of fabric, etc.
3 In some emerging markets, the apparel industry is viewed as a sunrise industry, a new or relatively new industry expected to become economically important because it may spark economic growth.
4 Ellen MacArthur Foundation, Keeping clothing in use to reduce waste: thredUP, as of May 25, 2022, https://ellenmacarthurfoundation.org/circular-examples/keeping-clothing-in-use-to-save-us-money-and-reduce-waste-thredup and Ellen MacArthur Foundation, A New Textiles Economy: Redesigning fashion’s future, as of May 25, 2022, https://ellenmacarthurfoundation.org/a-new-textiles-economy
5 FESPA, Digital Textile market trends and opportunities 2022 – how does the future look?, as of May 25, 2022, https://www.fespa.com/en/news-media/features/digital-textile-market-trends-and-opportunities-2022-%E2%80%93-how-does-the-future-look and Allied Market Research, Digital Textile Printing Market Outlook – 2021-2030, as of May 25, 2022, https://www.alliedmarketresearch.com/digital-textile-printing-market
This material was published on March 25, 2022 and has been prepared for informational purposes only and is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley Research Department and is not a Research Report as defined under FINRA regulations. This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.
The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”), and may not be reflected in all the strategies and products that the Firm offers.
This material contains forward-looking statements and there can be no guarantee that they will come to pass. Information contained herein is based on data from multiple sources and Morgan Stanley makes no representation as to the accuracy or completeness of data from sources outside of Morgan Stanley. References to third parties contained herein should not be considered a solicitation on behalf of or an endorsement of those entities by Morgan Stanley.
The returns on a portfolio consisting primarily of sustainable investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because sustainability criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.
Calvert Research and Management is part of Morgan Stanley Investment Management, the asset management division of Morgan Stanley.
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