Major ESG Risks in Fashion and Why It Matters
Fashion has all but grasped ESG disclosures — reporting them in pages-long company sustainability reports — but still needs to understand the latest ESG risks.
If viewed in isolation, company self-disclosures may falter in comparison to the valuable public data culled from many stakeholders, according to environmental, social and governance risk intelligence firms. ESG risk (including everything from greenwashing to privacy violations) is grounded in credit risk management, yet today’s company disclosures may be more for looks and a corporate social responsibility rebrand, some experts argue.
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A growing number of firms, including RepRisk, FactSet, Moody’s ESG Solutions, Net Purpose, Preqin and Sentifi are muscling in on the ESG risk data territory. Meanwhile, social media listening platforms (first accustomed to taking down internet trolls) are now full-throttle in the real-time ESG risk intelligence space, quietly working with top luxury brands. (One example being the U.K.-based firm Crisp).
ESG risk intelligence is only getting more advanced in light of ongoing setbacks in fashion, including forced labor in cotton fields, wage theft and other pressing concerns.
Fashion’s Big Risks
Fashion is not for the faint of heart where ESG risk is concerned.
RepRisk is one ESG data provider sifting through real-time ESG risk from a variety of places, scanning 100,000 internet sources, including media, non-governmental organizations, social platforms, governments and regulators across 23 languages. But the firm doesn’t even look at company-provided disclosures, and instead casts aside company sustainability reports as a risk in their own right, vetting information via artificial intelligence and machine learning.
“We’ve been doing this kind of work for over 16 years. Having information at the local level and languages [data sources in different languages] is critical for the early warning signals that we can provide for clients,” said Alexandra Cichon, RepRisk’s executive vice president, to WWD.
In Cichon’s words, RepRisk aims to “be a mirror to the company,” providing insights from external stakeholders to its clients — 70 percent of which are in the financial services sector. In its decade in business, RepRisk has provided insights to BlackRock, J.P. Morgan and other financial institutions.
Businesses are trying to address their consumer wishes, wants and expectations. RepRisks’s ESG data maps risk factors to globally accepted frameworks, including the U.N. Global Compact and Sustainability Accounting Standards Board standards. RepRisk assessed risks on companies like Boohoo, for example, four years before material losses occurred and can pinpoint ESG-related reputational risks for today’s top players. For Shein, this may include a current “medium” risk exposure score of 46 (on a score of 0 to 100, with 100 being the highest risk) spanning privacy scares, misleading communication and labor concerns, according to an October report provided to WWD.
Overall, RepRisk determined that one in five ESG failures is attributed to “greenwashing” — a repeat occurrence in fashion.
“Greenwashing is one of the biggest topics in ESG today,” Cichon continued. “It’s not a topic that affects the fashion industry or fast-fashion industry exclusively,” she clarified, adding that transparency is an important topic that is growing alongside increased awareness from consumers and regulators.
However, some fashion categories may be more predisposed to certain risks.
Based on a two-year risk incident sample for 15 fashion companies in fast-fashion and luxury categories, RepRisk found a number of core ESG risks spanning the entire value chain. Animal mistreatment and social discrimination were only noted in luxury categories. Meanwhile, fast fashion saw higher counts of greenwashing, forced labor and negative community impact.
“For fast fashion, poor employment conditions seems consistently to be the top ESG issue,” said Cichon. “There was a notable rise in these conditions at the onset of the pandemic in 2020, which overlapped with health and safety issues. For luxury fashion brands, [it’s] animal mistreatment and social discrimination — or allegations of racism.”
These data platforms are arming fashion firms with the intel to identify and manage risks before they materialize.
Is ESG More of the Same?
The U.S. Securities and Exchange Commission looks to draft frameworks for more consistent climate reporting, but critics have voiced their concerns.
A July report from the major accounting firms found that company-provided ESG disclosures fell short as companies were “selectively disclosing.” The report contends that without the help of professionals, ESG data is subject to greater variability and less oversight.
What differentiates ESG management this time around? Thought leaders weighed in on the changes afoot.
“Unlike CSR, which is often philanthropic in nature, ESG cuts [to] the core of companies’ business models,” said Lauren Densham, head of impact and ESG at alternative asset management firm Energize Ventures. “It’s all about the way in which you deliver value by managing the environmental, social and governance factors which are material to your business and its key stakeholders. This is a meaningful and fundamental shift from the status quo, particularly in certain industries like apparel, where industry-wide collaboration will be critical.
Elisa Niemtzow, vice president, consumer sectors and membership for Business for Social Responsibility, said that while it’s possible to see ESG as a rebranding of CSR, the long-term evolution that ESG signifies is a movement beyond a risk-based focus into an “opportunity and impact-driven focus” that mobilizes company leadership to find solutions across all business functions. “For example, when a company reduces waste linked to product returns or unsold inventory, this isn’t about managing risks related to disposal or optimizing product recycling, but about mobilizing several functions to address the root causes of overproduction — such as sending inflated quantities to every door, or inaccurate forecasting, or overinvestment in non-modular products that can’t be changed to more easily meet consumer needs.”
“The reality is that greenwashing can manifest itself in many ways, so the key is to question the data, ask for supporting documentation, and carry out your own analysis,” said Alix Lebec, founder and chief executive officer of Lebec Consulting, who believes in the need for unified sustainability reporting and disclosures.