Key ESG Learnings and Best Practices in the Fashion Industry
Addressing environmental and social challenges across the value chain is essential
Transitioning to more sustainable business models starts with the identification of material environmental, social, and governance (ESG) issues. These include, on the one hand, factors that may entail risks and opportunities for a given company, and on the other, factors most impacted by the company’s activities. Then, to have a clear benchmark to compare against, companies should identify best practices and define how to close identified gaps.
This knowledge is key for companies to successfully integrate sustainability into their strategy and processes, ensuring it supports their long-term value creation and competitive advantage. It can also inform investors’ ESG engagement efforts and decision-making, and help them identify trends and opportunities.
The apparel and clothing industry is exposed to heightened scrutiny due to its impact on climate change, pollution, biodiversity loss, and water scarcity¹, as well as concerns regarding labor conditions and societal impact. By leveraging our sustainability expertise and our database of historical information, including raw data and ESG scores², we can identify trends and best practices at the industry level. We have analyzed more than 280 organizations across four consecutive years using Clarity AI’s proprietary ESG Risk scoring methodology, to identify companies that have made the most significant improvements in terms of sustainability and draw conclusions regarding performance drivers. Among them, we’ve pinpointed two standout improvers: SMCP SA (France), and Bosideng International Holdings Ltd (China) (see a short description of these two companies at the end of the article).
Graph 1: Total ESG total scores for SMCP SA and Bosideng International Holdings Ltd and the industry average, between 2020 and 2023
When looking at the results, we see common drivers behind the positive evolution of the scores, paired with additional actions taken by some of these companies. For these organizations improvement stems mostly from advancements in the environmental and social standards implemented throughout their supply chains, a topic material to the industry based on SASB Industry Standards. Companies need to put in place processes and oversight mechanisms to ensure the health and safety of supply chain workers, the respect of human rights, and decent working conditions, on top of environmental considerations and business practices for suppliers.
Best practices to improve ESG performance
The global supply chain in the apparel industry significantly contributes to environmental challenges, and reliance on partners in regions with limited environmental oversight exacerbates the problem. This industry significantly contributes to issues like water usage (from growing natural fibers to manufacturing textiles) and waste generation, as well as being an energy-intensive industry. Heightened stakeholder scrutiny and regulations are prompting efforts to reduce these impacts. Businesses collaborating with suppliers to improve efficiencies and limit environmental impacts can mitigate risks, safeguarding long-term shareholder value. By 2021, SMCP and Bosideng had implemented environmental criteria in the selection process of their suppliers and sourcing partners.
Additionally, concerns regarding labor conditions in the supply chains are mounting among consumers and regulators. Key issues in the apparel industry include worker health and safety, fair compensation, and the prevention of child and forced labor. Despite efforts to improve these conditions, the industry’s complex network of suppliers, subcontractors, and part-time workers presents challenges in managing these issues effectively. Moreover, due to the industry’s tendency to seek suppliers in countries with lower production costs, manufacturing often occurs in regions with lax labor regulations and enforcement. This poses reputational risks and can lead to increased scrutiny and costs, including regulatory fines and production disruptions due to strikes or other labor-related issues³.
In the face of this challenge, Bosideng implemented policies to improve employee health and safety in its supply chain. By enforcing strong supply chain standards, actively monitoring labor conditions, and engaging with suppliers to address concerns, these companies are better positioned to protect long-term shareholder value. Both companies reported the incorporation of human rights criteria, including the prevention of forced labor, in the selection and monitoring process of suppliers and sourcing partners.
Results are encouraging but not enough: How to accelerate sustainable progress
The measures implemented by SMCP and Bosideng are steps in the right direction. By addressing environmental and social challenges in their value chains, these companies are better placed to minimize risks and negative impacts, meet stakeholder demands and comply with increasingly stringent sustainability regulations.
However, the apparel industry still has a long way to go to become sustainable, reduce environmental and social impacts and decouple value creation from continuous resource extraction and unsustainable consumption patterns. More efforts need to be made to increase the transparency and oversight of the value chain to ensure environmental and social standards are correctly and fully upheld, transport and logistics need to be efficiently managed to reduce its carbon footprint, and innovation is needed to reduce dependencies from continuous resource extraction. Last but foremost, the fashion industry needs to transition away from the current linear model to a more circular and sustainable model, increasing the possibilities of reusing, repairing and recycling.
Through Clarity AI’s ESG Risk historical data and scores, we invite you to explore different industries best practices and top improvers. By continuing to prioritize sustainability, transparency, and social responsibility, companies are not only safeguarding shareholder value but also contributing to a more sustainable and equitable future. Contact us to learn more about key indicators and metrics to measure companies’ performance across the years.
About SMCP and Bosideng
SMCP SA
- Headquarters: France
- Employees: 6,000 approx.
- Description: Operates apparel retail stores and owns brands Claudie Perlot, Sandro and more
Bodiseng International Holdings Ltd
- Headquarters: China
- Employees: 12,000 approx.
- Description: Designs, manufactures and distributes branded down apparels
¹ The fashion sector is considered responsible for between 2% and 8% of global GHG emissions as well as significant pollution, water extraction and biodiversity impacts, including 9% of annual microplastic losses to oceans, while consuming 215 trillion liters of water per year. Source: UNEP FI
² Clarity AI’s ESG Risk scores evaluate the environmental, social, and governance (ESG) performance of an organization, focusing on financially material issues. Scores are graded on a scale from 1 (worst performance) to 100 (best performance). Clarity AI scores are derived from over 120 ESG indicators and cover a set of over 30,000K companies over a period of more than 4 years
³ Clarity AI has captured multiple cases of these challenges during the past years through its controversies module. A recent example is the one of H&M, which in late 2023 decided to gradually phase out operations in Myanmar due to alleged cases of worker labor abuses in garment factories in the country. Source
