By Simon Turner
ESG performance is emerging as one of the biggest issues that management teams in the global apparel sector need to address. This won’t come as a surprise to most investors. The growing focus on environmental, social and governance issues is a leading trend in post-COVID investment considerations. Investors are increasingly aware of the performance-enhancing and risk-reducing benefits of improving their sustainability performance.
The pressure to change
The global apparel sector is well known for being resource intensive. It depends on supply chains originating in countries with low standards for working conditions, social benefits, and environmental neglect. Investors are particularly focused on mitigating the business downside on the ESG front and finding upsides from improved ESG performance.
In addition to rising investor expectations regarding ESG performance, consumers concerned with climate change increasingly are scrutinizing companies’ ethical consumption and circular business models. Retailers aiming to improve their own ESG performance are also demanding change from their vendors. The pressure for change is all-encompassing and inescapable for apparel vendors. Given the sector’s logistical complexity, the changes required must encompass the company’s operations, its supply chains, and even what happens after products go from a shopping cart to the consumer’s closet.
The business upsides from embracing sustainability measures
The good news for the apparel sector is that the drive toward higher ESG ratings is creating business opportunities for management teams who move early, positioning their companies to benefit from improved sustainability. Here are some of the most significant business upsides:
Responding to climate legislation
The recent COP26 climate change forum calls on all countries to strengthen their 2030 emission reduction targets by the end of 2022. That means that most countries are more likely to pass and enforce stricter emission-reduction and environmental legislation. Companies that prepare for this are less likely to be impacted negatively by these impending changes. Early movers also will be well-positioned to win market share from companies less prepared. Better to embrace inevitable change than to be dragged along.
The Science Based Targets initiative (SBTi) recommends that the apparel sector reduce its carbon emissions by improving energy efficiency, using renewable energy across the value chain, and substituting materials with lower environmental impacts wherever possible. Each of these strategies brings with it the potential to significantly lower a company’s costs if executed properly. For example, improving a company’s energy efficiency, such as installing lower-impact lighting and sensors, generally requires a relatively low level of upfront investment, while the payback can be large and rapid, often cutting costs and improving cash flow.
More efficient supply chains
Apparel companies that work on improving ESG factors within their supply chain generally focus on working with suppliers to embrace and improve ESG performance. That means that companies in their supply chain will lower costs and raise profitability relative to competitors, making them more efficient and sustainable. These changes also pressure companies that are part of the supply chain to provide healthier workplaces for employees, increasing their well-being, reducing their health risks, and contributing to higher motivation, job stability, and productivity. For apparel companies working with such suppliers, such changes also reduce their legal exposure to penalties which may result from working with suppliers that have unsustainable business practices.
Obtaining sustainable raw materials is another significant supply chain issue for most apparel companies. SASB, a leading ESG-reporting framework, is currently reviewing its standards for raw material sourcing and reporting in the apparel sector. The expected changes are likely to lead to a shift in product costs and availability. By preparing for such changes in advance, apparel companies can position themselves to benefit from more efficient and sustainable supply chains.
As consumers become more aware of climate change and sustainability issues, they are likely to change their buying habits. Many apparel management teams have been surprised by how much research consumers are doing before buying their products. With this trend comes the opportunity for companies to “future-proof” their products by ensuring that they check the sustainability boxes of the greatest growing concern to consumers.
Reputational and competitive advantage
Most management teams understand the importance of achieving a reputational and competitive advantage. Apparel companies with excellent ESG credentials are more likely to build their advantage when management communicates the company’s sustainability story to consumers and stakeholders in ways that connect with them personally, focusing on their own interests. The evidence shows that younger shoppers, Gen Z in particular, value ethical consumption and are more likely to favor apparel companies that take positive sustainability actions and improve their ESG profile.
Seize the opportunity!
The benefits of improving sustainability mentioned above are just some of the many upsides that companies in the apparel sector can expect. It’s a great time for management to become more ESG-aware, cut costs, improve productivity, keep out of trouble, and stay in front of the competition. This is a chance to benefit from a higher ESG rating and increased sustainability. As a key to competitive advantage, the data have never been more compelling.
At Global Imprint, we’re here to help you make sense of the ever-evolving ESG landscape. Reach out to our team to set up an introductory call or complete our ESG Readiness Survey to get your ESG baseline.