Not so fast fashion

As consumer awareness of the garment industry’s environmental impact grows, change is coming through innovative sustainable materials. Tackling societal threats without damaging a lucrative global industry is the key challenge.

Fast fashion may offer consumers the opportunity to frequently refresh their wardrobe, but the challenges arising from the headlong growth of the apparel industry are increasingly attracting investor and consumer attention as concern over the wellbeing of our planet intensifies.

Clothing is a $2.5 trillion annual business, generating around 3 percent of the world’s gross domestic product. Efficient global supply chains and decades-long apparel price deflation have enabled exponential growth in fast fashion, a business model built on speed to market and constant novelty – but often associated with low prices and a throwaway culture. Over half of the garments produced every year are thrown away or incinerated within 12 months. The industry uses vast amounts of water, causes 20 percent of industrial water pollution, and emits more carbon dioxide than aviation and shipping combined.

This resource-led, consumer-driven paradigm is being challenged. The industry’s heavy environmental footprint is coming under increased scrutiny and a business model that has driven considerable profit for the biggest retail and fashion brands could face disruption.

Vicki Kalb, ESG & Sustainability Analyst at UBS Global Research, highlights widening recognition of the industry’s negative environmental and social impacts. “We see changes in consumer behavior as being more powerful than companies’ ability to respond,” she says.

UBS estimates that continued educational, marketing and advocacy campaigns aimed at consumers, as well as those directed against companies themselves, combined with recognition of the potential benefits of better waste management and pollution control, could mean high-volume, low-price apparel sales declining 10 percent to 30 percent over five to 10 years.

This clearly poses financial risks for companies and investors in the sector. The financial impact of a 20 percent decline in sales in the European apparel retail sector, for example, assuming no change to fixed costs, could result in a 60 percent decline in earnings before interest and tax, the bank estimates.

Assessing consumer sentiment on apparel sustainability, a UBS Evidence Lab Apparel Sustainability Awareness PulseCheck Survey in March 2020 revealed that 55 percent of respondents knew of people who had already changed their shopping behaviors as a result of sustainability-related awareness.

Potential regulatory solutions are confronted by a sector so complex, multinational and fragmented that it would be difficult to structure legislation that would be effective.

Practical approaches are complicated by long, opaque and highly complex apparel supply chains. Yet positive change in the sector is not only possible but already gathering momentum, notably with big brands starting to use alternative, sustainable materials.

Bolt Threads, based in California, has developed a material called Mylo™ from mycelium, a naturally occurring fungal fiber, which is a sustainable alternative to animal leather. One of the company’s consortium partners, adidas, this year revealed sneakers made from the “mushroom leather.” Bolt Threads has also produced a bio-based spider silk material called Microsilk™ which is an alternative to the synthetic, oil-based polyester that is ubiquitous in garment manufacture.

Its CEO, Dan Widmaier, says: “We’re looking at materials that have really big market opportunities. We envision that as being capable of taking double-digit percentages of market share, but the question is how long it takes to get there. When it comes to Mylo, we are currently on track to deliver 1M sq ft of the material in the near future and rapidly scaling beyond that in order to meet growing demand from brands and consumers for sustainable alternatives”.

In addition to alternative materials, adoption of more sustainable sourcing and circular economy principles are becoming key parts of the solution. Canopy Planet, a non-profit organization, collaborates with corporate partners in the fashion and packaging sectors to improve supply chains by eliminating sourcing from ancient forests and finding sustainable alternatives. An estimated 150 million trees are felled annually to make rayon and viscose clothing. Canopy promotes alternative natural feedstocks, such as wheat or hemp straw, to make pulp that can be turned into material for garment manufacture.

“There’s very strong market demand, the technology is there, and now it’s mobilizing investment so that these technologies can take off,” says Nicole Rycroft, Canopy’s Founder and Executive Director. “Brands have been investing in this space; it just needs to be scaled.”

Vicki Kalb believes that companies with such circular sourcing may weather the coming storm better, and that rental and repair models could be part of a broader solution based on reducing the quantity of apparel made.

“Ultimately, system redesign is required – with fewer items sold, items lasting longer, fewer items disposed of – rather than completely replacing conventional garments with more sustainable alternatives.”

Data – including alternative data, and often at a granular level – is increasingly essential to navigating a fiercely competitive environment. It’s particularly relevant when assessing target companies from an environmental, social and corporate governance (ESG) perspective.

Alice Crawley, Managing Director at UBS, says that while there is a plethora of ESG information available from different sources, “some of these tools can be a blunt instrument or have too much of a political agenda to be trusted,” so it’s essential for an acquirer to understand the reputation of the target company as a whole.

“One interesting dynamic – to be looked at as a bit of an iceberg – is activism,” she says. Shareholder activists are often seeking M&A, in some form, as a catalyst to unlocking value at companies. “They have been building positions while stock prices have been low, but they often operate below the radar and so may not have made themselves visible to companies or in the public domain.”

Leveraging the tools of predictive analytics and big data is critical. The UBS-GUARD analytical system assesses the vulnerability of public companies (over 4,000 in the U.S. and Europe) to shareholder activism. For financial buyers, it is used to highlight companies that might have a higher probability of divesting assets attractive to SPACs.

ESG is relevant for all industries and companies, traditional and emerging, as they consider the whole ecosystem in which they operate. From shareholders, employees and customers, to the communities in which they exist, people want to do business with companies that share their own values.

Gaining that understanding will increasingly come from looking at data, Ms. Crawley believes. “ESG diligence will be fundamentally changed going forward, and that’s important to an acquirer so they can see where the issues are,” she says.

These emerging trends in the dealmaking landscape represent profound change that companies, investors and other stakeholders will be watching intently.

The quotes used in this article were relevant when shared on July 29, 2021. Current views may differ.