Balancing the ESG Challenge in the Fashion and Luxury Goods Industry

Balancing the ESG Challenge in the Fashion and Luxury Goods Industry
November 22, 2023 8 mins

Balancing the ESG Challenge in the Fashion and Luxury Goods Industry

Balancing the ESG Challenge in the Fashion and Luxury Goods Industry Hero Banner

As ESG scrutiny intensifies, luxury goods brands will need to juggle competing stakeholder demands.

Key Takeaways
  1. Businesses must focus more on sustainability while maintaining margins for shareholders, which can be a challenging balance.
  2. People strategy leaders should consider more than just working conditions and rights within the brand’s own operations — it’s about the workforce throughout the entire supply chain.
  3. Luxury brands must start examining the environmental impact of their business, and develop new approaches to combat negative effects and embrace a more sustainable future.

Environmental, Social and Governance (ESG) is not new; the term was first mentioned back in 2004 in a report published by the UN Global Compact.1 However, it has only become well-used in recent years, driven by increased levels of ESG-related attention from investors, regulators, risk capital providers and, of course, consumers.

The luxury goods sector will need to balance many of their conflicting stakeholder interests in a way that maintains the reputation, integrity and profitability of their brands against a wide range of ESG factors. These range from the responsible use of materials and disposal of waste during the manufacturing process of their goods, to workers’ rights and conditions in their supply chain. In many cases, they will need to respond to an increasingly regulated sector, as initiatives like the Fashion Pact, the Responsible Jewellery Council and the establishment of science-based environmental targets gain prominence.

While a lack of action around ESG could be a threat to a luxury goods brand, there is also an opportunity for businesses to use it to their competitive advantage.

The release of science-based targets for nature provides businesses with the opportunity to set critical targets and take the actions necessary to protect and restore nature, according to the Cambridge Institute for Sustainability Leadership (CISL).2

Reducing the Environmental Impact

A significant focus for the luxury goods sector now relates to the environmental impact of what they do, the use of sustainable products and practices and what their sustainability plan looks like — particularly for apparel and jewelry. Are goods being manufactured sustainably and ethically throughout the supply chain?

This could mean using conflict-free diamonds or laboratory-produced gemstones for jewelry retailers. It could also mean reducing the use of water in the clothing manufacturing process. French luxury goods group LVMH, for example, has committed to reduce the group’s overall water consumption footprint by 30%.3

Getting the environmental approach right is critical and luxury goods companies should be especially concerned around greenwashing. Brands will want to maintain and build their reputation by talking about how environmentally friendly they are, but there is always a risk of greenwashing. They will have to measure areas like carbon emissions throughout their supply chain — from manufacturing to the sourcing of raw materials. Associated risks can be transferred partially, but they also have a large strategic component attached to them. This once again highlights the importance of addressing the challenges of ESG holistically rather than looking at them in isolation.

30%

French luxury goods group LVMH has committed to reduce the group’s overall water consumption footprint by 30%.

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It’s a paradox for the luxury goods industry — part of the brand appeal is the inaccessibility to it which comes at a cost, while at the same time consumers will be wanting and expecting a recyclable product.

Tracie Thompson
Global Head of ESG and Climate, Aon

Workforce Focus

On the social side of ESG, the focus is largely on workforce employment and working conditions for luxury brands. Do companies understand who they are effectively “employing” through their supply chains and do they have the governance in place to ensure that the workforce is not being mistreated? What kind of labor rights have been implemented? The notorious 2013 Rana Plaza collapse for example, cost Bangladesh more than 1,000 lives and highlighted the poor working conditions and safety standards for many workers producing clothes for European brands.4

Transparency around the supply chain is key. Where do the raw materials come from? What factories are used in production? And, what does the distribution network look like? If a brand is sourcing products or has manufacturing sites outside of where they are domiciled, businesses should look at the local communities and employment of the local workforce and make sure their activities show them to be a business of good character.

ESG Comfort for Investors

Not only are consumers increasingly taking note of ESG factors like these, but so are investors as they become wary about putting their capital in a business with poor ESG performance. There is a big drive from providers of capital — from private investors and banks to public markets — for greater ESG scrutiny and evidence that a potential investment opportunity has a clear and forward-looking ESG plan to drive initiatives.

In some instances, such as Prada’s recent €90 million loan, money is being borrowed to specifically drive through sustainability plans.5

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Companies that neglect their ESG responsibilities can see a deterioration across investment ratings, access to capital, insurance coverage, employee turnover, future value and reputational market position.

Jake Tobin
Global Co-Head of Financial Sponsors, Aon

The EU’s Corporate Sustainability Reporting Directive has also come into force — applicable from 2024 — which “modernizes and strengthens the rules concerning the social and environmental information that companies have to report6.” This will be applicable to more businesses, both large as well as listed small and medium enterprises. Much of this will also be superseded by the sustainability disclosures being developed by the International Sustainability Standards Board, highlighting that the direction of travel now, whether a private or listed business, will be a regulatory obligation to disclose climate risk.

Reputational Cost

Attention on ESG in the luxury goods sector is not as prominent as in other industries like transport, agriculture, and oil and gas. However, reputations can still easily be lost from failure to incorporate responsible business practices. More consumers — particularly those less driven by price — care about sustainability. It’s this conscious consumerism that is already challenging luxury goods firms to explain how they are marrying some of the materials they might use, such as leather, fur or precious metals, with their own environmental and ethical concerns. Luxury group Kering, for example, has been leading the way on the use of fur. The brand announced it would be entirely fur-free from 2022, and will also be looking into the viability of laboratory-grown leather.7 Further, luxury brands like LVMH have been investing in lab grown diamonds.8

The fashion industry as a whole will have to come together to drive change and teach new behaviors to consumers. Fashion consumers have been conditioned by the industry to believe, for example, that four collections a year are needed. Through increased transparency around the impact and environmental footprint of such practices, the industry might be able to drive consumers to adopt more responsible buying behavior. So, for example, instead of buying 20 pieces at a lower price, consumers are encouraged to only buy five pieces a year at a higher price. This allows the positive effects of sustainability to flow down the supply chain. Increased consumer awareness will likely lead to a change in buying behavior, which in return will allow the brands to continue to invest in good quality materials and designs that are created to last and be passed on through generations.

Designing a Sustainable Future Through ESG

There is a great opportunity right now to set the tone and gain the competitive advantage, not just for being ESG-compliant, but for truly considering these different areas now without being forced to do so by regulation. At the very least, consumers increasingly demand it, and a business’s ability to raise funds for future investment will depend on it.

Want to learn more about the latest key trends and issues impacting the luxury goods industry? Download our Designing a Sustainable Future for the Fashion and Luxury Goods Industry paper.

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ESG is becoming an area where firms can differentiate themselves and very quickly point to tangible financial value when they are deploying appropriate initiatives across the E, S and the G.

Jake Tobin
Global Co-Head of Financial Sponsors, Aon

1 The Global Compact - Who Cares Wins
2 https://www.cisl.cam.ac.uk/news-and-resources/publications/raising-ambition-nature-fashion-apparel-and-textile-sector-primer
3 https://www.lvmh.com/news-documents/news/lvmh-announces-an-ambitious-water-efficiency-plan-to-reduce-the-groups-overall-water-consumption-footprint-by-30/
4 https://www.dw.com/en/textile-workers-still-unsafe-years-after-bangladesh-pakistan-factory-disasters/a-46507683
5 https://www.esgtoday.com/prada-signs-e90-million-sustainability-linked-loan/
6 https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
7 https://www.kering.com/en/news/kering-goes-entirely-fur-free/
8 https://www.theguardian.com/fashion/2022/oct/01/lab-grown-diamonds-girls-best-friend-or-cut-price-sparklers

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This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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