SHEIN IPO Raises ESG Red Flags

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    Stockholm (NordSIP) – The potential multi-billion Dollar public listing of online clothing group SHEIN on either the New York or London stock exchanges serves as a reminder of the significant environmental impact of fast fashion.  The Nanjing-founded company posted $2 billion profits on total sales of $45 billion in 2023 and is rapidly cementing its place as one of the leading distribution channels for the more than 100 billion garments produced worldwide each year.  Sustainability-minded investors tempted by the forthcoming IPO will need to consider multiple negative externalities inherent in so-called fast fashion firms.

    With the recent bankruptcy of textile recycling start-up Re:NewCell AB, hopes of improving the management of the vast quantities of clothing waste being generated by the fast fashion industry receded significantly.  A rapid decline in the real terms cost of clothes over the past two decades has encouraged a sharp rise in consumption of what are almost regarded as disposable garments.  Within the European Union (EU) barely 1% of discarded clothes are recycled into new products.  However, the environmental impact of SHEIN and other fast fashion giants like Sweden’s H&M and Spain’s Inditex is not limited to textile waste.

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    Water-related risks

    Sustainable finance non-profit Planet Tracker is urging investors to factor water risk into their investment decisions regarding the apparel industry.  It can take the equivalent of 7,500 litres of water to produce one pair of jeans, mainly due to the intense irrigation requirements of cotton farming.  However, a January 2024 Planet Tracker report revealed that only about 10% of apparel industry firms’ documents, transcripts and filings mentioned water-related risk.  While corporate disclosure platform CDP reports improvements in some companies’ management of water-related issues in their supply chains, it also cautions that $77 billion-worth of business remains under threat of growing water scarcity.

    The clothing industry practice of textile dying not only consumes vast quantities of water but is also the world’s second largest source of water pollution, with chemical-infused residual liquid too often disposed of in the environment.  It is also estimated that over a third of marine microplastic pollution comes from the laundering of synthetic textiles, with a typical laundry load of polyester clothes discharging around 700,000 microplastic fibres into the drainage network.

    A lifeline to the petrochemical industry

    The popularity of cheap synthetic fabrics has provided a welcome boost to a fossil fuel industry that is under international pressure to reduce the production of coal, oil and gas.  The apparel and footwear industries account for roughly 10% of global carbon emissions, more than the combined output of the UK, France and Germany, or the whole of international shipping and aviation.  While China has been investing heavily in renewable energy generation and transport, it maintains a persistent level of demand for hydrocarbons, which is in large part supported by the boom in the cheap clothing and other plastic items marketed globally by the likes of SHEIN and Temu.

    Efforts to encourage consumers towards better quality clothing made from sustainable, natural materials will be hard to scale up as long as current price differentials with fast fashion remain in place.  Moreover, petrochemical-based materials are ubiquitous throughout the fashion industry.  Even items sold as 100% cotton may in fact contain up to 10% of petroleum-based synthetic materials in the form of polyester thread, elastane waistbands, or other features such as plastic labels and tags.

    With the growing environmental impact of fast fashion compounded by the sector’s poor track record in workers’ rights, sustainable investors should approach SHEIN’s upcoming IPO with caution, and may consider upping their engagement efforts on the topic with the apparel and footwear companies in their portfolios.

    Image courtesy of Ian Deng on Unsplash (edited)
    Richard Tyszkiewicz
    Richard Tyszkiewicz
    Richard has over 30 years’ experience in the international investment industry. He has worked closely with major Nordic investors on consultancy projects, focusing on the evaluation of external asset managers. While doing so, Richard built up a strong practical understanding of the challenges faced by institutional investors seeking to integrate ESG into their portfolios. Richard has an MA degree in Management and Spanish from St Andrews University, and sustainability qualifications from Cambridge University, PRI and the CFA Institute.
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