Given the communication technology we have access to nowadays, it is surprising (if not utterly irritating) that companies still get away with blatant lies. It happens too often, with companies that are too ubiquitous (like Coca Cola) and the consequences are often not significant enough (like for Triton Partners) to be a deterrent. We can only hope that ultra-fast fashion giant Shein’s1 fate will be more consequential. At least, let’s try and make sure another liar doesn’t litter our pension portfolios.
In case you don’t read the Swedish press, you should catch up on an investigation published earlier in January by two Swedish journalists. It is worth it. Spoiler alert: while Shein says that the majority of clothes bought and returned in Europe are being resold locally, there is a good chance that they are lying.
This article, however, poses more conundrums than the trustworthiness of Shein’s executives. There are already a lot of reasons to suspect that this Singapore-headquartered e-commerce giant is not walking the talk when it comes to its sustainability DNA. In the UK, lawmakers recently got frustrated about their lack of transparency about the origin of their cotton. Children were also found working at the ‘Shein village’ manufacturing site.
Let’s remember that Shein is planning an IPO in London this year, and because its market cap is likely to be large (€60 billion expected as of June last year), it will end up in major stock market indices and therefore in most passive portfolios. To put this into perspective, a successful IPO would put Shein’s market cap at three times that of H&M (about €20 billion). All that money for an online retailer of very low-quality stuff, produced in very poor conditions, containing inordinate amounts of chemicals and contributing to the planet’s pollution throughout its value chain (production, transport, consumption and disposal). Basically, this is one of the best examples of the free-market globalisation algorithm gone wrong, where the allure of rock-bottom prices allows the maximisation of economic profits at an enormous cost for the global society.
Unfortunately, this is just one (albeit very compelling) example of how our Western consumption patterns are unsustainable. Our wardrobes, as well as our entire abodes, are cracking at the seams with ‘stuff’ that our great-grandparents would only have dreamt of (until they experienced the quality). Our cave-people’s brains are triggered by hoarding instincts and we get flooded by feel-good hormones each time we secure incredible bargains. For the same reason that we should curb our fast food addiction, we need to watch our fast consumption. This isn’t easy when there is so much money at stake and textile companies are using every trick in the box to push us to sin.
This is where the regulators have a role to play, and the political reaction to the Shein investigation in Sweden was encouraging. Alas, it feels that the dice are rigged there too. According to Aftonbladet, Swedish officials complain about the process being slow at the EU level. Could it be due to the fact that Shein has signed up Günther Oettinger, a former EU commissioner turned gun-for-hire?
Where can we find hope? We can start with our own consumption habits, of course, but we should also demand more from the managers of our Nordic pensions. None of them own Shein yet, but a large majority of them, if not all, hold at least some H&M stock and most also include Industria de Diseño Textil (aka. Inditex, the owner of Zara among other brands) which far outweighs its Swedish counterpart by market capitalisation (approx. €160 billion). We can also expect that the pensions that have resorted to passive investing will own even more of the fast fashion culprits, including Japanese Fast Retailing (the owner of Uniqlo, with approx. €92.2 billion in market cap) or GAP (just under €9 billion). Indeed, giant US-based passive managers such as BlackRock, Vanguard and State Street Global Advisors are all listed at the top of the ownership lists of these companies and for a good reason: these companies are large, thereby belonging to their respective market indices and passive managers’ offering is a low-cost investment product based on these indices.
For the past 10 years, we have seen a massive effort by index providers such as MSCI, S&P or FTSE (LSEG) to provide a version of their index that takes sustainability into account, either by underweighting some stocks with lower ESG scores or, more rarely, by excluding stocks altogether. When it comes to fast fashion, however, the ratings aren’t all that bad, as far as we can tell. Inditex, in particular, ranks really well and qualifies as a Leader (AA) according to MSCI, reaches an ‘Excellent’ level for LSEG and a ‘Low’ risk mark for Sustainalytics. H&M also qualifies as AA for MSCI, ‘Excellent’ for LSEG and just a little riskier for Sustainalytics, with a ‘Medium’ rating. Similar scores appear for Japanese Fast Retailing and GAP.
These findings are not surprising. When we look at asset owners’ sustainability policies, fast fashion or the textile industry is never mentioned as an exclusion factor the same way tobacco, weapon manufacturers or gambling companies are. After all, clothes are not dangerous. However, the production and disposal of clothes, when pushed to the extreme and seen at the systemic level are an issue. On top of that, fast fashion companies are (allegedly) doing their best to remediate the situation.
If you look around, you’ll find a lot of information about Inditex committing to changing their ways, or better said, “promote a more respectful industry for people and planet by boosting circularity, traceability and worker wellbeing.” Unfortunately, they too are not telling the full truth. As a recent investigation by Follow the Money shows, the appeal of profit is stronger than the urge to ‘do the right thing’ when it comes to providing poor country workers with a decent pay. Whether we are talking about the environment or human rights, there is definitely some serious ‘rinsing’ (as in ‘green rinsing‘) going on in the textile industry, similar to what Big Plastic has been doing for a while.
It can be overwhelming to consider all aspects of responsible investing. I get that. We all know that there is an inherent dichotomy between maximising returns (by investing in companies that maximise profits, for example) and minimising risks; especially when these risks are far away from the actual investments but with the greater picture, i.e. ethics and morality. That’s what the whole ESG backlash is all about. In theory, we think that companies doing the ‘wrong thing’ will get punished someday, but most of the time they don’t (or just a little) or it takes so long for it to happen that the damage is already done (think Purdue Pharma).
The fact is that, whatever the initiative is called (NZAM included), companies motivated by profits, which, in turn, are incentivised by their shareholders in search of higher returns, were never going to compromise their business models. They say one thing, do the minimum they can get away with and hire lawyers to avoid the consequences. For the fashion industry, just like for oil, plastics or asset management, the levers are demand, financing, taxes and regulations. Unfortunately, we are probably too optimistic if we continue to rely on only the first two. I still hope you will think twice before buying Shein and another cheap piece of clothing.
1 According to the company’s executives, the name is pronounced “she”+”in” and not “shine”, which is all the better, since what we are talking about it less than stellar.↩
