Fashion on the wrong side of ESG

The UK fashion retailers are under investigation by government watchdog group Competition and Markets Authority on whether its green claims were overexaggerated.

Asda was also named in the investigation and the CMA has said it would not hesitate to take legal action against the chain if necessary.

All three firms have claimed to have clear sustainability guidelines and are working with the CMA, but the investigation raised questions about how fashion brands fit within the changing ESG landscape.

Fashion brands currently make up 25% of greenwashing complaints to the CMA, data from Mattison Public Relations revealed.

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Analysts at Mattison Public Relations said most of the complaints relate to false or misleading claims about the use of recycled materials in a clothing line, claims that the clothing is manufactured in a ‘sustainable’ way or that buying the product will be beneficial to the environment.

The government is ramping up its crackdown on greenwashing in this space and is granting the CMA greater powers to tackle the issue, including fining firms as much as 10% of global annual turnover, creating an obvious investment risk to companies that are caught out.

Morningstar currently rates ASOS with a medium ESG risk, with Boohoo given a high rating.

Jelena Sokolova, senior equity analyst at Morningstar, said Boohoo’s rating was partly due to the ongoing probe by the National Crime Agency over modern slavery charges, which came after the Sunday Times investigated working practices at clothing suppliers during lockdown.

Simon Taylor, partner at Forensic Risk Alliance, said the ESG regulatory landscape was evolving rapidly and the new regulatory requirements create both challenges and opportunities.

He said: “Companies that perform well on ESG criteria will have easier and cheaper access to debt and capital markets and will command greater consumer confidence, with the opposite being true for poor performers.

“In last place will be companies caught out greenwashing, for whom regaining trust and shaking off the stigma will take time and resources. Funds should equally be able to use this information to more readily compare investment choices based on ESG principles, and embed this data into their own reporting.”

Sokolova said it remains to be seen what the outcome of the investigation and what the suggested remediation plans would be. Even if the investigation reveals nothing, the growth of ESG accountability and requirements are creating headwinds for these types of companies.

“Both companies are facing numerous other headwinds at the moment, with slowing sales growth and tough margins, helped by brick-and-mortar store closures the past two years ago, increased delivery costs and deteriorating consumer sentiment through inflation,” she added.

“Increased sourcing of more sustainable products typically comes at an additional cost, which consumers are broadly not willing to pay more for and could have some adverse effect on profitability.”

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Several funds have moved away from Boohoo in recent weeks because of the poorer macro backdrop.

The VT Cape Wrath Focus sold out of the company a few weeks ago. A spokesperson told Investment Week: “A number of factors weakened the thesis on Boohoo, including structural changes in the industry/market and concerns over future cashflow.”

Regarding Boohoo’s ESG criteria, however, the group said: “There are material ESG issues, although we feel that these are to a large extent ‘in the price’ already.”

The Jupiter UK Mid Cap fund sold out of its 1.1% stake in Boohoo last month as part of a move away from UK domestic cyclicals.

In the latest quarterly report, Jupiter said: “The fund exited positions in online retailer Boohoo, given lower conviction on international growth prospects coupled with concerns over the near-term demand backdrop.”

However, many portfolios have remained invested in both retailers in the wake of CMA’s probing.

M&G UK Sustain Paris Aligned has stuck by ASOS following the news and while it refused to speculate on the outcome of the CMA’s enquiry, they backed the firm’s ESG criteria.

A spokesperson said: “ASOS has committed to net zero across its own operation by 2025 and across the majority of its supply chain by 2030. The firm has stretching targets for using sustainable and recycled materials within packaging and apparel products, as well as integrating circularity into the fashion life-cycle.”

Several Baillie Gifford funds have a stake in ASOS but the firm said it would not be commenting due to the small holding size. AXA Framlington UK Mid Cap gave the same reason for not addressing its investment in Boohoo.