- A UK regulators’ investigation into greenwashing at three fast fashion brands could be the tip of the iceberg of so-called regulatory activism on greenwashing.
- The high-risk industry is an increasingly treacherous area for investors who want no association with environmental mis-selling.
- If wrongdoing is found it could lead investors to bring cases against the companies in question and many others, say lawyers.
While many credit oil and gas companies with writing the greenwashing playbook in the late 20th century, in recent years seemingly every industry – from funeral planning to banking – has been accused of overstating its green credentials in a bid to sell more products.
But in the UK it is fast fashion the regulators are making an example of. The $1.7trn fashion industry accounts for 10% of annual global emissions and nearly 20% of wastewater. A 2017 study found that if nothing changes, the industry could exhaust a quarter of the global carbon budget by 2050.
And on 29 July, the UK’s Competition and Markets Authority (CMA) announced the launch of an investigation into three fashion brands – Asos, Boohoo and George at Asda – to scrutinise the way they market their products as environmentally friendly. The investigation is expected to last up to two years.
Overegging the supposed sustainability of a product or service appears to be just too irresistible for many companies and those advising them; survey after survey shows consumers indicating they would be more likely to buy a product if it is more environmentally friendly.
This is the CMA’s first greenwashing investigation and follows the publication of its Green Claims Code in September 2021, a comprehensive guide aiming to help businesses understand what is and is not legitimate when it comes to communicating their green credentials.
“The guidance is very useful for companies, particularly those worried about the green claims they’re making,” says Lauren O’Brien, managing associate at law firm Linklaters in London. “Before, we were applying principles from other areas to sustainability topics – it’s useful to have this benchmark where we didn’t before.”
The investigation will focus on the brands’ language in marketing materials for certain clothing ranges: Asos’s Responsible Edit, Boohoo’s Ready for the Future, and Asda’s George for Good. One of the CMA’s concerns is that the criteria for including products in these ranges is much looser than consumers would expect – for example, some products may contain just 20% recycled fabric – and that this constitutes mis-selling.
An extensive fact-finding period will follow whereby the CMA will set out to prove that these claims were misleading. Today the regulator is not authorised to impose sanctions on businesses for consumer protection claims, which this falls under, though that could soon change – the government has said it will grant the CMA enhanced powers to fine companies as much as 10% of their annual global turnover. It has not specified when this will happen.
Allen & Overy lawyer Russell Butland says that investors will be watching the CMA’s investigation closely.
“If the CMA finds the retailers have been greenwashing, [investors] will then use those findings as the basis for their own individual claim,” he says. “It means they just have to prove either a related legal course of action, or simply their loss as a result of the CMA’s findings. There’s no reason why we wouldn’t see more claims coming out of this investigation – we see that in other competition cases all the time.”
Fast fashion industry built on hyper-consumption
The three brands – particularly Asos and Boohoo – are representative of a much bigger, ultra-fast, ultra-cheap fashion world perpetuated by influencers on Instagram, TikTok and YouTube. Incidents like the £1 bikini, sold by Boohoo competitor Missguided – which has since gone bust – have caught the public’s attention for all the wrong reasons.
Indeed the industry has come under fire from environmentalists and other influencers over the years, but continues to grow at pace, with the global market forecast to grow from $99bn today to more than $133bn by 2026. And that’s not to mention the considerable social issues the sector faces, most significantly modern slavery and worker exploitation.
Perhaps because of this, investor reaction to the CMA announcement itself was muted, with little impact on the companies’ share prices (see chart) – though short sellers, following a more sustained drop in both Asos and Boohoo’s share price over the past year, were reportedly “betting on the firms’ demise”.
Either way, fashion’s investment risks are growing, according to a June 2022 Morningstar report, which cites environmental, supply chain, business ethics and human capital as substantial risk factors, and investors such as Australia’s Aware Super are sharpening their focus on issues such as modern slavery.
The investor view on greenwashing
James Corah is head of sustainability at £13bn charity fund manager CCLA. His company does not have holdings in any fast fashion brands, but it has a stake in LVMH, owner of luxury brands Christian Dior, Fendi and Louis Vuitton, which he says face many of the same environmental and social standards as lower-end companies.
“If we’re going to unleash the power of the market to achieve the societal changes we need, people need to have confidence in what they’re being sold – so these greenwashing investigations are really important,” he says. “I think this is the real beginning, and I think there are lessons for the higher-end fashion industry too.”
T Rowe Price previously had the biggest institutional holding in Boohoo, though the firm reduced its stake from nearly 10% to 5% in early August. Spokeswoman for the asset manager, Anne Read, says it only became a significant holder after modern slavery allegations surfaced in 2020.
“Our investment continues to be based on Boohoo being a turnaround story when it comes to ESG, and we have seen the company display an encouraging pace of improvement,” she says. “We recognise the CMA investigation is in its early stages and will continue to engage with the company as more information becomes available.”
Other major investors in the three companies, including Norges Bank Investment Management (NBIM), Baillie Gifford and Camelot either declined to comment or did not respond to requests.
And while investors are keen to trumpet their engagement on environmental and social issues, the vast majority remain largely focused on the bottom line. And many companies would argue that it is this relentless drive for quarterly profits that pushes them to cut corners.
Corah says the investment industry has long had a complicated relationship with regulation.
“The classic way we have of looking at things is focused on individual companies, and when you do that, you get the sense that all regulation is bad, and many investors will push for deregulation,” he says. “But when you take a step back – which we are famously bad at doing – and think about the system, regulation becomes your friend because we really need to see confidence improve, and we want the market to reward real sustainability.”
Not just regulators – and not just fast fashion
As well as regulatory action, all companies – but particularly consumer-facing brands – are also at increasing risk of litigation over their green claims. Mis-selling accusations are expected to make up a growing chunk of the steep rise in climate-related litigation over the next few years.
Fashion is no exception: Swedish fast fashion brand H&M is the subject of a consumer claim in the US in which the plaintiff accuses the company of “taking advantage of consumers’ interest” in sustainability by exaggerating or entirely misrepresenting the environmental impact of its products – for example, with the use of misleading scorecards, which H&M has already stopped using.
The CMA has also said that other sectors will come under review in due course, singling out transport and fast-moving consumer goods in particular.
Financial services appears to be a particular target. German and US authorities are currently investigating greenwashing at German asset manager DWS, and earlier in August the UK Financial Conduct Authority put the CEOs of hedge funds and private equity firms on notice regarding outlandish ESG claims with an open letter.
If investors were turning a blind eye to the fashion sector’s environmental and social flaws, they may well soon live to regret such a decision.
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