Exiting the clothing industry as an investor: Is this the right path to sustainability?

Last week, ASN Impact Investors, the asset manager of Netherlands-based ASN Bank, announced that it sold all its stakes in clothing companies. This step was taken because major fashion brands such as H&M, Zara and Asics are not making sufficient progress in the area of sustainability. While this may seem like a bold decision at first glance, it also raises important questions: Is selling shares the solution for an impact fund? What does this mean for the future of sustainability in the clothing industry?

Selling shares: justified?

ASN sold approximately 70 million euros worth of shares in the clothing industry. While this is a substantial amount, it is only a fraction of the 4.2 billion euros in assets under management (1.7 percent of the portfolio). This is in stark contrast to the enormous impact that the clothing industry has on our planet, namely one of the most polluting industries. How does selling shares change that enormous impact?

Let's start with ASN's portfolio. Selling existing shares mainly changes the composition of an investment portfolio. Divesting less sustainable investments pulls up the average of the investment portfolio. But the net effect on the sustainability of the clothing industry is minimal. Share trading of existing shares does not provide companies with direct new capital to become more sustainable. Buying or selling shares in this way therefore has little influence on the sustainable business operations of fashion brands, unless there is sufficient voting power to address and implement changes. Without this influence on business strategy, buying or selling existing shares remains primarily a signal, with no direct consequences for the sustainability of the sector itself.

At the moment, the vast majority of the clothing industry operates on linear business models: from production to use to waste. The overall trend in this industry is to run as much volume as possible through this model in order to run a good business. The easiest way to higher profits is therefore to sell as much as possible at low production prices. And yes, there is something to be said for not wanting to be associated with that as an impact investor.

However, there are more ways to invest in the transition to a more sustainable clothing industry than just taking a position in a clothing brand. And that seems to be the way to go.

The opportunities: circularity and innovation

Instead of investing directly in shares of clothing brands, investors would be better off focusing on external innovations that enable sustainability in the clothing industry. The real opportunity, both in terms of impact and economic value, lies in facilitating the transition from linear to circular initiatives.

The key to sustainability in the clothing industry lies in the innovation and implementation of circularity, whereby the use of new materials is minimised as much as possible and reuse is optimised. This goes beyond recycling; it focuses on extending the life of products and reusing materials to make new clothing. Circularity has a hierarchy, also known as the R-ladder, with numerous investment-worthy business models, such as repair, reuse, lending and upcycling. In this way, the impact on the environment can be reduced, while meeting consumer demand.

Circularity starts with design, by opting for sustainable materials, modular designs that are easy to repair, producing clothing that can be easily pre-sorted, reused or recycled. This reduces the ecological footprint from the outset.

During and after the purchase phase, consumers can also make more conscious choices by purchasing circularly designed clothing or limiting their purchases. But also by repairing clothing or taking it back for a second life with 'reverse supply chains', one of the potentially lucrative business models that investors are needed for, the demand for new products is reduced. Initiatives such as buy-back programmes and second-hand sales play an important role in the transition to circularity.

When clothing can no longer be repaired, remanufactured or upcycled, recycling is the last resort to recover raw materials. Innovations such as chemical recycling play a role here. Initiatives such as upcycling also offer opportunities to convert old clothing into new, creative products. This in turn also extends the life of materials in the clothing industry.

Increasing demand for knowledge about circularity among clothing brands

Many clothing brands are orienting themselves towards circular models to make their business future-proof. At Manufy, for example, we see a great demand for knowledge and advisory trajectories. This is not only driven by the intrinsic motivation of fashion companies to reduce their ecological footprint, but also certainly in response to increasing legislation and the financial incentive towards business cases on circularity. Many solutions result in lower costs and/or higher revenues per garment sold. For example, by adding their own or a facilitated second-hand platform, a clothing brand can earn multiple times on the same garment.

Having a positive business case for sustainable initiatives is the most important link in bringing about the transition to circularity. Knowledge platforms bridge the gap between the innovations themselves and the clothing brands that need to implement the innovation.

In conclusion: keep investing, but in the right place

ASN and other impact funds must continue to invest in innovations, but also in the bridges between innovations and clothing brands, such as knowledge platforms. In this way, clothing brands can be helped to successfully establish a sustainable and profitable, circular business.

This could lead to the right decisions being made by large companies such as H&M and Zara now and in the future, and to their being able to transform into profitable, circular clothing brands, and to the 700,000 clothing brands active in Europe being able to make the transition to a cleaner clothing industry through knowledge sharing.

This article originally appeared on FashionUnited.NL. Translation via AI and edit by Rachel Douglass.