The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
This article first appeared in The State of Fashion 2022, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company. To learn more and download a copy of the report, click here.
The COP26 meeting in Glasgow, UK that took place in October and November 2021 was the latest in the United Nations’ series of conferences that aims to tackle climate change and its impacts. COP stands for “conference of the parties,” which refers to the UN member states that are represented parties of the climate change convention, and this is the 26th year the secretariat met to discuss plans. Previous COPs have led to international climate treaties like the Kyoto Protocol and the Paris Agreement. The COP26 agenda focused on four goals: 1) securing global net-zero carbon emissions by 2050 and keeping the 1.5-degrees Celsius limit on global warming within reach, 2) adapting to protect communities and natural habitats, 3) mobilising finance, and 4) working together to deliver on commitments.
For the fashion industry, the run-up to the event galvanised companies such as Arezzo & Co, Cartier, New Look, Prada, Soorty Enterprises, Under Armour and YKK Corporation into making specific commitments or announcements of broader sustainability initiatives, and provided an opportunity for collective discussion and advocacy. Fifty textile, apparel and luxury companies announced their commitment to science-based targets in the six months before the event, which is more than three times the number in the same period in 2020. Fashion-focused events were also planned for COP26, including The Fashion Dialogue, featuring prominent speakers from the global fashion industry, and the Fashion Industry on the Race to Zero.
In addition, as COP26 heightened the focus on communities and natural habitats — both of which are for the most part negatively impacted by the fashion industry — many companies honed their biodiversity agendas through “nature positive” commitments, aimed at proactively enhancing the resilience of the planet against climate change and reversing nature and biodiversity loss.
While these commitments are all positive indications that parts of the industry are keen to change, the proof will be in tangible actions taken over the next few years. While specific outcomes of COP26 are not included in our analysis owing to the time of writing, below we outline the main goals of COP26 and what the fashion industry will need to do to respond.
COP26 Goal 1: Secure global net-zero emissions by 2050 and keep the 1.5-degrees Celsius warming limit within reach
To get on the 1.5-degrees Celsius pathway — or, in other words, limit the increase in global temperature to 1.5 degrees Celsius above pre-industrial levels — and make progress towards net-zero carbon emissions by 2050, the world needs to cut CO2-equivalent (CO2-e) emissions in half before 2030. Yet, the UN’s NDC Synthesis report published in September 2021, which aims to give a comprehensive picture of actions being planned or undertaken by governments that impact greenhouse gas emissions, projected a 16 percent increase in emissions by 2030.
Within the fashion industry, key parts of the supply chain could still be at risk from climate change even if the 1.5-degree pathway is maintained. Despite these risks, fashion is still one of the least environmentally sustainable industries. It accounts for approximately 2.1 billion tonnes of CO2-e emissions per year — that’s 4 percent of annual global emissions. More than 70 percent of these emissions comes from production processes, with the remainder from retail, logistics and product use (such as washing and drying). The fashion industry is resource-intensive, using significant amounts of water, land, wood and pesticides for the farming of raw materials such as cotton. On top of this, 17.5 cubic metres of textiles — the equivalent of one garbage truck — is either burned or sent to landfill every second.
Companies should consider both firming up and accelerating action on their near-term commitments. Every sector needs to focus on its own breakthrough actions if it is to meaningfully and proportionately contribute to meeting the goal of halving emissions by 2030 and progress towards net-zero emissions by 2050. Within the fashion industry, many companies have already committed to ambitious reductions in greenhouse gas emissions. Some 125 companies have committed to drive the fashion industry towards net-zero greenhouse gas emissions by 2050 through the UN Fashion Industry Charter for Climate Action, which launched in 2018. Most public commitments made by fashion brands in the run-up to COP26 were to reduce emissions by 30 percent by 2030 (from 2015 levels or later). Some companies, such as Levi Strauss & Co., have committed to reducing emissions across their supply chain by 40 percent by 2025, while others, such as H&M, are striving to be “climate positive,” reducing more greenhouse gas emissions than its value chain emits, by 2040.
Sourcing more sustainable materials, including fibres that are recycled and recyclable, regenerative and/or sourced responsibly, is a critical component of decarbonisation. As such, many brands are setting targets on their use of materials. For example, Lululemon has committed to making 100 percent of its products from “sustainable” materials (that are recycled, renewable, regenerative or sourced responsibly) by 2030, while Stella McCartney has committed to using 100 percent recycled polyester (from garments and plastic waste) by 2025. Various alternative materials that offer reduced environmental impact compared to virgin raw materials are also being developed: Nike, for example, is using a product called ELeather for its Flyleather shoes. ELeather is a reusable leather, originally developed for seat covers in the transportation industry, which is made from either used shoes or scrap material.
Despite these commitments towards more sustainable materials, however, the reduction of environmental impact by some of the alternative materials currently available is not sufficient. The industry needs to scale up closed-loop recycling processes (see “Circular Textiles”) while acknowledging that no singular solution will offer the key to emissions reduction on its own. To achieve tangible improvements, fashion will also need to invest further in areas such as material innovation and improved industrial processes and manufacturing techniques to deliver on targets.
While commitments to source and use better materials are encouraging, fashion brands will need to understand and address emissions in the entire production and consumption process down to the deepest tiers of their supply chain. This includes establishing more sophisticated tracking of emissions across all tiers in order to be able to first quantify the impact at each stage, and second to design and implement mitigation measures. Technologies such as product passports (see “Product Passports”) are scaling up to help address these challenges.
Beyond decarbonisation of existing business models, brands and retailers will also need to decouple from current volume-driven measures of success. The Global Fashion Agenda and McKinsey & Company’s “Fashion on Climate” report finds that if the industry could reduce the share of stock sold at a discount by 15 percentage points, it would achieve a volume and emissions decline of about 10 percent, without any impact on value growth. To realistically remain on a 1.5-degree pathway, the industry should reimagine a world with smaller individual wardrobes, with more focus on longer-life garments and a flourishing resale and rental market.
COP26 Goal 2: Adapt to protect communities and natural habitats
Although mitigating climate risk by reducing CO2-e will be critical in the long run, much of the warming likely to occur in the next decade will be the result of emissions that have already been produced. Over the next decade, when experts agree that temperatures are likely to warm by 1.5 degrees Celsius, almost half of the world’s population could be exposed to a heat-, drought-, flood- or water stress-related climate hazard, according to a recent McKinsey report.
At their most extreme, these events could be life threatening. But another insidious impact is likely to be on people’s wellbeing and livelihoods. In a scenario whereby the world were to warm by two degrees above pre-industrial levels by 2050, the number of people exposed to severe heat stress could increase to 15 percent of the global population, compared with less than 1 percent today. Chronic heat stress could make it impossible to work outdoors or in rooms without air conditioning in some places, including parts of India, a critical region for cotton production. As climate conditions change and become more extreme, yields of raw materials could also fall in their traditional growing regions, including the south of the United States, Pakistan and Australia. Meanwhile, coastal and riverine flooding could jeopardise manufacturing sites in parts of Southeast Asia, such as Bangladesh and Vietnam. This could significantly disrupt fashion supply chains and affect business continuity, not to mention raise the volatility of demand in these key consumer markets.
Therefore, in addition to accelerating action to decrease emissions, fashion leaders need to build resilience against climate hazards into their plans. This will require making some tough choices, particularly when resources are scarce, on where to invest now rather than later; where to either invest in protection of physical assets against growing climate risks, or consider a managed retreat; and, critically, how to include community voices in decision-making.
COP26 has put resilience and adaptation to climate risks on a par with emissions reduction as a cornerstone of tackling climate change. Vulnerable countries and communities need significant help, and COP26 offered an opportunity for a moment of global solidarity. Even in regions less vulnerable to extreme climate hazards, such as Europe, the impact of climate change is so severe that the European Central Bank predicts a worst-case scenario of a 10 percent drop in the European Union’s GDP and a 30 percent rise in corporate defaults as a result.
Fashion companies need to move quickly to build resilience. In some cases, established technologies, such as flood defences or solar powered air-conditioned warehouses for workers, can be deployed in the supply chain. In others, fashion companies will need imaginative solutions, such as securing multiple raw material sources to mitigate the risk that extreme weather events destroy primary sources such as cotton. The faster companies build resilience, the better for employees, consumers and suppliers, and the greater competitive advantage established. There is, of course, a tension between creating business resilience by relocating parts or all of the supply chain while supporting vulnerable countries as they seek to secure the economic welfare of their populations. For example, as the use of virgin materials decreases and recycled materials increases, it will be the poorest and most vulnerable, including farmers and workers at virgin fibre mills, who will likely suffer the most financially. Business leaders should be prepared to make hard, long-term choices with the welfare of all stakeholders considered.
Establishing resilience is also about protecting and restoring natural environments, as biodiversity and climate agendas are critically interdependent. It is estimated that around half of greenhouse gas emissions could be eliminated through natural measures such as reforestation and limiting land degradation. However, the fashion industry contributes to significant biodiversity loss, with 23 percent of the world’s insecticide used in cotton agriculture and 25 percent of industrial water pollution resulting from textile dyeing and treatment. Fashion companies that manage biodiversity in the same way they manage value creation use impact-weighted accounts (which reflect financial, social and environmental performance) and establish measurable biodiversity targets. For example, Gucci’s “nature-positive” climate strategy aims to proactively protect forests and biodiversity by restoring mangroves, whilst investing in and incentivising farmers to shift to more sustainable practices, such as regenerative agriculture which supports soil health and water quality to enhance carbon sequestration.
Shifting to alternative materials and investing in materials that reduce non-biodegradable waste are also critical actions for fashion companies to reduce their biodiversity impact. Several brands, including H&M, have been changing their dyeing processes in an attempt to eliminate the need for water and chemicals that pollute waterways.
Increasingly, investors will scrutinise companies’ climate resilience as they scrutinise decarbonisation efforts today and will expect companies to disclose their climate risk exposure and mitigation plans. Over the medium term, companies are likely to unevenly bear the cost of building resilience and transitioning to net-zero emissions, investing different amounts and causing the competitive landscape to shift. Customer demands are also changing, with environmental credentials becoming a prerequisite to compete, not a differentiating factor. As such, companies should look to develop technological solutions to climate hazards across their ecosystems, whilst stimulating investment and assessing the carbon intensity of their full value chain.
The investments and actions required will not always demonstrate clear payback in the short term, meaning companies will have to update how they measure ROI by adjusting the time frames they assess and how they effectively incorporate competitive advantage into these decisions.
COP26 Goal 3: Mobilise finance
It is clear that decarbonisation and adaptation of operational practices both require significant investment. COP26 is the first major COP Climate Change Conference that has had such a sharp focus on the financial commitments needed to tackle climate change, especially by the private sector.
Climate finance tracked by the Climate Policy Initiative (CPI) reached an average of $579 billion over the two-year period between 2017 and 2018, reflecting an average increase of 25 percent from the previous two years and a steady increase in financing from different types of investors — despite many investment budgets being restrained during the Covid-19 pandemic. However, even though investment has reached record levels, the annual investment that would be required to achieve a 1.5-degree scenario is estimated to be between $1.5 trillion and $3 trillion. Such volumes of capital must come from mainstream finance: from corporations, banks and institutional investors. In 2017, only 1 to 2 percent of investments in climate adaptation projects came from the private sector. A core argument at COP26 is therefore that more money must be spent — up to 10 times more than in 2017 by 2030 for developing countries alone — and more of that money needs to come from the private sector. This implies a radical reallocation of capital and investment, with a particular focus on flows into countries whose economies are particularly vulnerable to climate change, as well as into the technologies needed both for decarbonisation and resilience.
Fashion companies are setting up grant and venture funds which aim to target specific sustainability challenges, in both their own operations and their supply chains. These vehicles present an opportunity to harness external innovation and build credibility and internal knowledge. For example, Kering’s Regenerative Fund for Nature provides grants to farming groups, non-governmental organisations and other stakeholders to scale regenerative practices in leather, cotton, wool and cashmere production. Kering is also involved in a joint venture alongside Stella McCartney, Burberry and the Apparel Impact Institute, which focuses on improving the environmental impact of Italy’s luxury fashion supply chain by establishing a platform for manufacturers to coordinate, fund and scale environmental programmes. At the same time, many companies are ramping up investments in recycling technologies (see “Circular Textiles”). One example is Infinited Fibre, which recently completed a funding round led by H&M Group and including players such as Adidas and Zalando, during which it raised €30 million ($35 million) to boost production at its pilot plant and prepare for building its new 30,000 tonnes-per-year flagship factory.
Beyond specific funding vehicles, company leaders across all sectors need to give significant attention to resource-reallocation issues. However, there is still a lack of awareness and acceptance of the urgency and scale of the risk and the opportunity. Climate is still not tightly enough integrated into organisational management — too often it is an individual agenda point and siloed into teams, rather than something that underpins every decision and that is supported by executive-level advocacy.
COP26 Goal 4: Work together to deliver on commitments
Fashion companies will need to work together with both upstream partners and downstream retailers to make real progress on sustainability, as well as collaborating with non-fashion companies and technological specialists to catalyse change. No one part of the value chain can make enough impact by itself; meaningful change requires a concerted effort across the industry and sufficient investment must be funnelled into relevant technologies. Brands need to drive sustainable decision-making at the design stage, in their choice of materials, production of waste and adoption of recycling. In many cases, brands and retailers should consider joining together to invest in research fields such as alternative materials and regenerative farming to ensure progress is made fast enough to have a meaningful impact. Coalitions are starting to form across the value chain, including the Aura Blockchain Consortium, supporting the development of product passports for materials traceability and transparency, among other things, and the Higg Index, which aims to standardise the measurement of value chain sustainability. While multi-stakeholder initiatives can divide opinion, industry-wide collaboration will be required to drive progress beyond the current baseline.
Ultimately, business leaders in the fashion industry — as in other sectors — need to increase awareness of the environmental and social impact created by the industry and the end use of its products. This will mean embedding a climate strategy to reach net-zero emissions as a core part of corporate strategy; being conscious that there is a competitive advantage in becoming a leader in sustainability; forming an innovation ecosystem to support the development of new technological solutions; and finally, mitigating for the changes ahead, including the impact on workers and jobs, by building resilience. The agenda set by COP26 for fashion is multifaceted, but it is essential to secure the future of the industry.
Disclosure: As COP26 had not yet commenced at the time of writing, specific outcomes are not reflected in this text.
Harry Bowcott leads the Sustainability Practice in the McKinsey London Office, and Leigh Chantal Pharand manages the COP programme strategy. Libbi Lee focuses on Sustainability in Apparel, Fashion and Luxury, including McKinsey’s research partnership with the Global Fashion Agenda on “Redesigning Growth.”