Climate Change and Fashion Supply Chains: Translating Aspirations into Meaningful Corporate Climate Action?
by Danielle Yeow and Brian Chang
This is the second blog post of a two-part series, which discusses efforts to galvanise industry to take action to reduce carbon emissions in their supply chain. Our first[1] blog post focused on ESG and carbon reporting standards and science-based targets, the limits of voluntary climate disclosures and corporate pledges (which often do not address Scope 3 emissions)[2], and legislative and regulatory efforts to require reporting and targets on Scope 3 emissions, drawing parallels with the growing trend towards mandatory human rights due diligence laws. This second blog post will concretise the first blog post through the example of the fashion industry, in which there is a clear need for corporate action to reduce carbon emissions and its supply chain.
The Fashion Industry’s Climate Challenge
Although the fashion industry has not received as much attention as the aviation and shipping industries where there are prominent and relatively more advanced international efforts to combat climate change, the fashion industry is reported to be a larger source of carbon emissions than the combined emissions from the aviation and shipping industries[3]. According to a 2020 McKinsey report, the fashion industry accounts for 4% of global carbon emissions[4] – more than the combined emissions of France, Germany and the UK – and the fashion industry’s annual emissions are set to grow from 2.1 billion tonnes of GHG emissions in 2018 to 2.7 billion tonnes in 2030, if no further actions are taken to reduce this.
To meet the Paris Agreement’s ambition of limiting global warming to 1.5°C, the fashion industry has to join the rest of the world in reducing absolute emissions by 45% by 2030 and reaching net-zero by 2050. The same McKinsey report finds that more than 70% of the carbon emissions attributable to the fashion industry come from upstream activity in the supply chain, such as raw material production, preparation and processing. Only 30% are generated by downstream activities such as transport, packaging, retail operations, usage and end-of-use. As a representative example of fast-fashion companies, Swedish retailer H&M Group estimates that more than 99% of its emissions are found within its value chain (Scope 3 emissions) rather than from its own operations (Scope 1 emissions) or its energy suppliers (Scope 2 emissions). It is thus clearly imperative for the fashion industry to reduce absolute emissions within its supply chain.
Industry initiatives
To their credit, many companies in the fashion industry are working together on industry-driven initiatives to address this challenge. Many fashion companies such as Burberry, H&M Group, Inditex, VF Corp., Kering, and Nike – with the notable exception of popular online fast fashion retailer SHEIN – have signed on to the Fashion Industry Charter for Climate Action, which commits signatories to either implement science-based targets or to slash their absolute (Scopes 1, 2 & 3) emissions by 50% by 2030 and hit net-zero by 2050.[5] Around 200 fashion companies have committed to the Science-Based Targets Initiative (SBTi), which is a tool for reducing carbon emissions (including Scope 3 emissions), which requires annual disclosures on progress.[6] The Fashion Pact (which originates in France’s 2019 Presidency of the G-7) commits about 30% of the fashion industry to key environmental goals in three areas: stopping global warming, restoring biodiversity and protecting the oceans. The climate goals include implementation of the Fashion Charter and the SBTis.
However, as with many industry-driven, voluntary initiatives, these initiatives do not require all industry players to join, and lack enforcement mechanisms for failure to disclose accurate carbon emissions or meet emissions reduction targets. The need for robust disclosure standards and actions to reduce absolute emissions has been underscored by the Norwegian Consumer Authority, which recently complained that the Higg Materials Sustainability Index created by the Sustainable Apparel Coalition was “not sufficient as a basis for the environmental claims” that were used in marketing to consumers through digital labels on textiles. Other European and the UK consumer protection authorities are beginning to pursue fashion companies that engage in misleading claims on sustainability (“greenwashing”), but the focus of greenwashing investigations on marketing claims means that they are not well-suited to address the underlying problem of inadequate climate action.
Although the Science-Based Targets initiative is generally viewed as an ambition-raising tool for companies wishing to set and implement targets that are aligned with the goals of the Paris Agreement, the SBTi’s sector-specific guidance for the Apparel and Footwear industry has been criticised for not requiring fashion companies to reduce their absolute emissions[7]. Instead, fashion companies are allowed to choose between different targets that roughly fall within the broad categories of reducing absolute emissions, or reducing carbon intensity, and for Scope 3 emissions, supplier engagement to ensure that a specific set of suppliers meet the science-based targets within five years. Depending on the choice made, the SBTi sector-specific guidance allows international brands to set targets to reduce carbon intensity (while letting absolute emissions grow if the company increases its production). For example, a high-production volume fast-fashion brand could in theory decrease their emissions by 45% per product while doubling sales between now and 2030, thereby actually increasing their absolute emissions.
The lack of representativeness of these industry initiatives – which mainly feature big players in the Global North – also raises important process- and outcome-related questions concerning the weight given to the voices of suppliers in the Global South, who are after all critical partners in the implementation of actions to report and reduce emissions along the entire supply chain. For instance, Reuters reported[8] last year that Bangladeshi factories that invest in energy and environmentally sustainable technology failed to secure better prices from Global North brands. Manufacturers have argued that buyers need to pay more to motivate the factories and ensure a climate-neutral or climate positive supply chains in the future. Consumers also have to be willing to pay more for genuinely sustainable fashion. The Global Fashion Summit, a sustainability initiative that has evolved from the Copenhagen Fashion Summit, has recognised the need for better representation and has committed to holding its next edition in autumn 2022 in South or Southeast Asia.
Regional, national and sub-national regulatory initiatives
To spur the fashion industry to take faster and more robust action towards achieving climate and environmental sustainability, the European Commission introduced in March 2022 an EU Strategy for Sustainable and Circular Textiles, which has been dubbed a “war on fast fashion”. This strategy has many different and interesting elements, which will have significant impacts on suppliers outside the EU as the EU imports more than half (52%, or €80 billion) of its textiles from non-EU states. The strategy includes a legislative proposal to include mandatory design requirements for textiles under the proposed Ecodesign for Sustainable Products Regulation, which will require textiles to contain mandatory minimums for the inclusion of recycled fibres, and increase textiles’ performance in terms of durability, reusability, reparability and fibre-to-fibre recyclability (e.g. using higher quality zippers; using fabrics that tear less easily; and reduce blending of polyester and cotton as this makes fibres harder to recycle). The strategy also introduces a requirement that all textiles have a Digital Product Passport that will include mandatory information on circularity and other key environmental aspects.[9] These two requirements, depending on how they are legislated and implemented, could raise questions about their compatibility with international trade law.[10]
A proposed New York Fashion Sustainability and Social Accountability Act (“NY Fashion Bill”) is a novel, industry-specific attempt to require the fashion industry to report on Scope 3 emissions and act to reduce them.[11] The NY Fashion Bill seeks to address this challenge, by requiring large fashion companies (that make more than USD 100 million globally) that do business in New York to: map at least 50% of their suppliers; report on social and environmental due diligence; publish an impact disclosure that would include providing a baseline and reduction targets for GHG emissions, water and chemical management; independently verify GHG reporting; and implement emissions reduction targets that are in line with the science-based targets for the apparel and footwear sector to meet the goals of the Paris Agreement. Failure to comply with the NY Fashion Bill could result in a fine of up to 2% of annual revenues, and both the New York Attorney-General and private citizens would be authorised to file enforcement actions. The NY Fashion Bill reflects a single jurisdiction’s attempt to regulate and drive a global industry’s climate actions.
Integrating climate change, environmental and human rights reporting
As observed in the first blog in this series, the current trend of ESG reporting standards and requirements, particularly in the Global North, appears to be blurring the distinction between human rights due diligence (HRDD) and climate and environmental sustainability reporting. This is perhaps inevitable, given that the common thread between action to combat climate change, protect the environment and human and labour rights is the stated objective of sustainable development, as referenced in the UN’s Sustainable Development Goals and the preamble to the Paris Agreement. Contextualizing this in the fashion industry, a change in focus and reduction on pricing pressure by international brands on factories in the Global South should in theory enable better working conditions, fairer wages, and the use of more environmentally- and climate-friendly production methods.
While it appears to have no precedent within the climate space, the NY Fashion Bill builds on a growing trend of legislation requiring environmental and human rights due diligence within supply chains. Such developments, which were observed to have taken place both regionally and in the Global North, were discussed in the first blog post.
Concluding Observations
First, as noted in the first blog post, although the voluntary industry initiatives and proposed regulatory initiatives pursue noble goals, the issue of representativeness is critical to ensure that the burden of climate action is not shifted to suppliers in the Global South without concurrent financing and support. These questions are acute and accentuated in the fashion industry where 70% of the carbon emissions attributable to the industry are said to emanate from upstream activities in the supply chain, which predominantly takes place in the Global South. In particular for the fashion industry, it is crucial that international brands work collaboratively with suppliers to meet shared climate and ESG goals.
Second, questions of the compatibility of these domestic or regional measures with international trade and investment obligations merit close examination.
Thus far, much attention on the intersection of international trade law and international climate change law has been given to the issue of carbon border adjustment mechanisms (CBAMs). The EU’s Strategy on Sustainable and Circular Textiles raises similar related questions. While it is beyond the scope of this blog post to assess its compatibility with international trade and investment rules, it bears observing that the World Trade Organisation (WTO)’s General Agreement on Tariffs and Trade (GATT) and Technical Barriers to Trade (TBT) Agreement prohibit unjustified discrimination between “like products” on the basis of technical regulations that have the effect of creating unnecessary obstacles to international trade, especially if those technical regulations are not in accordance with relevant international standards. Depending on how the EU’s mandatory “eco-design” requirements are designed and implemented, they could potentially result in tariff or non-tariff barriers to the importation of “like products” that do not meet these requirements, potentially triggering disputes over “Processes and Production Methods (PPM)”. The labelling requirements for the “Digital Product Passport” bring to mind the Tuna-Dolphin[12] and US – COOL[13] litigation before the WTO, and the importance of ensuring that labelling requirements are in line with relevant international standards.
In this regard, the preamble to the TBT Agreement reflects the objective of ensuring “that technical regulations and standards… do not create unnecessary obstacles to international trade”. At the same time, the preamble also recognizes “no country should be prevented from taking measures necessary… for the protection of human, animal or plant life or health, of the environment… at the levels it considers appropriate”. While the TBT Agreement does not contain a general environment exception, the definitions of the relevant TBT obligations do give states scope to adopt measures to protect the environment. For instance, legitimate regulatory distinctions will not constitute discrimination under TBT Art 2.1. Along the same vein, TBT Art 2.2 provide that technical regulations “shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create”. Such legitimate objectives include “the protection of human health …, animal or plant life or health, or the environment.” This incorporates in essence a weighing and balancing exercise similar to that in GATT Art XX(b).
It remains to be seen whether and to what extent, newer EU FTAs, which contain more prominent sustainability related provisions, could influence the balancing exercise in the context of those FTAs. International investment law provisions could also be implicated, with challenges potentially premised on inconsistencies with the obligation of fair and equitable treatment (FET) or that they constitute an indirect expropriation. Such arguments remain to be tested and would be very much dependent on the specific language of the applicable agreements and the factual matrix in question.
Another interesting question is whether an analogy for the Paris Agreement and the reports of the Intergovernmental Panel on Climate Change (IPCC) might be drawn with the plain packaging litigation in various international fora such as the WTO (Australia – Plain Packaging)[14] and investment arbitrations (e.g. Philip Morris v Uruguay),[15]. Broadly speaking, those decisions relied in part on the fact that States were implementing their obligations and rights under the World Health Organisation (WHO)’s Framework Convention on Tobacco Control (FCTC), and also allowed the use of the FCTC and its guidelines as evidence of fact. The analogy is imperfect in the case of governmental measures affecting extra-territorial supply chains in other jurisdictions, but it is arguable that future international adjudicators will give weight to the IPCC Special Report on Global Warming of 1.5°C which sets out the need to reduce absolute emissions by 45% by 2030 and reach net-zero by 2050, when adjudicating governmental measures requiring companies to reduce emissions in their supply chain (as the Hague District Court did in its decision in Milieudefensie et al v Royal Dutch Shell, paras. 2.3.5.1-4; 4.4.29-32; 4.4.39; 4.4.55).
As observed in the first blog post, it bears repeating that these developments also point to the fragmentation of governance, with corporates and sub-national authorities playing increasingly important roles in norm-making The multiplicity of reporting approaches and growing regulatory divergence – with some being specific to certain sectors, while others being general and sector-neutral, some focusing on risk-based assessments, while others focusing on compliance – also raises questions of viability and compliance burden for supply chains, especially in relation to suppliers that serve multiple sectors and multiple jurisdictions.
Finally, the important empirical question of whether the fashion industry as a whole is doing enough to meet the goals of the Paris Agreement of limiting global warming to well below 2°C, and ideally to 1.5°C. Although many companies have committed to the Fashion Industry Charter for Climate Action, this may have an intensity “loophole” if companies choose to adopt science-based targets based on the existing guidance for fashion and apparel companies, instead of committing to absolute emissions reductions including the crucial Scope 3 emissions of more than 50% by 2030 and net-zero by 2050. The challenge for fashion companies is to translate their aspirations and commitments into meaningful action within this crucial decade, while ensuring that suppliers and workers are incentivized to make this transition.
[1] Danielle Yeow and Brian Chang, ‘Carbon Reporting and Science-Based Targets: Precursors to Effective Corporate Climate Action’ (NUS Centre for International Law Blog, 28 July 2022) <https://cil.nus.edu.sg/blogs/carbon-reporting-and-science-based-targets-precursors-to-effective-corporate-climate-action-by-danielle-yeow-and-brian-chang/> accessed 24 August 2022.
[2] The proportion of carbon emissions varies by industry and individual businesses; CDP’s Global Supply Chain Report 2020, based on reports by 8,033 suppliers, found that “supply chain emissions are on average 11.4 times higher than operational emissions.” Put differently, CDP found that, on average, 92% of emissions are attributable to the supply chain (Scope 3) while 8% are attributable to operations.
[3] Is fashion bad for the environment? | World Economic Forum (weforum.org) See also A new textiles economy: Redesigning fashion’s future.https://ellenmacarthurfoundation.org/a-new-textiles-economy
[4] A 2018 report by environmental sustainability consultancy Quantis found that the apparel and footwear industries accounted for an estimated 8% of global carbon emissions.
[5] A 2021 Working Paper by the World Resources Institute and the Apparel Impact Institute sets out 6 key interventions that could deliver over 60 percent of the necessary reductions to align with a 1.5°C scenario: maximizing material efficiency, scaling more sustainable materials and practices, accelerating the development of innovative materials, maximizing energy efficiency, eliminating coal in manufacturing, and shifting to 100 percent renewable electricity. The report also highlights that the “elephant in the room” that needs to be addressed is consumption-driven business models that derive revenue from selling more new products.
[6] However, a Forbes reporter and advocacy group Stand.earth have expressed concern that the SBTi Guidance for the Apparel and Footwear sector does not require fashion companies to reduce their absolute emissions, but allows them to set targets to reduce carbon intensity (while letting absolute emissions grow).
[7] Compared this to SBTi’s new net-zero corporate standard launched in Oct 2021. SBTi launches world-first net-zero corporate standard – Science Based Targets; Net-Zero-Standard.pdf (sciencebasedtargets.org)
[8] Business-savvy Bangladesh fabric factories take on a greener hue | Reuters
[9] Note that it is not clear from the European Commission’s proposal whether this will include information on the carbon emissions associated with the textile, or whether it will only address other environmental concerns such as water use and water pollution caused by the textile’s production.
[10] Another key element of the EU Strategy for Sustainable and Circular Textiles addresses “greenwashing” by the fashion industry, by requiring general environmental claims such as “green”, “eco-friendly” or “good for the environment” to be allowed only if the product meets recognised EU or ISO ecolabelling standards, or has a voluntary sustainability label that is established by public authorities or verified by a third party. The EU is already legislating amendments to this effect under a proposed Directive on Empowering Consumers for the Green Transition, and is considering further requirements under a forthcoming legislative proposal on Substantiating Green Claims.
[11] Although the NY Fashion Bill was not passed in this year’s legislative cycle, it may be re-introduced and passed in future legislative cycles, or similar legislation may be passed in other jurisdictions around the world. The EU’s proposed Corporate Sustainability Reporting Directive, which is likely to pass this year, is likely to include mandatory disclosure of Scope 3 emissions (discussed below).
[12] David Sifonios and Andreas R. Ziegler, ‘“Tuna-Dolphin Forever”? The Development of the PPM Debate Related to Trade and Environment in the WTO’ (2020) Indian Journal of International Economic Law 106. WTO, United States — Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products, WT/DS381.
[13] WTO, United States — Certain Country of Origin Labelling (COOL) Requirements, WT/DS384.
[14] WTO, Australia – Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging, WT/DS467.
[15] Philip Morris v. Uruguay, ICSID Case No. ARB/10/7, Award (8 July 2016).