Is More Reform on the Way as New York Lawmakers Unveil the Fashion Act?
Stella McCartney, the Act on Fashion Coalition, New York State Senator Alessandra Biaggi, and Assembly Member Dr. Anna Kelles all announced new legislation aimed at cleaning up the fashion industry last week. The Fashion Sustainability and Social Accountability Act, if signed into law, will require apparel and footwear retailers with global revenues of at least $100 million that sell products in New York State to make public environmental and social disclosures, as well as plans to improve the workings of their supply chains, or face non-compliance status and monetary penalties of up to 2% of annual revenues.
The "Fashion Act" (S7428/A8352) would force businesses to map out at least half of their supply chain, identify "significant real or prospective harmful environmental and social consequences," and then reveal objectives for reducing and reducing those impacts. Companies would also be required to publish their material usage (by material type), a quantitative baseline, and reduction objectives for energy and GHG emissions, water and chemical management, as well as worker salaries.
The bill, which was first introduced in the New York State Senate in October, has three co-sponsors in the Senate as well as supporters in the fashion industry, with renowned fashion designer Stella McCartney, for example, stating that the legislation is "an example of a step towards a better, more regulated future." The proposed legislation, according to a report published last week by the New York Times, would allow "pretty much every large multinational fashion name, ranging from the very highest end – LVMH, Prada, Armani – to such fast-fashion giants as Shein and Boohoo" to be held accountable "for their role in climate change."
The Fashion Act, which aims to make "fashion retail sellers and manufacturers disclose environmental and social due diligence policies," is deserving of the many glowing headlines it has received since its public unveiling, as the fashion industry is woefully lacking in transparency about its occupants' environmental impact and labor policies (topics that typically fall under the umbrella of Environmental, Social, and Governance ("ESG") reporting), desirous of the many glowing headlines it has received since its public unveiling.
"Unlike other polluting industries, such as the car industry, fashion shops and producers operate in a regulatory-free vacuum," the New Standards Institute said in a statement on Friday. "As a result, there has been a worldwide race to the bottom, with the corporations with the least concern for the environment and people gaining the most economic advantage."
Against this backdrop, the sector is in serious need of transformation. Several industry efforts and volunteer collectives have developed to clean houses, but they have often fizzled out or missed the target in terms of what has to be fixed. Getting firms to map out at least half of their supply chains and establish science-based objectives to lessen their environmental impacts is a big step forward, and the Fashion Act should hopefully launch a bigger transformation of the fashion/retail industry.
However, before such an industry-wide ESG accounting can be implemented, several essential aspects must first be in place.
From uniform data standards to dependable audits, we've got you covered.
The current absence of common data standards is one of the most significant hurdles to adopting regulation in the fashion and clothing field (and any other industry when it comes to monitoring environmental and social aspects). In contrast to financial reporting, there is no internationally agreed-upon standard for measuring or calculating environmental and social aspects, nor is there a procedure for assessing conformity against such a standard.
Of course, the issue of data uniformity and openness is not new. "We are well past the point at which it can be honestly argued that climate risk is not serious," said Allison Herren Lee of the United States Securities and Exchange Commission in August 2020. We also know that today's investors do not have access to this crucial information. Every major systemic bank, as well as the world's leading asset managers, pension funds, insurers, and asset managers, want disclosure of climate-related financial risk."
There are hundreds of distinct ESG rating systems available right now, including those from Sustainalytics (a Morningstar subsidiary), Morgan Stanley Capital International ("MSCI"), Bloomberg, and Institutional Shareholder Services. These companies rely on volunteer information to quantify climate risk, human rights and social policy, corporate governance, and supply chain policy using proprietary models. To guarantee a consistent structure in the data collecting and reporting process, a unified data standard for reporting social and environmental data – together with advice on the essential data, computations, and disclosures – is currently absent. (Within the fashion/apparel arena, the Sustainability Accounting Standards Board's Apparel, Accessories, and Footwear standards are worth highlighting because they cover a wide range of ESG goals.)
ESG ratings rely mostly on voluntary and survey data supplied by firms, which is frequently inadequate, inconsistent, and lacking in rigor when compared to financial data. Boohoo, a fast-fashion firm received a AAA ESG grade from MSCI in 2020 because of this voluntarily reporting.
While many consumers and investors want to believe that ESG ratings are as trustworthy as Moody's or S&P's firm credit ratings, there are significant distinctions. Credit ratings, for example, are computed using identical procedures across different rating agencies and are based on exact, publicly available market information and corporations' audited financial accounts. Companies' financial statements are prepared by the stringent and legally enforceable GAAP or IFRS principles, and then independently audited for conformity with those standards by an independent auditor recognized with the Public Company Accounting Board in the United States. After that, auditors create a report that is submitted with the Securities and Exchange Commission (in the United States), where omissions and errors are punished. Auditors then write a report that is submitted with the Securities and Exchange Commission (in the United States), where omissions and mistakes are punished with fines, prison time, and other penalties.
In the absence of a common framework or industry-specific rules, as well as accurate audited data, each firm must choose how it estimates its effect and risks, as well as how it analyses its progress toward ESG goals. Even in the best-case scenario, if businesses are truthful with their data, the lack of a single reporting standard leads to uneven comparisons between companies — a well-documented complaint from asset managers to regulators. In the worst-case scenario, this lack of uniformity encourages enterprises who are unhappy with the outcomes of their present techniques or their progress toward particular goals to simply alter how they measure their effect or to eliminate troublesome suppliers and goods.
While more than 80% of major global companies report on some aspects of their social and environmental impacts, Brookings discovered that the data needed to determine whether such ESG efforts have had a positive social and environmental impact is "often missing, incomplete, unreliable, or unstandardized."
Furthermore, industry-wide uniformity is essential since firms have a mixed record when it comes to voluntary disclosures — and this is true across industries. While voluntary disclosures have been hailed as an effective measure for better climate risk management, research from individuals at the Center for Economic Research at ETH Zurich, University of Zurich, and the University of Erlangen-Nuremberg-Friedrich confirm that corporations tend to cherry-pick their data when it comes to climate-related data and reports non-material information.
Still, Timothy M. Doyle essentially asserts in an article for the Harvard Law School Forum on Corporate Governance that ESG ratings don't really rate anything because companies make "select and unaudited disclosures," and that even third-party ESG ratings can "vary dramatically... due to differences in methodology, subjective interpretation, or an individual agency's agenda."
Without a standard framework or government-mandated guidelines for calculating key environmental risks (similar to how the government sets the parameters and standards for key metrics like leverage and capitalization ratios), and given the overarching pattern of companies putting forth carefully curated information on the ESG front (while downplaying the negative aspects) of their operations,
This isn't a one-off problem.
Of course, the issue of data standardization, accuracy, and openness is not unique to the fashion sector; it is a complicated worldwide market issue that authorities are actively tackling with input from industry and the world's best experts in corporate finance and financial markets. The SEC, the European Commission, and numerous other authorities across the world have spent years figuring out how to establish the correct norm for each industry. The Global Reporting Initiative, Task Force for Climate-Related Financial Disclosures, and Sustainability Accounting Standards Board have developed the most commonly acknowledged standards, which authorities are anticipated to converge on to varying degrees.
The Corporate Sustainability Reporting Rule ("CSRD"), which was adopted by the European Commission in April 2021 to modernize the 2014 non-financial reporting directive and increase the breadth and reliability of sustainability reporting, is one such initiative. The CSRD is expected to increase the number of companies that disclose sustainability information when it goes into effect in 2023, and it will require them to report their sustainability performance using EU-wide disclosure standards developed by the European Financial Reporting Advisory, a private organization with strong ties to the European Commission. (However, the CSRD gives corporations a lot of leeway in terms of what and how they disclose, and it has varying criteria for organizations in different sectors and sizes.)
At the same time, the Securities and Exchange Commission in the United States is considering a regulation that would require publicly traded firms to disclose their environmental, social, and governance (ESG) impacts.
The general view among regulators tends to be that effective regulation is difficult without standardized and reliable data, which is one reason why we haven't seen more legislation in this area. However, increased ESG awareness and persistent requests from consumers and investors, together with tenacious efforts by researchers, legislators, and regulators, appear to be shifting the status quo.
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