ESG in fashion: a general overview of the EU framework on environment, social and governance criteria in the fashion industry

Brussels – More and more fashion companies are announcing programs with ambitious (some more than others) goals in relation to environmental, social and governance criteria. Recently ASOS launched its ‘Fashion with Integrity’ (FWI) 2030 programme, committing to achieve Net Zero across the full value chain by 2030. Also consumer demand is not lagging behind, urging fashion companies to change the way they run their businesses and minimizing environmental impact while keeping track of human rights and labour practices across the production and supply chain.

As textiles are the fourth highest-pressure category for the use of primary raw materials and water, after food, housing and transport, and fifth for GHG emissions, a conscious and effective ESG policy is therefore high on the agenda of many fashion companies and is becoming increasingly important for shareholders, investors and customers. Also, legislators are not lagging behind and there are many recent initiatives, especially at EU level, that will have an impact on the sustainability policies of companies.

The EU has set itself the ambitious target to reduce its emissions by at least 55 percent by 2030 and achieve climate neutrality by 2050. A whole series of recent EU initiatives have been taken in this area, including the EU Action Plan on Financing Sustainable Growth (March 2018), the Green Deal (December 2019), the Proposal for a European Climate Law (March 2019), the Circular Economy Action Plan (March 2020), the Farm to Fork Strategy (May 2020), the Climate Pact (December 2020) and the EU Regulation on Sustainability-Related Disclosures (March 2021). In April 2021, the European Commission presented its new Sustainable Finance Package, intended to help improve financing of sustainable activities across the European Union. And most recently, the Fit for 55-pack was launched on July 14, 2021. This package of proposals aims at making the EU's climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55 percent by 2030, compared to 1990 levels.

1. The EU legislative framework from a general perspective

While the concept of “ESG” is now broadly understood, some confusion remains regarding which environmental, social and governance factors should count towards the EU’s sustainability target, and which legislative instruments should regulate the different aspects of ESG. Moreover, a lack of transparency, accountability and comparability makes it difficult for investors to fully understand the financial risks resulting from the various sustainability-related crises we face, and to proactively look for investment opportunities addressing environmental and social problems.

The 2019 Communication on the European Green Deal is the EU’s response to our current climate and environment-related challenges. This Communication proposes a series of measures and legislative instruments that are intended to transform the EU by 2050 into a modern, resource-efficient and competitive economy, with no net emissions of greenhouse gases, and where economic growth is decoupled from resource use. It also aims to protect, conserve and enhance the EU's natural capital, and to protect the health and well-being of citizens from environment-related risks and impacts. The Green Deal is looking to achieve a socially-just transition to a sustainable economic system by providing a Just Transition Mechanism and Fund, focusing on the regions, sectors and citizens most at risk from this transition.

In July of this year, the European Commission adopted a package of proposals to make the EU's climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55 percent by 2030, compared to 1990 levels. Besides a proposal for an extended emissions trading system, an effort sharing Regulation, a Regulation on land use, forestry and agriculture, the pack also contains proposed Directives on renewable energy and energy efficiency. By 2030, the European Commission has set the target to produce 40 percent of the EU’s energy from renewable sources.

As significant investments are required to achieve the climate and energy targets that have already been set for 2030, public and private funding will need to be explored and facilitated. Hence, as one of the first steps in the strategy towards sustainable growth, the European Commission has reviewed the Non-Financial Reporting Directive (2014/95/EU, see below for more details). The disclosure of non-financial information should contribute to the measuring, monitoring and managing of undertakings' performance and their impact on society. In turn, this should allow investors to direct financial and capital flows to green, social and overall sustainable investments.

To further incentivize ESG commitments, investments and sustainable growth, the European legislator has developed a common language and definition of what is considered “sustainable” in the EU Taxonomy Regulation (2020/852). This Regulation, which established a framework to facilitate sustainable investment, will be amended, updated and completed in the course of the coming months and years. Currently, it sets out a classification system for environmentally sustainable activities in relation only to climate change mitigation and climate change adaptation objectives. In the near future, the Regulation will be amended to cover other objectives as well – relating to pollution prevention, the transition to a circular economy, the sustainable use and protection of water, and the protection and restoration of biodiversity and ecosystems.

Finally, on April 21, 2021 the European Commission announced its Sustainable Finance Package, which aims to provide the legal fundaments and framework to create a sustainable financial EU ecosystem. The focus lies on increased transparency and the provision of tools for investors to identify sustainable investment opportunities. Such opportunities have a key role to play in channeling private investment (as a complement to public funding) for the successful transition to a climate-neutral, climate-resilient, fair economy.

2. The EU Strategy for Textiles

As part of the EU Green Deal, the European Commission introduced one of the means that will be particularly relevant in the context of the fashion industry. The Circular Economy Action Plan (published on 11 March 2020) is looking to shift the landscape from a linear industry towards a circular economy. With a focus on resource-intensive sectors (including textiles), the Circular Economy Action Plan includes a “sustainable products” policy to support the circular design of all products based on a common methodology and common principles, as well as a “right to repair,” and measures to empower consumers to make informed decisions and play an active role in the ecological transition. By prioritizing the reduction and reuse of materials before recycling them, and by fostering new business models with innovative products / services, the Circular Economy Action Plan aims at preventing environmentally harmful products from being placed on the EU market.

Specifically, the development of ecodesign measures will be encouraged to ensure that textile products are fit for circularity. To reduce waste and prevent lost value of materials, the Circular Economy Action Plan wants to ensure the uptake of secondary raw materials and to empower consumers to choose sustainable textiles and have easy access to re-use and repair services. As a second action point, the European Commission encourages companies to move away from the fast-fashion business model and to find other ways to offer textile and fashion products, in particular by providing incentives and support to product-as-service models.

Also on the waste side, Member States will be obliged to put in place a system that achieves high levels of separate collection of textile waste. By 2025 the generation of waste in the textile industry should be minimized as much as possible. The sorting, re-use and recycling of textile products will be key to achieve such goals, as well as regulatory measures and an extended producer responsibility.

Finally, it is important to note that the European Commission has just closed its public consultation round on the development of an EU Strategy for Textiles at the end of the summer holiday period. In the course of the next couple of months, the EU is expected to publish the Strategy document aiming at a shift to a climate-neutral, circular economy where products are designed to be more durable, reusable, repairable, recyclable and energy-efficient.

3. Initiatives by the Member States

Besides the European Commission, also several EU Member States have launched initiatives awaiting the global regulatory framework. Last year, France was the first country to have adopted a law prohibiting the destruction of unsold non-food inventory, such as clothing, shoes, beauty products, books, or consumer electronics (Loi n° 2020-105 of 10 February 2020). Manufacturers, distributors, and stores having such unsold products in stock will be obliged to donate or recycle these products instead of incinerating it or dumping it in landfills. Additionally, the law expands incentives for manufacturers to design their products to be more easily recyclable.

4. What to expect in the ESG-series

With such general overview in mind, we will continue this ESG-series with an overview of the rules on green- or wokewashing (and two instruments that are expected soon, i.e. the Directive to strengthen the role of consumers in the green transition as well as the Regulation on substantiating green claims), the risks for companies not complying with the new ESG-principles as well as the rules on collaboration between companies to achieve sustainability efficiencies and labelling obligations in the fashion industry.

Written by Blanche Devos and Judith Bussé, attorneys of Crowell & Moring LLP is an international law firm with a fashion law practice representing clients in Europe, the United States and across the globe. Crowell & Moring assists clients in the fashion industry with a variety of legal issues, in the regulatory, intellectual property, licensing and antitrust area of law.