Moody’s Says ‘Increased Sustainability Scrutiny’ Poses Risk To Apparel Brands And Retailers

Global credit rating agency Moody’s says increased scrutiny by consumers and regulators of the environmental and sustainability practices within the apparel industry pose a financial and reputational risk to companies that don’t adapt.

In a research announcement released Wednesday (April 7), Moody’s said the global rise of eco-friendly trends create long-term challenges, especially for fast-fashion retailers and discount brands, which it said are most at risk.

“Changing behavior among environmentally conscious and socially aware consumers will put more competitive pressure on global fashion brands to adapt to sustainability measures,” said Guillaume Leglise, assistant vice president and analyst at Moody’s Investors Service.

“Longer term, environmental and social factors will put the apparel industry’s profitability at risk,” Leglise added, noting that small brands already suffering from the pandemic will find it most difficult to make the necessary changes.

Large international brands and luxury companies such as H&M, Nike, Adidas and Ralph Lauren will fare better, the note said, but fast-fashion and discount brands are “the most at risk of competitive pressure” as sustainability becomes more important to consumers.

Influence Of Young Consumers

The cautionary comments from Moody’s come at a time when many forward-looking designers, retailers and apparel manufacturers have embraced the sustainability being led by environmentally discerning — and demanding — young consumers, particularly among Generation Z and millennial consumers, ages 15 to 40.

Given the size, buying power and influence on style and fashion this massive demographic carries, companies are increasingly taking note and competing among each other on the merits of their sustainability, as they fear being overlooked by consumers if they don’t.

For example, improving sustainability was a major pillar of the five-year strategic plan Adidas recently released.

“Our strategic focus is on increasing credibility of the Adidas brand, elevating the experience for our consumers and pushing the boundaries in sustainability,” Adidas CEO Kasper Rorsted said, noting that 90 percent of the athletic footwear, apparel and other merchandise would be made from sustainable materials by 2025, up from 60 percent currently.

The current success of other rising apparel and retail industry trends, like reCommerce — or the reselling of secondhand goods — is directly linked to the evolving sustainability movement, especially among newer companies that were “born sustainable” rather than existing companies needing to adapt.

Newly-listed clothing resale platform thredUP, for example, refers to itself as a “one-stop thrifting destination committed to saving the planet from fashion waste” and even offers its customers a way to calculate the carbon footprint of the clothing in their closet.

“The fashion industry produces more harmful carbon emissions than the aviation and shipping industries combined,” thredUP said.

Even high-end designers and resellers have teamed up to advance the sustainability crusade, such as the “upcycling collaboration The RealReal announced last week that repurposes designer fabric and damaged clothes that would otherwise go into a dumpster.

“To have such a dynamic group of luxury brands join us for our first collection sends an incredibly powerful message about the importance of circularity and the opportunity we all have to support a more sustainable future for fashion,” said Julie Wainwright, founder and CEO of The RealReal. “Our hope is that [our newly launched] ReCollection will inspire people to think about the afterlife of what they own and embrace more conscious consumption.”

In addition to the emerging risk of failing to embrace rising sustainability demands, Moody’s also cautioned retailers and apparel makers that they face growing regulatory challenges as well in the form of increased government oversight related to consumer data protection by apparel companies.

“Brands using online and data analytics are vulnerable to data protection risks, cyberattacks and non-compliance fines, all of which can tarnish their reputations,” the Moody’s report said.