Key Points

  • Current trends in fashion consumption and production cannot be maintained if the industry wants to reduce its environmental impact.
  • Companies in the textile and apparel industry are increasing their focus on sustainability in response to growing regulation and rising pressure from consumers and investors.
  • At Newton, we view this as presenting opportunities to seek investments in companies better managing such environmental or social risks, as well as emerging business models which offer solutions to these issues.   

If the apparel production isn’t near the top of your list of environmentally unfriendly industries, think again. According to the World Bank, the fashion industry is responsible for 10% of annual global carbon emissions, which is more than all international flights and maritime shipping combined.[1]

While the apparel industry is resource intensive, societal and industry trends have exacerbated its environmental impact. The industry owes some of its growth, and its wastefulness, to ‘fast fashion’. Fast fashion refers to cheap, mass-produced clothing produced in condensed cycles that seeks to capitalize on fast-changing trends, often fomented by social-media influencers. The average consumer is now purchasing 60% more items of clothing compared to 2000, but each garment is kept half as long before it is discarded to be incinerated or sent to landfill.[2] Many consumers have come to treat clothing almost as disposable and, in some cases, even single use.

The fashion industry has come under greater scrutiny with increasing focus on sustainability by regulators, consumers, and investors. In addition to the climate impact, consumers and investors in fashion companies are also scrutinizing the sector’s material use, labor practices, and pollution.

ESG Risks in the Apparel Industry

There are numerous ESG concerns that, left unaddressed, could have a financial impact on companies. This creates multiple risks that could impact the sector across multiple environmental and social issues.

Analysis from Quantis suggests that in 2016 greenhouse gas emissions from the apparel industry totaled four billion tons of CO2—equivalent to 8.1% of the global total and more than those emitted by all international flights and shipping combined.[3]

Cotton is the most common natural fiber used to make clothing, accounting for about 33% of all fibers found in textiles. Cotton is an enormously water-intensive material. The production of one cotton T-shirt requires 713 gallons of water, which is equal to the amount one person would drink in 2.5 years. Cotton farming also requires more pesticides and fertilizers than any other single crop. That said, cotton is not the most common material in clothing—synthetic fibers such as polyester are. Those fibers have less impact on water and land than grown materials like cotton, but they emit more greenhouse gasses per kilogram.

There is also an enormous amount of waste in the fashion industry, with fast fashion’s overproduction and overconsumption exacerbating the problem. In the US, the number of garments bought per person is now around 65 per person, compared to 40 in the early 1990s. In the UK, the figure is around 50, compared to 20 in the early 1990s. Globally, just 12% of the material used for clothing ends up being recycled. This compares to paper and polyethylene terephthalate bottles – which have recycling rates of 66% and 29%, respectively, in the US. Most of that ends up either being incinerated or sent to landfill.[4]

About 20% of industrial water pollution derives from garment manufacturing, while the world uses 1.3 trillion gallons of water each year for fabric dyeing alone, and 20% of industrial water pollution globally is attributable to the dyeing and treatment of textiles.[5]

Finally, labor practices have been long subject to criticism. Many clothing companies face problems with labor conditions throughout their supply chains, including child labor, low wages, and health and safety hazards.

Investment Implications

Of course, these issues have impacts on the natural environment and on workers in apparel supply chains, but why do they matter to investors? We believe the environmental impacts of clothing production, and the industry’s labor conditions, are financially material, and have the potential to affect the performance of companies through the risks they present.

Many apparel companies have set targets for the use of sustainably sourced materials. Even if not, incoming regulation with the aim of reducing crop chemical use may nudge companies towards sourcing different types of raw materials. However, materials with sustainable certification or recycled content tend to be more expensive and may affect margins or result in higher prices for consumers. There are also risks associated with supply chain bottlenecks, whereby there is less availability of sustainable materials or more volatile pricing. Companies tend to want to achieve the targets that they have publicly set, but a resilient and stable supply chain is an important investment consideration.

Similarly, the waste associated with fashion is likely to have a financial impact on companies in the sector. There are increasing restrictions on landfill usage across the globe. In addition, poorly managed inventory and excess supply can damage brand perception as well as stock prices. This is true for both low-cost and designer fashion. There is also potential for the companies to capitalize on the value of unworn garments—but this can require different business models with the expertise to access and understand how garments are used once in the possession of consumers.

Finally, working conditions and practices in apparel supply chains can also be material, and therefore are relevant for investor consideration. How labor is managed is intrinsically important to the management of the supply chain – and it is beneficial for companies to have a resilient and flexible supply chain. This is about ensuring the company has the right product, in the right place, and at the right price. Managing suppliers—contract terms and the nature of the relationship—not only enables a better supply-chain management but also has an impact on the conditions of the workers along the supply chain. It is not possible to ensure labor rights are adequately managed without integrating this into the way supply-chain relationships are managed.

What Next?

Companies across the fashion industry have stepped up their ESG initiatives in response to growing government action and increasing pressure from consumers and investors worldwide. Companies are implementing ESG practices for different reasons—some want to attract investment, or meet regulatory expectations, and others want to see real-world impact. Fortunately for the industry, there are numerous points along the supply chain to improve sustainability: upstream activities such as materials production, preparation and processing, and downstream retail, logistics, and product use.

Alleviating the environmental impact of the fashion business will require collective effort and collaboration. To that end, industry participants have formed coalitions to tackle environmental and social challenges. For example, over 150 brands, suppliers, and chemical suppliers have joined the Roadmap to Zero in order to work toward safer and more sustainable chemical inputs. The Sustainable Apparel Coalition, with over 280 members, has devised methods to measure sustainability practices. The Better Cotton Initiative seeks to minimize the harmful impact of crop protection practices, use water efficiently, care for availability of water, care for the health of the soil, and conserve natural habitats. The Rodale Institute promotes an alternative to chemical pesticides that pollute air and water by improving organic practices.

The first step is for companies to measure their environmental impacts and understand areas where they can improve. Carbon data and supply-chain mapping are key focus areas—these are also the foundations for further work. Without supply mapping, it is hard to manage risks. The regulatory environment is also extremely complex, with numerous NGOs and specialist groups ramping up pressure, and so companies need help navigating the challenges they face. Further, the materials companies use can play a key role in enabling recyclability and circularity and reducing environmental impact.

Emerging Themes

How can the fashion industry manage the issues before them? The key is to determine where solutions exist, or where might they emerge, and what can be addressed through operational practices. These present opportunities for companies to develop solution-orientated business models, or better manage risks, both of which are opportunities for investment. Materials innovation and addressing fashion waste have better solution opportunities, whereas issues such as emissions management, sourcing raw material and supply-chain scrutiny can be reasonably well addressed through a brand’s operational practices. Circular business models represent a significant opportunity for new and better growth in the fashion industry.

Private Market Insights

We believe it is useful to examine funding in behind-the-scenes startups that can help drive innovation. In our view, there are three focus areas: recycling technology, supply-chain traceability, and innovative materials.

Textile Recycling

The two key recycling methods are chemical and mechanical. Mechanical has been around much longer, but chemical recycling is where most of the venture capital has been flowing in recent years, much of which will likely be used to scale technologies and build factories in coming years. Chemical recycling is thought to produce higher quality materials, although mechanical recycling is considered by many to be less resource intensive. Most chemical recycling companies focus on cotton and/or polyester materials. According to data sourced from Pitchbook, there has been about eight times the amount of funding into chemical recycling versus mechanical between 2014 to 2022.

We met a private company, Evrnu, in the chemical recycling space for textiles. They have worked with multiple large brands and highlighted an interesting point: designers will play a role in the uptake of recycled fibers in the future (although they won’t want to compromise on look, feel, or performance of the material).

There is, however, still some venture capital flowing into mechanical recycling. One company that we met in the mechanical recycling space is Refiberd, an artificial intelligence and robotics-enabled textile recycling startup. There is a big race to commercialization in the textile recycling space—the question of supply of waste materials, and commitments of clothing companies to include the recycled fiber in their product lines remains. We are interested to see if sustainability goals for the large clothing brands play a role in the pace of commercialization for these technologies from a supply/demand standpoint.

Traceability in the Supply Chain

Blockchain can be used to enhance traceability in the supply chain for textiles, enabling information about each stage of production to be recorded, including the origin of raw materials, location and time of production, and the transportation of the final product. Additive tracers add a substance to fibers, materials, or other garments at the beginning of the supply chain process which can be detected later in the supply chain to verify the origin of the material. The tracer can consist of a spraying mist, invisible ink, liquid ink/pigment, or digital serialization marking.

There are multiple issues driving the goal of increased transparency in the supply chain, including concern over supply chain ethics and human rights issues, need for better management of resources and waste, and consumer demand for transparency and sustainability. As sustainable options continue to become more important to consumers, it’s possible we could see more brands incorporate sustainability insights using advanced traceability options. But there still exist many questions around the implementation, cost and scalability of these technologies.

Innovative Materials

Mycelium leather (made from the root of mushrooms) has received attention in search of a leather alternative—it’s biodegradable, pleasant to touch and long-lasting. It is already being incorporated by major brands, especially in the luxury space. Some sources quote the approximate cost of mycelium leather at ~$50/square foot, with predictions of a drop to $5/square foot. There isn’t yet price parity with regular leather, but if price comes down, this could act as a further incentive to consumers.

To date, there has been some encouraging collaboration on sustainable materials between public and private companies. We are watching closely to see how these materials will be perceived by consumers and what the uptake will be as cost comes down.


Global demand for clothing is likely to increase as more people in emerging countries enter the middle class and spend more on apparel. While this presents an opportunity for fashion companies, those that choose not to confront the social and environmental progress may be taking a risk. Those risks could become even more important as younger generations—who appear more socially aware and environmentally responsible—gain purchasing power and influence shopping trends, assuming their values translate into purchasing decisions. We believe this focus on sustainability will present opportunities to seek investments in companies better managing environmental and social risks, as well as emerging business models which offer solutions to these issues.   

[1] The World Bank, How Much Do Our Wardrobes Cost to the Environment?, September 23, 2019,






Rebecca White

Rebecca White

Global ESG integration lead

Meghan Bruni

Meghan Bruni

Investment strategist

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