Small fashion brands are preparing for upcoming climate regulations

The tobacco industry and the fashion industry have more in common than what feels comfortable.

Both industries cause harm, and both have promised to self-regulate to reduce that harm. If you follow the health regulation trajectory for tobacco, you’ll find similar notes playing out now for climate sustainability regulations in fashion.

In 1964, when the U.S. Surgeon General published their first comprehensive report on the effects of smoking on personal health, tobacco companies promised to self-regulate. As a way to circumvent government regulation, they created the Cigarette Advertising Code as a self-governing set of rules that promised not to advertise tobacco to children or include misleading health claims in ads. 

Thirty-two years later, a 1996 analysis by J. W. Richards revealed the code to be a failure, stating that, “The code has served as the basis of the industry's efforts to avoid further local, state, and federal regulatory oversight of its marketing activities. A historical review of cigarette advertising since 1964 indicates that the voluntary code’s major provisions have been regularly violated in the spirit and the letter.”

The fashion industry has been on a similar trajectory, one where self-regulation may be coming to a drawn-out end. The fashion industry contributes an estimated 4% of the world’s total greenhouse gas emissions, with fast fashion companies like H&M, Shein, and Zara responsible for half of those emissions. As people learn more about this reality, pressure from a growing number of climate-conscious consumers have forced large fashion brands to invest in voluntary sustainability efforts to prove they’re doing something about their impact on the planet. 

But this time, it isn’t taking 32 years for experts to see that promises from large fashion brands aren’t enough. According to an analysis in Cleaner Logistics and Supply Chain, the fashion industry is still on a trajectory to exceed emissions for a 1.5°C outcome with current efforts. 

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In response to the growing need for action beyond greenwashing, governments and regulatory bodies are starting to step in with the New York Fashion Sustainability and Social Accountability Act (“Fashion Act”) and the SEC’s Enhancement and Standardization of Climate-Related Disclosures for Investors. 

Smaller fashion brands aren’t yet included under this regulatory umbrella. But as the SEC begins to parse meaningful climate action from greenwashing, new standards will be created in the minds of consumers whether small fashion brands are required to report or not. If those brands fall behind by relying on familiar sustainability marketing tactics that are fast becoming outdated, it may be difficult to catch up. 

So what exactly should small fashion brands do to stay ahead of the climate reporting curve? Here's what you need to know about what's coming for regulations in the fashion industry, and how to stay relevant throughout one of the most defining decades in environmental history.

The New York Fashion Sustainability and Social Accountability Act (“Fashion Act”): The basics

“The fashion industry is responsible for a staggering 4–8.6% of global greenhouse gas emissions and has been permitted to operate unchecked by regulations that would curb pollution and the use of exploited, forced, and child labor.” —New York State Assemblymember Dr. Anna Kelles, Prime Assembly Sponsor of Assembly Bill A8352

Bill status: In Committee, with votes scheduled for late spring 2022

The New York Fashion Sustainability and Social Accountability Act would require global companies with more than $100 million in revenue that are doing business in New York to:

1. Map a minimum of 50% of their supply chain, from where they source raw materials to where clothes are made in factories
2. Identify their largest impact on the environment and outline what they're doing to change it
3. Disclose greenhouse gas emissions, energy, water, and plastic use, chemical management, and wages
4. Conform to the Greenhouse Gas Protocol Corporate Standard and the GHG Protocol Scope 3 Standard

Consequences for failing to comply are a fine and public shaming. Three months after a warning, companies that are still in violation would be fined 2% of gross annual revenues (not reduced by the cost of goods sold) of $450 million or more. The Attorney General would also publish an accessible list of companies that have failed to comply. 

Enhancement and Standardization of Climate-Related Disclosures for Investors: The basics

“I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.” —Gary Gensler, SEC Chair

The U.S. Securities and Exchange Commission (SEC) released its proposed rule on the Enhancement and Standardization of Climate-Related Disclosures for Investors on March 21, 2022. Comments are due on June 17, 2022.

The proposed rule would apply to all SEC registrants, including public companies, and its goal is to require “consistent, comparable, and decision-useful information” on climate-related business activity. If adopted, the rule would require companies to:

1. Publish the company’s governance of climate-related risks, including the processes they're implementing to manage those risks to their business 
2. Publish projections for how identified climate-related risks will affect their financials in the short, medium, or long term
3. Invest in considering how climate change will affect the company's business strategy, including any pivots on business model 
4. Describe how climate-related events like storms will affect their business 
5. Disclose information about the company’s scope 1 emissions (direct from production and distribution) and scope 2 emissions (indirect from purchased electricity or energy from vendors)
6. Disclose scope 3 emissions (indirect from the entire value chain, both upstream and downstream) “if material” or if the company has already set benchmarks for these emissions

Important note on scope 3 emissions: Scope 3 emissions are the majority of emissions from most companies. They represent indirect emission from products produced or from the energy required to ship products across vast distances. Under the proposed SEC rule, it would “provide a safe harbor for liability from Scope 3 emissions disclosure” and an exemption for smaller companies.

How small brands can adopt meaningful climate standards before regulations

Small fashion brands don’t need to adhere to climate regulations just yet, but they have an opportunity to learn from the unsustainable growth mistakes of those larger fashion brands now facing scrutiny.

“The [New York Fashion Act] has the potential to bring a tremendous amount of value and needed evolution to the fashion industry,” says Bridget Thorpe, ESG strategist, “yet it will also require a fundamental change in how organizations conduct business. The amount of detail, time, money, and expertise it takes to gather appropriate disclosure information is significant.”

Climate impact disclosure at the government level takes work—but if smaller fashion brands begin to prioritize a climate-aware culture now, they’ll have the luxury of time to prepare for any upcoming regulations. Here’s where fashion brands can focus their time right now to have the most impact with the resources they have:

1. Become a Certified B Corp business

Voluntary certifications are a blueprint for what climate and labor assessments should look like, and they encourage entrepreneurs to see their businesses through a new lens—their impact on the world. 

The B Corp movement’s reporting requirements are accessible for smaller brands. B Corp certifies businesses based on labor practices, climate impact, governance practices, equitable inclusion, and impact on customers. 

Note, however, that B Corp’s stance on the fossil fuel industry is weak, as they certify fossil fuel and energy companies under certain circumstances.

2. Develop better relationships with suppliers for actual transparency

ESG strategist Bridget Thorpe says, “Smaller brands may not have the bargaining power to uncover needed disclosure details from some suppliers quite yet.” This is why owner/operators of smaller brands need to form close relationships with suppliers early, so they truly understand their products’ impact on the environment. (The better the comprehension, the better impact is communicated to customers.)

Regulators and consumers are soon going to want to know exactly where their goods come from, how they were processed, and how far they traveled to get to the next step in production (hello, scope 3 emissions!). Here’s what you’ll need to consider for a transparent supply chain:

Tip: Fashion brands that want to go the extra mile can contribute their supply chain data to the Open Apparel Registry, which publishes open-source, searchable data on apparel suppliers.

3. Localize your supply chain with reshoring or nearshoring

According a 2021 McKinsey report, Revamping fashion sourcing: Speed and flexibility to the fore, 71% of fashion brands say they’re considering “nearshoring”, or bringing manufacturing sites closer to consumers, by 2025. On top of this, 24% of fashion brands are planning to reshore manufacturing to the same country as their headquarters. 

While most fashion brands are localizing supply chains because of recent disruptions, the positive effect on scope 3 emissions makes nearshoring and reshoring a win-win for brands and the environment. Saskia Hedrich, co-author of the McKinsey report, told Vogue, “The shorter transport routes increase sustainability while lowering greenhouse emissions. Nearshoring also allows more flexible in-season production, which helps to reduce overproduction.”

4. Commit to anti-greenwashing practices

The SEC is turning its attention to greenwashing, which is the practice of exaggerating holistic sustainability claims in marketing material. Besides misleading claims, greenwashing also means focusing on one area of production as sustainable, while another step in the process is environmentally destructive.

An example of greenwashing is H&M’s focus on their 27.8% reduction in plastic packaging—meanwhile, H&M sells 60% of their garments without a markdown, with 40% of unsold inventory sent to a landfill. 

Some of the ways your fashion brand can cut through the greenwashing and commit to meaningful action are:

• Make high-quality clothing that lasts
• Offer a clothing repair service
• Incentivize customers to return clothing for repair and resell
• Reduce your product line
• Use 100% renewable and recycled material
• Search for suppliers whose factories are powered with renewable energy
• Localize supply chains

No one said running a climate-friendly fashion brand would be easy. But as consumers get smarter and regulators build processes, it’s fast becoming a necessity. We now know what unsustainable growth looks like, and small fashion startups have a chance to do things differently. 

The next decade will separate those who chose long-term, sustainable growth over those who chased the next profitable quarter at the expense of the climate emergency. What kind of entrepreneur will you be?