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11 Apr 2023 - Climate and Environmental challenges and opportunities

By: Redwheel

Climate and Environmental challenges and opportunities

Redwheel (Channel Capital)

March 2023


The Greenwheel Insights team provide thematic sustainability research to our investment teams to help shape their thinking on key themes or holdings within their portfolios. In this piece, commissioned by Redwheel's Global Equity Income team, Stephanie Kelly highlights the key issues investors should consider in the Fast Fashion Industry and Nick Clay explains how the research has informed their views on some of their fashion holdings.

Stephanie Kelly, Head of Greenwheel

Fashion accounts for an estimated 10% of global carbon emissions, which is more than the emissions of the shipping and airline industry combined.[1] Fast fashion, defined as 'inexpensive clothing produced rapidly by mass-market retailers in response to the latest trend', is heavily criticised for driving these emissions through a combination of high volumes and material choice. Relatedly, the environmental impacts of fashion are profound in terms of water use, microplastics and the use of synthetic dyes and chemicals in textile production.

Unsurprisingly, fast fashion companies have been under pressure in recent years to show commitment to greater sustainability. While much is said by companies about their commitment, it is important to dig deeper to evaluate the true sustainability credentials of these firms.

The key drivers of emissions and environmental damage in this sector are:
• Materials: Producing clothes can vary significantly in terms of environmental footprint. Key factors to look out for in terms of climate and environment impacts include:
• Energy inputs to production
• Land use/management
• Crop yield
• Water & chemical use.
• Volumes: The fundamental challenge for fast fashion in the context of sustainability is the high volumes of goods produced and distributed. Ever higher volumes of product limit the potential cuts to emissions and environment improvements.
• Lifecycle: Related to the issue of volumes and material choice, the life cycle of textiles is an important component of sustainability. With high volumes of textiles being pumped out, the average life span of a high street garment is claimed to be just seven wears. The natural corollary of this is huge volumes of textile waste going to landfill or incineration, not to mention massive resource depletion.

Nick Clay, Head of Global Equity Income, Redwheel

The input of the Greenwheel team into our understanding of the complexities of the environmental challenges that face our fast fashion companies has been insightful, educating on the nuances of each issue and has aided in the structuring of an engagement plan and ongoing monitoring with respect to our holdings.

Our central view has always been one where a solution to the life cycle impacts of fashion is both necessary and achievable, rather than the solution being fashion cycles cease to exist. The strategy has always looked to invest in those companies able to transition through their ESG challenges and demonstrate that they are doing so. The greater depth of understanding of the challenges faced, highlighted by Greenwheel, has demonstrated the importance of our flags to monitor the progress the companies are making.

Two examples are Inditex and H&M. Inditex continue to demonstrate their desire to be a leader in reaching a closed loop system to deliver its fast fashion. Investing EUR1.1bn per year in order to achieve this along with its collaborations with recycling textile companies (such as Infinited Fiber Company) and recent "resell, repair or donate" programs are all evidence of progress. Greenwheel correctly point out how much more needs to be done for Inditex and are advising on metrics to monitor the impact of their initiatives, but Inditex are exhibiting the characteristics we look for.

H&M, on the other hand, have demonstrated that the continued pressure being placed upon the company from the high inventories and China setbacks, has led to them cutting back on investment required for them to transition in a similar vain to Inditex. This is a warning flag to us, as the transition required is absolutely necessary if these companies are to be the ultimate winners in the new future of fast fashion. We had the opportunity to sell H&M and switch into Inditex, and some others such as Kering (another strong improver in its ESG challenges) to improve our likelihood of transitioning the ESG challenges faced whilst not having to pay a higher valuation for doing so. This is an ongoing process over many years, and one we look forward to engaging and monitoring with Greenwheel by our side.

Authors: Stephanie Kelly, Head of Greenwheel & Nick Clay, Head of Global Equity Income, Redwheel


Funds operated by this manager:

CC Redwheel Global Emerging Markets FundCC Redwheel China Equity Fund

Sources:

[1] European Parliament: The impact of textile production and waste on the environment. 


Key information:

No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. Past performance is not a guide to future results. The prices of investments and income from them may fall as well as rise and an investor's investment is subject to potential loss, in whole or in part. Forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of Redwheel. This article does not constitute investment advice and the information shown is for illustrative purposes only.

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