UniCredit – the factors reshaping business models within the fashion industry

Organisations are increasingly integrating sustainability criteria into their corporate strategies due to regulatory requirements, consumer preference, peer pressures, the need to hire and retain talent and the potential impact of ESG aspects on financial performance.

For what concerns the regulation, sector-based initiatives to tackle shared challenges are not something new to our continent. Europe has indeed been at the forefront in launching initiatives to enable a sustainable transition.

In 2020, with the EU Industrial Strategy and circular economy action plan acting as one of the main building blocks of the European Green Deal, textile was recognized as one of the fourteen priority industrial ecosystems and since then, EU regulation has rapidly evolved. To establish a greener and more resilient textile sector, the EU Strategy for Sustainable and Circular Textiles was defined in 2022. This strategy implements commitments of previous EU initiatives, including: Ecodesign, Green Claims and the 2023 proposal of amendment of the Waste Directive. On the disclosure side, a key role will be played by the Corporate Sustainability Reporting Directive (CSRD), under which even more companies will need to report and verify non-financial data and the Corporate Sustainability Due Diligence Directive (CSDDD), with the aim to foster sustainable and responsible behavior up and down supply chains.

Moreover, the importance placed on sustainability by younger generations is unprecedented. Gen Z and millennials, which together account for 49% of the global population, care about sustainability more than anyone else. These two generations are also those that will benefit from the “great wealth transfer” from previous generations, another unprecedented phenomenon as this transfer, in the US alone, is estimated to be worth 72 trillion dollars. As a direct consequence, younger generations will become five times richer by 2030 and this influx of wealth may have a considerable impact on the investment space and drive a spike in demand for certain industries, such as luxury goods and services.

It is true on one side that younger generations care about sustainability more than anyone else and their attitude is inspiring other age groups to act more sustainably. However, these are also generations used to instantaneous, on-demand experiences. So, with that in mind, how should brands reshape their business models to balance these different aspects?

Successful brands are innovating their processes but at the same time, given that the fashion industry is the fourth most impactful industry on environment and climate change after food, housing and mobility, sector players are also prioritising their ethical and sustainability credentials. Innovation is key as it enables “5Rs” strategies: reduce, rewear, recycle, repair and resell.

Circularity is of course a must but it should be combined with relevance, and it should evolve from a single collection concept to the way the whole business is conducted. 

For what concerns claims, all sustainability related claims should be based on proof, with companies ’walking the talk’ and backing up with relevant data sets. Such behaviour will also help fashion players to deal with the Green Claims Directive.

That said, it can be still difficult to distinguish between a sustainable and greenwashed product. The Digital Product Passport (DPP) will help consumers to track a product’s impact across its life cycle. The DPP will also facilitate access to a centralised bank of information regarding products, which will contribute to consumers making more sustainable choices.

Last but not least, on the impact of sustainability on financial performance, we have all the reasons to believe that prudent management of a company’s sustainability profile is a key value driver. Transparency on non-financial data, ESG risk management, resilient supply chains and solid ESG governance could inevitably impact financials as increasing revenues, lowering cost of capital and helping companies to avoid costs deriving from penalties, legal costs or reputational damage.

That said, the precise quantification of this impact is a matter of debate, however, with the impact of the CSRD and its embedded study on double materiality, sustainability data will become even more prevalent and potentially reveal the connection with pure financials.