Fashion industry: a regulatory inflation is coming to Europe

Fashion is one of the economic sectors that has benefited the most from globalization, producing clothing in low-cost countries and selling them in consumer markets where prices and currencies are stronger. This is evident from the clothing import data from non-EU countries in 2019, totaling 80 billion Euros (Source: Euratex). Thanks to this well-established model, the sector has enjoyed comfortable margins that allowed it to finance the development of extensive store networks, mechanized logistics warehouses, and powerful information systems, which have become even more necessary with digitalization.

An Industry Shaken in the Last Two Years

However, in early 2020, fashion companies had to face several factors that impacted their production costs, halting this large import model. These factors include the COVID-19 crisis, which profoundly destabilized supply chains – including blackouts in China, and the closure of the Yantian port, among other disruptions – leading to a dramatic increase in container prices (from $1,300 per container in June 2019 to $7,000 in June 2022); the rise in raw material costs (cotton prices doubled between August 2019 and August 2022) combined with the strengthening of the dollar, which further destabilized markets; and lastly, the war in Ukraine and the de facto closure of China-Europe railway routes, significantly disrupting the textile industry.

European fashion companies, however, managed to recover and regain their pre-COVID profits by 2021. Paradoxically, this was due to insufficient stock, which led to increased discounting or sale prices, generating higher margins for retailers. They also streamlined their store networks and continued investing in digital commerce. Furthermore, most players started diversifying their supply sources, reducing reliance on China and benefiting from their green policies.

A New Constraint from the Green Deal: the CSRD

Now, another threat looms that could have an even stronger impact than the recent geopolitical or health disruptions.

The European Commission, having made the fight against climate change the cornerstone of its actions, recognizes that textile consumption in Europe is the fourth largest environmental impact source. As a result, it has established a stringent regulatory framework to which the fashion industry must comply. With the Corporate Sustainability Reporting Directive (CSRD), large companies are required to conduct demanding non-financial reporting, integrated into their annual management report, which must include standardized sustainability indicators. The EU is not alone in wanting to improve the publication of information regarding sustainability risks by companies, but it requires a double materiality analysis, meaning it must include both the negative and positive impacts a company has on the environment. The European legislator is more ambitious than the international body (ISSB), which focuses solely on financial materiality. The CSRD, once transposed into national law, will come into effect in 2024.
 

Fashion and Textiles as Targets of Upcoming European Legislation

The ambition to legislate particularly affects the textile sector, as evidenced by the recent legislative proposals from the European Commission. Adopted in March 2022, the EU’s strategy for sustainable and circular textiles seeks to regulate the entire production cycle of textile materials. It sets minimum thresholds for recycled fibers in textile compositions, measures to protect consumers regarding the information they receive, and actions to combat the release of microplastics. 

Finally, in its proposal for a directive on due diligence, which has an extensive and extraterritorial scope, the Commission aims to go further than the French law on due diligence that it draws inspiration from. The proposed directive seeks to require affected companies to integrate due diligence into their internal policies, assess and identify real or potential environmental and human rights impacts throughout their value chains, including contractual clauses with subcontractors, and establish grievance procedures for affected individuals, unions, or NGOs.

It remains to be seen whether European companies will be able to withstand this regulatory tsunami that is unique to the European continent.