China Insight: Chinese Fashion Firms Push ESG to Spark Growth
Various statistics for the first half of the year indicated that the Chinese fashion consumer market is facing an uncertain reality. The World Bank, after raising its global and Chinese economic growth forecast in early June, stated in its China Economic Update released in the middle of this month that “China’s GDP is expected to grow by 5.6 percent in 2023.” While this is above the government’s target of 5 percent, that is the lowest it has been in decades.
Aiming for a prosperous future in the face of this tougher reality, some Chinese fashion companies have chosen to push progress in environmental, social and corporate governance as the next key winning point for faster development.
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In May, China’s consumer price index witnessed year-over-year growth of 0.2 percent but a month-over-month decrease of 0.2 percent, marking the fourth consecutive month of decline; the producer price index witnessed year-over-year decrease of 4.6 percent and a month-over-month decrease of 0.9 percent, marking the second consecutive month of negative month-over-month growth. Coupled with fluctuations in the renminbi exchange rate and a year-over-year decrease of 7.5 percent in imports, it shows a series of statistics for the macro economy are running low.
The fashion industry, led by apparel companies, is also facing the challenge of weakening foreign demand, with textile exports declining by 14.2 percent year-over-year and by 5.6 percent month-over-month. Apparel exports, meanwhile, fell by 12.2 percent year-over-year but increased by 3 percent month-over-month.
With order indices for manufacturing and service industries falling below the boom-or-bust line, coupled with a large number of layoffs from the leading tech companies, China economists have been calling for “stabilizing the economy at all costs” in the face of the significant sluggish demand. It is precisely against this social backdrop that some Chinese apparel companies are investing more in ESG governance in order to obtain longer-term returns.
In the first half of this year, 19 of the 42 A-share apparel companies took the initiative to disclose ESG reports or social responsibility reports. It is a disclosure rate of 45.2 percent, higher than the overall disclosure rate of the industry.
In the era of relatively low-speed development, all parties are seeking a new path in ESG, especially since there is a global awareness of the need for standardized disclosure principles.
In the Chinese market, ESG has gained more attention and momentum from the top level. In late May 2022, the state-owned Assets Supervision and Administration Commission of the State Council, or SASAC, proposed implementing the “new development philosophy” and exploring the establishment of a sound ESG system by stating it would strive to achieve “full coverage” in the disclosure of relevant special reports for listed companies by 2023.
In fact, as of June 7, 2023, 1,755 A-share listed companies have disclosed their 2022 ESG reports, accounting for 34.3 percent of such companies. According to industry classification statistics, banks have the highest disclosure rate of 100 percent; machinery and equipment has the lowest disclosure rate of 19.2 percent.
The apparel industry, with a disclosure rate of 45.2 percent, is in the middle of the pack, but its ESG ratings are mediocre, with 10 ESG ratings of A (including A+, A, A-), accounting for 23.8 percent; six ratings of B (including B+, B, B-), accounting for 14.3 percent, and 26 companies with ratings of C and D, accounting for 61.9 percent.
ESG disclosure is considered the “second financial report” of listed companies in terms of its disclosure positivity and value of the content; its significance has long been different from before. Against a background of local enterprises generally being short of money, investment and financing become their lifeline. In the current Chinese market — which is being promoted by three types of green markets: the green certificate trading, green power trading and carbon emissions trading — a focus on ESG governance can help reduce financing costs and broaden the available financing channels for companies.
On the one hand, ESG disclosure directly impacts the financing and initial public offerings of firms. On the other hand, for Chinese companies going abroad, export products may face supply chain challenges in the European Union based on the disclosures. In terms of overseas trade, preventing an increase in carbon tariffs by meeting the emission reduction targets becomes a pressing issue.
Zhong Xiaoyang, partner in charge of ESG sustainable strategy and operations for consulting firm PwC Mainland China, summed this up with his experience advising global fashion companies: “ESG enables brands to gain ‘added value’ and is even considered as an important driver to lead innovative disruptions in the industry.” At the same time, he admitted that Chinese companies are still a bit behind Europe in terms of ESG. Therefore, China will be a huge testing ground for innovative ideas in terms of consumer awareness and product innovation and solutions.
More than capital market performance and carbon tariffs on exports, companies are being pushed to disclose their ESG achievements and goals because of the increasing impact of social responsibility on consumer purchasing behavior.
As Stephan Sielaff, chief executive officer of fiber manufacturer Lenzing Group, stressed in an interview with WWD China’s Johannes Neubacher this month, “The consumer is the most important part of the consumption cycle. Without consumer interest, sustainable supply chains and sustainable fashion cannot exist.”
In fact, most of the listed apparel companies releasing ESG reports use research and development and the application of green materials as an important element. For example, the “stretch shirt containing 30 percent bamboo fiber” launched by Hodo Group is made from fast-growing and self-renewing bamboo fibers, which are integrated with environmentally friendly polymeric fibers as a more sustainable alternative raw material. Joeone takes into account cost, environmental impact, the product performance, regulatory requirements, the best feasible technology and customer needs when selecting green materials.
Even those enterprises above a designated size that are not listed on the stock market, such as K-Boxing, are practicing ESG, from production to sales and marketing. Their implementation of ESG in the full production chain also encourages their consumers to participate in sustainable fashion, and sparks the participation of colleges and universities through collaboration between industry, university and research institutes.
It is worth noting that, as the only apparel company in Shenzhen recognized as one of the “Top 500 Chinese Listed Companies in Innovation Index” for two consecutive years, Ellassay Group has hired Dominique Simard as chief sustainable fashion officer, appointed Digital Human @SaElisa as sustainable fashion ambassador and established the Sustainable Fabric Innovation Lab. By focusing on energy savings and emission reduction, it has passed the Oeko-Tex STeP certification for its own factories, and advocated a circular economy.
In its spring-summer 2023 collection, sustainable products for the Ellassay and Laurè brands reached 15 percent and 18 percent of stock keeping units, respectively. It aims to achieve 95 percent of 2C and 2B product packaging to be recoverable, reusable or recyclable by 2025.
From the industry as a whole, more and more fashion companies are realizing the whole life cycle of green design, green raw materials, green manufacturing, green consumption and recycling by extending from manufacturing to both ends through the collaboration of the whole value chain and the synergistic collaboration of the consumer market. The ESG concept is gradually integrated into their business strategy and daily work.
It is true that the core value of ESG is key to China’s strategic goal of high-quality development, but for companies, especially fashion companies with a faster pace of internationalization, ESG is not just about the preparation of reports or simply filling out forms by ESG categories. It is also crucial to align with international standards. As mentioned by Zhong Xiaoyang, with the Chinese market featuring scarcity in resources and complexity in management, companies need to aim for internationalization and localization, as well as a better connection with consumers.
This month, the International Sustainability Standards Board, an organization under the International Financial Reporting Standards Foundation, is likely to issue two sustainability standards, namely the General Requirements for Sustainability-Related Financial Disclosures and Climate-Related Disclosures. Meanwhile, the EU Sustainability Reporting Standard is scheduled to be approved and come into effect. Previously, the guidelines issued by the Global Reporting Initiative and the Task Force on Climate-related Financial Disclosures were generally applied. This means that starting in the second half of 2023, Chinese companies may have to comply with new ESG disclosure guidelines.
In the future, how can ESG governance in China be practiced to incorporate international guidelines? In the process of navigating through the cycle with resilience, ESG practices have become a major strategic choice for companies to seize opportunities and address challenges in this era filled with systemic changes in economic and social development. At a time when the market is challenged and growth is slowing, ESG may help companies spark faster development and find a balance between short-term returns and long-term value.
Editor’s Note: China Insight is a monthly column by WWD’s sister publication WWD China looking at developments in that key market.
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