Let’s start by asking, what does SROI stand for? The answer is “Sustainability Return on Investment”. It’s a method of measuring the impact of an investment or project on society. It will enable brands, retailers, and their Tier 1-5 manufacturing partner stakeholders to calculate their economic, social, environmental, and manufacturing benefits when related to investment and assigns a monetary value to those benefits to determine if an investment is achieving its intended objectives.
The metrics for sustainability return on investment (SROI) typically but not exclusively include:
- Economic benefits that result in reduced operational costs, increased revenues coming from existing and new markets, lower cost of operations, and increased productivity and operational efficiency compounded when applied across the entire value chain.
- Social impact introducing new measures to improve employee retention, satisfaction and engagement, and relationships with partner stakeholders, shareholders, and consumers. Enhanced brand reputation providing greater loyalty and increased spending. Increased trust across all stakeholders.
- Environmental impact, the overall reduction in greenhouse gas emissions (CO2 equivalent), is linked to energy consumption reductions across the entire value chain, including a planned reduction in waste materials and repurposing, lower energy cost of oil, electricity, gas, and reduced water consumption.
- Regulatory compliance and adherence to environmental, social, and governance (ESG) regulations and standards require brands to report on the scope 2 and 3 emission goals. Extend to their stakeholders, who will support brands, and retailers in delivering scientific impact measurements, enabling their scope three objectives.
- Financial return, increased use of digital platforms delivers greater efficiency and lower costs, lower risks linked to the brand’s stock price valuations, increased investments from new environmentally focused investors, higher product price points, and greater customer loyalty.
So, what’s driving SROI, and why is it so important for brands today?
Brands and their collective value partners have little choice but to deliver environmental and sustainability strategies. They find themselves under tremendous pressure from consumers, governments, NGOs, influencer channels, green-driven shareholders, media coverage, and legal enforcement to state just a few of the many critical drivers.
No more greenwashing
The UK’s Competition and Markets Authority (CMA) has now published its green claims code, checking whether brands’ and retailers’ environmental claims are genuinely green or simply more marketing spin! Today the brand is responsible for the accuracy and evidence of their environmental claims, and the brand is accountable if that evidence is lacking.
The UK CMA has so far opened up investigations into three fashion businesses to scrutinise their ‘green’ claims: ASOS, Boohoo and Asda. The point of contention? That the criteria used by some of these businesses to decide which products to include in these so-called ‘green’ collections may be lower than customers might reasonably expect from their descriptions and overall presentation.
For example, some products labelled ‘green’ may contain as little as 20% recycled fabric. Also, when using recycled materials, brands need to consider the true climate cost of synthetic fibres: including the use of fossil fuels and oil to produce the chemicals. Then there is the issue of processing, this is an area which very few people understand when it comes to the impact on the environment. And on top of that there’s the use and disposal of garments made from polyester, where microplastics are released into the environment when clothes are washed, not to mention the incredibly lengthy timeline for decomposition. The problem with microplastics is that they do not readily break down into harmless molecules. Plastics can take hundreds of years to decompose, and can damage the environment, including animals and humans.
The ‘devil’ really is in the detail when it comes to standing by the identification of environmentally friendly products. To be able to confidently declare the sustainability profile of a product, the brand must measure and reduce the energy resources used during the processing time, from the farm to fibre spun into yarn, from yarn to woven into materials, and from pre-treatments to dyeing and finishing. That’s before we cut the materials, which is another stage where the industry produces a vast amount of waste! Approximately 15%-20% of the material goes into the bin after cutting, relative to the product type, design silhouette, and product size ratios.
Imagine if we could utilise this waste in a more productive way that would require less processing and create new uses. Well, the fact is that we can! And the reality is that we must, since regulations are being introduced, tightened, or expanded in many different regions.
The French Decree 2022-748 will eventually apply to all fashion brands that sell garments, footwear, and home textiles in the French market. It will be implemented for companies with a turnover above €50m from January 2023 and phased in for smaller companies during 2024 and 2025. The law aims to inform consumers about the environmental impact of their purchasing decisions. Last year, France also banned companies from destroying leftover stock under an ‘anti-waste’ law.
In the US, the Garment Worker Protection Act (GWPA) was strengthened in October 2022, ensuring that retailers cannot use layers of contracting to avoid liability. It also prohibits paying garment workers by the “piece”, thereby eliminating a significant obstacle to workers being paid minimum wage and protecting their health and safety.
“No industry is rifer with employment violations than the garment industry,” the GWPA website says. “Los Angeles has the country’s highest concentration of garment industry workers. It’s beyond time that clothing manufacturers worldwide use standard approved methodology for time study and pay a fair living wage within that country making garments. Introducing these changes helps to protect the brand or retailer from reputation damage! The world’s largest clothing retailer, Inditex, signed up with the International Labour Organisation (ILO). The group’s CEO, Óscar García Maceiras, announced the move recently (January 2023) meeting in Geneva with ILO Director-General Gilbert F. Houngbo.
Obstacles to sustainable initiatives
Given the fact that brands, together with their value chain partners, will need to come in line with these challenging drivers, it makes perfect sense for all parties to work together on SROI strategies that deliver benefits for all and publish their ESG results – entering these strategic projects with SROI front and centre of the plan! Sadly, there appears to be some misconception at the board, and managerial levels that being sustainable will cost businesses money and damage their bottom lines. We would argue strongly that this is not the case. Instead, the reality is that ‘most’ brands, retailers, and their manufacturing partners simply do not know ‘how and what to measure’ when delivering on SROI objectives.
Defining the journey ahead
There are so many critical reasons why sustainable business practices need to be implemented. Examples include increasing market share and reputation, becoming agile and fast, complying with the raft of global legislations, and continuing to attract (lower risk) investment in the brand from investors that are demanding minimum ESG requirements. These drivers are not isolated to fashion and apply across all industries. Businesses must start the process using a detailed SROI project, transformation process objectives linked to the end-to-end stakeholders, introducing new process and impact measurements, measuring and mapping the desired outcome, cost reduction objectives, project timelines and deliverables, benefit statement, and certification of successful execution.
SROI and its calculations are essential for all ESG-related projects. The SROI analysis considers the costs and all benefits of a sustainability initiative, both tangible and intangible benefit calculations, to arrive at a comprehensive and holistic evaluation of the investment.
To simplify our discussion to fit with the ‘column inches’ for this article, we’ll focus on cost savings and increased revenue generation, tangible or intangible, when creating an SROI.
Tangible financial benefits:
- Cost savings through alternative energy efficiency measures related to the downstream brand, retailer headquarters, offices, distribution methods, warehousing, packaging, selling, returns, and waste reduction.
- New digital process introductions across the value chain will reduce resources of ‘all’ types, including labour, transport, energy, water, dyestuff, chemicals, etc.
- Improved relationships with supply chain stakeholders, such as all Tier 1-5 partners, investors, and customers.
- Reduction in less sustainable materials, reduction in physical sampling, reduced waste materials, and ability to repurpose waste materials more cost-effectively, resulting in waste diverted from landfills.
- Increased labour efficiency and quality.
- Move towards real-time tracking across the entire supply chain from raw materials to finish products, resulting in improved sourcing linked to smaller orders with lower risk to the brand.
- Reduction in expensive business travel and associated expenses relating to non-critical travel. Reduction in logistics cost related to fewer physical samples that need to be shipped. Reducing travel can be supplemented by virtual meetings, digital approvals, and certification.
- Reduction in administrative overhead costs, delivered from interconnected digital ecosystems, sharing common data, helping to reduce multiple administration tasks and workflow staging throughout the end-to-end value chain.
- Brands and retailers should consider introducing new digital technologies and using assets supporting both downstream (marketing & sales) and upstream (farm to manufacturing) efficiency benefits.
- Education, introducing new methods that support design development and manufacturing communities on best processes and adoptions linked to environmental and sustainability practices. All of which will enable stakeholders to make the best-informed decisions resulting in more significant benefits.
Intangible financial benefits:
- Enhanced brand reputation and customer loyalty, with consumers knowing that your brands are addressing environmental issues.
- Walking the sustainability talk will improve your business’s public image and reputation; consumers trust companies that are ethical, reliable, and responsible for the environment.
- Increased employee engagement and motivation. Younger generations have strong ethics regarding environmental issues and will only want to work for companies taking action rather than marketing greenwashing!
- Improved community relations, trust, and social impact. Delivering transparency and sharing the business SROI strategies, projects, and results with the broader community, partners, and consumers will help to build trust and loyalty.
- Reduced exposure to legal and regulatory liabilities. Does the business want damaging publicity regarding bad environmental practices? It’s simply not worth the risk; it takes years, even decades, to build a good reputation and only a few headlines to destroy it. We have seen many examples of these in recent times!
- Enhanced organisational culture and values. Brands and retailer boards and their management teams should formally communicate the company’s mission, and provide evidence of the steps it intends to take as part of its environmental and sustainability strategies. Brands and retailers should be transparent, and communicate how they intend to measure and report on the results of their actions.
It’s fair to say that the fashion industry has already taken steps regarding environmental sustainability. Some are leading the charge, whilst others are being pushed into acting. The broader world industries are moving quickly and deeply regarding addressing the challenges. They respond to the many drivers we’ve listed in this article. It’s encouraging to see that the fashion world is following in its footsteps and is slowly becoming greener. Contrary to the negative beliefs that sustainability will hurt the bottom line, the reality is the opposite and will uplift profitability from tangible and intangible benefits described in this article.
Now that we’ve established ‘what SROI’ is and ‘why’ we need it, in our next article(s), we will discuss ‘how’ and ‘what’ is measured to generate meaningful SROI.