A Regression In Reporting Requirements And A Battle For Manufacturing Capacity: This Week In Fashion Technology

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On Monday, the European Union’s executive body released an updated directive covering corporate Environmental, Social, and Governance (ESG) disclosures. This has now reached the “adoption” stage, which will likely – but is not guaranteed to – be followed by phased, progressive implementation and enforcement across the EU bloc.

These reporting requirements have been a long time in the making, and were intended to be something of a catch-all set of regulations that pull in both the environmental and the ethical sides of ESG / CSR.

There are valid arguments to be had about whether bundling together state-level policies against climate change and human rights abuses will see the two spheres of action complement one another, or have a detrimental, dividing effect. But given the short timelines for action in both cases – and the inextricable link between climate policies and humanitarian efforts in the regions most immediately affected by climate change – this multi-pronged directive had been seen as potentially the best tool Europe has for holding wildly different companies and business models accountable to the same set of standards.

In a surprising turn, though, the adopted directive has been markedly watered down in a way that undermines that hope for universality of regulation and a evening of the playing field between “sustainable” businesses and organisations that have chosen, instead, to game the pre-existing rules and pay the nominal fines.

Compared to the draft rules that were released in June – which promoted the introduction of enhanced, mandatory disclosures and provisions in key humanitarian areas like fair wages and collective bargaining – the adopted version of the directive shifts these and other reporting requirements, across both spheres, to selective, voluntary disclosure.

From climate and biodiversity to transition plans and worker rights, instead of government explicitly telling organisations what they must report on, the onus has now been shifted to business to use their discretion to determine what they should report on.

This freedom feels at odds, frankly, with how “regulation” has been spoken and written about – including here on The Interline – for the last few years. And while there’s a charitable reading of this switch (it may help to onboard a wider variety of businesses, or reduce the burden of administration in areas that are not universally applicable) there’s also a distinctly uncharitable one.

If we’re allowing each company to determine which areas of disclosure are “material” to their business, are we not just kicking the compliance can even further down the road?

As with many things in sustainability’s realm, there’s a tension at play here – ambition and aspiration versus practicality.

On the one hand, this watering down represents a step back in segment-level accountability and undermines the ability to directly compare the footprint and openness of one brand to another.

One brand, for example, might decide that biodiversity is non-material to them because they don’t believe the observable stages in their supply chain have a negative impact on the ecosystems around them, while they’re proud of the steps they’ve taken to help uplift local communities and enhance worker protection. At the same time, another brand determines that biodiversity is an area they need to report, because they’ve measured and started to manage their impact, but living wages isn’t.

For the consumer – and for the enforcement bodies – we can easily foresee a problem in separating “material” from “manageable”. Brands will face the temptation to disclose the areas where they are making the most pronounced progress, rather than the ones where they have the most profound impact.

On the other hand, there’s the uncomfortable idea that cut-and-dried, universal disclosure is simply too far for the average fashion brand to move in the time required. It’s become an open secret at industry events, and in policymaking circles, that fashion regulations will force a not-inconsiderable amount of fashion companies out of business – primarily because the gap from current supply chain visibility and the level needed to make accurate disclosures on multiple fronts is just too vast.

Is it better, then, to have businesses successfully reporting in a self-selected set of areas, or failing to report across a standardised group?

It’s important to note, too, that the European Commission as already started to justify its broader focus on materiality, citing consultations with the International Sustainability Standards Board (ISSB), which recently approved global norms based on materiality as a foundation. The commission expressed that there is now a significant level of alignment with ISSB, ensuring that companies adhere to standardised reporting guidelines and avoid duplicative efforts.

Even with that research backing, though, the materiality provision still seems wide enough in its interpretation that we probably can expect to see a mismatch of what companies will deem material and not, depending on what they feel like sharing. Whether this serves fashion’s urgent need for collective action in both spheres encompassed by this directive remains to be seen, but this week has certainly shown a different face on sustainability legislation than many expected to see.

We also won’t have long to wait before the next stage. The commission intends to release the final proposal by the end of August. And its form is now essentially fixed, because the European Sustainability Reporting Standards (ESRS) is a delegated act, and it cannot be modified by the EU Council or the European Parliament once presented by the commission – only be accepted or rejected as it is.

Our prediction, though, is that,= the commission’s approach will prove to have been excessively cautious in seeking to reduce the reporting burden. Fashion urgently needs to halt and then reverse its global carbon output, but without standardisation across monitoring and reporting, measuring progress towards that goal will become difficult – if not impossible.

But this is life on the frontier of sustainability (and technology for that matter, more on this next), where there are multiple factors at play and regulators have to try and strike a perfect balance to not curtail economic success, but also to make strides towards a better future for the environment.

The same can be said for the saga that is taking place between China’s top e-commerce giants, Shein and Temu. In the latest instalment of the pair’s rivalry, Temu has accused Shein of anti-competitive practices, taking the matter to federal court in Boston, and citing that Shein has been “forcing exclusive dealing arrangements on clothing manufacturers” and threatening them with fines and penalties if they worked with Temu.

These are strong-arm tactics for two global giants, and they reveal something deeper about fashion’s supply chains: manufacturers that do hit the right efficiency and sustainability targets stand a chance of becoming betting chips in a pitched battle for the manufacturing capacity ultra-fast fashion brands (or retailers with fast fashion business units) need to remain competitive.

As a refresher, both Shein and Temu use drop shipping: a supply chain method where the seller forwards orders and shipping details to either the manufacturer or a fulfilment house, who then directly ship the goods to customers. This business model relieves businesses of the burden of ensuring product quality and holding inventory, and requires minimal upfront investment, enabling companies to concentrate on marketing and business growth. This is something that Shein and Temu have been doing relentlessly in the US, with Temu’s expansion going particularly well. The e-commerce platform became the most downloaded shopping app on the US App Store in September 2022, and its parent company set up a base in tax-friendly Dublin, as a beachhead into the EU and UK markets, in May 2023.

As they battle it out, the two titans appear to be mirroring one another:  both companies taking steps to distance themselves from China – given that some US lawmakers are advocating for a ban on Chinese apps. While Shein’s suppliers and back offices remain in China, the company has shifted its headquarters to Singapore, and Temu now identifies itself as a Boston-based company. This is important to mention because it’s unclear whether China, at the government level, will become involved at all, as neither company sells directly to China – as was the situation with Alibaba and Temu’s sister company, Pinduoduo.

In that case, vendors were asked to sell exclusively on Alibaba’s platforms and not on Pinduoduo, resulting in a significant antitrust (anti-monopoly) probe by the Chinese government, which led to a record US$2.8 billion fine for Alibaba. China also then proposed an anti-monopoly law to regulate the power of its internet commerce giants. With the ongoing disputes between Beijing and Washington, it will be fascinating to see how this evolves from a political standpoint, too.

Alongside rivalry, the scramble for suppliers comes alongside the US ban on the importation of products using cotton from the Xinjiang province (where human rights violations against Uyghurs have been routinely alleged to have occurred) due to the Uyghur Forced Labor Prevention Act, which grants US border authorities increased authority to prevent goods associated with alleged forced labour in China from entering the country. With the availability of “safe-sourced” cotton becoming limited, Shein is evidently taking proactive measures to gain an advantage over Temu in the American market by securing as much of the approved cotton supply as possible.

To make matters even more overwhelming, TikTok just entered the American e-commerce conversation, too. The short-form video platform plans to introduce an online retail store to the US in August, which will offer made-in-China goods to American shoppers. And with their infrastructure – that enhances the shopping experience through personalisation, live streaming and beloved content creators – they could come out as the most popular shopping app, which could, in turn, lead them to become high bidders for locking out Chinese domestic manufacturing capacity.

And to provide some idea of the scale of what that might mean, through the so-called “infinite loop” (the idea that a user will enter, exit, re-enter, exit, and re-enter as often as needed before purchasing) TikTokers are 1.5 times more likely to make immediate purchases based on what they discover on the platform compared to users on other platforms.

This has created a new challenge for traditional, US-based online marketplaces like Amazon – who are competing by creating value through ultra-speedy last-mile delivery. On Monday, Amazon announced that it will “double the number of US same-day delivery facilities in the coming years”. Same-Day Delivery is currently available on millions of items for customers in over 90 US locations.

Here’s another dichotomy: while there’s a growing trend towards embracing more sustainable practices in fashion, the desire for lightning fast delivery has escalated. As The Interline recently explored, this is possible though technological advancement – including some powered by artificial intelligence. But while last-mile delivery improvements might provide a quick win – offering immediate gratification for the average impatient customer –  the rest of the supply chain should not be neglected. The temptation to do so is high as, unlike last-mile delivery, altering and improving the broader supply chain will likely take a considerable amount of time, effort, and investment.

In the pursuit of achieving market dominance, a lot has already transpired. From the Shein and Temu manufacturer controversy, to allegations of hazardous workplace conditions and mistreatment of employees at Amazon, and TikTok’s reputation being questioned for potential national security risks in the US – it seems that the e-commerce landscape has become a place where norms and standards are increasingly being challenged, and questionable tactics appear to be tolerated. Just as with the EU’s disclosure reporting, it seems that the perfect balance between commercial growth, ethics, and good environmental practices is still to be struck.

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