The world’s largest luxury fashion group LVMH and the world’s largest ultra-fast fashion group SHEIN may occupy opposite ends of the fashion spectrum, but both have their business models and ESG credentials under the spotlight.
While LVMH’s CEO Bernard Arnault basks in the glory of its role in the Paris Olympic Games (and the upcoming Paralympics) its Christian Dior business in Italy is under investigation for alleged labour exploitation and unethical practices.
The Chinese-owned SHEIN is also under intense scrutiny as it readies itself for an initial public offering (IPO) on the London Stock Exchange (LSE) that may value the now Singapore-headquartered company at £50 billion ($97 billion).
Advocacy and other groups accuse SHEIN of a multitude of sins such as human rights abuses (including denied accusations of allowing cotton tied to forced labour in China’s Xianjiang province to be used in clothing); its colossal carbon footprint; and copyright violations.
Godfather of the Olympics
The Olympics has certainly been a marketing coup for Arnault (pictured), who was dubbed the “godfather of the Olympics”.
LVMH-owned Chaumet designed the Olympic medals that were housed in Louis Vuitton trunks. Moët Hennessy wines and spirits were served in the hospitality suites, and French teams wore uniforms designed by LVMH’s Berluti. The opening ceremony outfits worn by Celine Dion and Lady Gaga were designed by Dior.
LVMH is proud of being a “family-run” company and four of Arnault’s children are on the LVMH board. Whether that sounds like best-practice governance for one of the world’s largest listed companies is, however, debatable.
Son Antoine, who is LVMH’s head of image and environment (a title suggesting the environment is a matter for the marketing department), has said LVMH’s involvement in the Games was not motivated by financial gain but a desire to boost the global influence of French culture.
But all this sounds a lot like “sports washing” given that just days before the Olympics kicked off the Italian Competition Authority (ICA) said it was investigating Dior (and another luxury brand Armani) for “possible unlawful conducts in the promotion and sale of clothes’ items and accessories”.
ICA said Dior and Armani “may have issued untrue statements about their ethics and social responsibility, in particular with regard to working conditions and compliance with the law by their suppliers”.
ICA’s action came after prosecutors in Milan uncovered Chinese-owned workshops on the outskirts of Italy’s fashion capital where underpaid workers, including illegal immigrants, made leather bags that were flogged off to Dior.
It has been widely reported that investigators said Dior paid its Italian subcontractors (who were Chinese-owned businesses) as little as €53 per Dior bag assembled, while Dior was selling the same style bags in stores for €2,600.
It was found Dior’s subcontractors had forced some workers to sleep in their factories and safety devices had been removed to allow them to operate faster. As a result, an Italian subsidiary of Dior was placed in judicial administration for one year.
Dior (whose global CEO is Delphine Arnault) claims it had earlier audited the offending suppliers but said they “evidently succeeded in hiding these practices”.
Reputational damage
It is also understood the Italian authorities may be investigating another dozen luxury brands for similar practices.
It seems the emerging business model is to buy products at “Made in China” prices and to sell to consumers at “Made in Italy” prices. This model relies on fashion companies not looking too hard to find things that may be hidden in plain sight.
However, with Italy accounting for just over half of global luxury goods production, these investigations could have serious implications for the reputation of the sector – and therefore its financial viability.
The Dior brand name, for example, is estimated to be worth about US$15 billion ($22.2 billion). The day may be coming when investors – and consumers – decide to ask why.
The recent 2023 Engagement Report of Europe’s largest asset manager Amundi provides some insight into LVMH.
The Paris-based Amundi says LVMH is “highly exposed to social risks such as poor working conditions, human rights issues, and living wage challenges due to its large and complex supply chains”.
But “like many luxury peers, LVMH has historically demonstrated limited disclosure on how it is addressing these social risks” and publishes “very limited reporting on supply chain KPIs”.
Amundi began engaging with LVMH on “living wage” matters for workers back in 2017 and became investor lead on LVMH with the investor coalition The Platform Living Wage Financials (PLWF).
But the lack of progress since then saw Amundi vote against the re-election of Bernard Arnault at LVMH’s 2022 and 2023 AGMs.
Surging SHEIN profits
SHEIN’s growth has been phenomenal. It reportedly more than doubled its profits to around US$2 billion in 2023 from soaring sales of US$45 billion on its e-commerce platform.
This success is putting on a lot of pressure on other leading fast fashion groups such as Spain’s Inditex (Zara) and Sweden’s H&M.
SHEIN uses artificial intelligence algorithms to identify trending images and designs on social media and websites. It then sends the results of this scanning to supplier factories that do small production runs of chosen products.
If customers respond well SHEIN identifies a supplier from its 5400-strong network of mainly Chinese contract manufacturers able to produce enough cheap garments to satisfy the actual demand.
But Amnesty International UK claims SHEIN has a “broken business model” where there is “little transparency and accountability for the pay or conditions endured by workers”.
Amnesty says “there is a lack of public disclosure and transparency around the sourcing and traceability of raw materials used by contractors in SHEIN’s supply chain”.
The World Benchmarking Alliance’s human rights scorecard below is typical of the sort of (poor) ratings SHEIN receives from advocacy groups.
Badge of Shame
Amnesty says it is “deeply troubling that a company with questionable labour and human rights standards and an unsustainable fast fashion business model could be set to reap hundreds of millions of pounds via a sale of shares and a listing on the LSE”.
“Rewarding SHEIN’s current methods via a flotation would be a badge shame for the LSE, the bankers helping bring it to market, and any investors set to profit from it,” Amnesty says.
SHEIN had been planning to list on the New York Stock Exchange (NYSE), but after strong opposition from US lawmakers and advocacy groups, it has apparently decided to seek an LSE listing instead.
The LSE is desperate to attract new listings like SHEIN. To help it do so, the UK’s Financial Conduct Authority (FCA) has just introduced new LSE listing rules.
These include easing restrictions on listing with dual-class share structures (DCSS) or weighted voting rights; no longer requiring companies to have shareholder votes on significant and related-party transactions; and removing the need for a company to have a “controlling shareholder” agreement.
The UK Sustainable Investment and Finance Association says “the notion that certain companies with particularly poor human rights practices and sustainability credentials could choose London as a listings destination will not help to make us more competitive in the long run”.
According to SHEIN’s 2022 Sustainability & Social Impact report, in September 2022, the company completed a baseline study of its 2021 emissions and committed to reducing absolute greenhouse gas emissions across its entire value chain by 25 per cent by 2030.
However, asset owners and managers who may be interested in SHEIN’s IPO should query this commitment. In 2022 SHEIN’s absolute emissions soared 52 per cent to 9.17 million tonnes CO2, reflecting the huge growth in production volumes.
While SHEIN may be able to deal with its scope 1 and 2 emissions, more than 99 per cent of its emissions are scope 3, generated by its contract manufacturers and by transporting products to customers.
Polyester poser
While there is a lot of focus on SHEIN’s cotton use, almost two-thirds of SHEIN’s garments are actually made from polyester, a fabric that is derived from petroleum (i.e. fossil fuels).
SHEIN says it intends to wean itself off virgin polyester through plans “to transition at least 31 per cent of our polyester-based products to recycled polyester by 2030 with the expectation of saving three million tonnes CO2e over the next five years”.
Currently, SHEIN’s contract manufacturers only use 1 per cent recycled polyester. And it is worth noting here that ‘recycled polyester” is not produced from waste polyester.
According to the Textile Exchange’s 2023 Materials Market report, 99 per cent of recycled polyester is actually produced from PET plastic bottles (that are, of course, also derived from petrochemicals).
Prospective investors should also note SHEIN – and its supply chain – will have to vigorously compete with the global beverage and other companies to secure the large quantities of PET bottles it will require.
Looks like another sustainability faux pas in the making.
