What do new sustainability rules mean for the fashion industry?

Sustainability legislation is showing no sign of slowing down. As many as sixteen pieces of legislation relating to fashion and textiles were under discussion in late 2023 in the EU alone, with many of these regulations now starting to come into force¹. The approach taken by lawmakers to new regulation in this area is holistic in nature, and ‘seeks to target the entire fashion value chain, from product design through to manufacturing, sales and marketing’. By the end of the year, self-regulation of sustainability is no longer likely to be viable. International legal frameworks will prescribe action on ‘everything from textiles production and chemical use, to recycling and waste’.²

From a contractual perspective, the direction of travel is towards a much more collaborative and risk sharing approach between customers and suppliers. It will no longer be sufficient for brands to seek to contract out of their responsibilities by pushing the risk of non-compliance onto their suppliers. Legislative developments will require both parties to act and to remediate where needed.

There is no doubt that the industry has made strides in addressing its sustainability credentials, and there is certainly desire for change, but, with the clock ticking down (both from a regulatory and climate perspective) – the time is now for regulators to provide more detailed and prescriptive rules for brands to follow.

In this article, we take a look at three areas of focus for new sustainability regulations and consider the impact that these new rules are likely to have on brands across design, supply chain and marketing.

Product design

A product’s design stage is where the material, dye and other components are selected, and this is when a retailer or manufacturer is best equipped to make environmentally conscious decisions about the overall environmental impact of that product. This approach is becoming more widely known as ‘eco-design’ or ‘sustainable product design.’

The EU is leading the way in the area of sustainable design and has sought to capitalise on the impact that these early product decisions can have in its new Eco-design for Sustainable Products Regulation (the “ESPR”). The ESPR came into force on 18 July 2024 and is set to come into full effect by 2025. Given that two of the four major fashion capitals are based in the EU (Milan and Paris) and due to the fact that many suppliers to global businesses operate out of the EU (in countries such as Italy, Spain, Portugal and Turkey) – it is not surprising that improving the sustainability of products in general is high on the European agenda. The new ESPR forms part of the EU’s European Green Deal and the Circular Economy Action Plan, and its scope is wide. Whilst the regulation will naturally impact EU-based businesses, it will also impact those outside of the EU in a range of circumstances. The scope of the regulation applies to those that sell, supply and distribute products into the EU, as well as online retailers offering products for sale in the EU.

In summary, this regulation sets minimum design standards for all individual products sold within the EU. Its aim is to significantly improve the circularity, energy performance and other environmental sustainability aspects of products placed on the EU market. As contemplated by the regulation, a ‘sustainable’ product is one that uses less energy, lasts longer, can be easily repaired, has parts that can be easily disassembled and put to further use, contains more recycled content and has a lower carbon and environmental footprint over its lifecycle. When designing products, brands should therefore consider each of these aspects and consider how it might adapt the initial specification to better meet these requirements.

Replacing the current Eco-design Directive 2009, the EU Commission advocates that the ESPR establishes a framework for setting eco-design requirements for specific product groups. These rules will be decided progressively over time, either on a product-by-product basis, or horizontally, on the basis of groups of products with similar characteristics. This flexibility enables the regulation to adapt with technological and product advances and helps to ensure as many products as possible are captured within the regulation’s remit. Brands should ensure that they keep up to date with these product categories as the law evolves. It will also be important to stay ahead of legal sustainability requirements and plan ahead to secure materials and resources to meet them.

The ESPR should encourage companies to bring more sustainable products to the EU market, whilst also boosting the competitiveness of sustainability frontrunners. We should start to see truly sustainable products outperforming their less “green” equivalents, with the legislation in combination with eco-conscious consumers driving market change.

Supply Chain

From a supply chain perspective, the key legislative development coming out of the EU is the new Corporate Sustainability Directive (the “CSDDD”) that requires in-scope companies to conduct human rights and environmental due diligence on their operations and value chains, to prevent/mitigate those risks, provide appropriate remediation and report publicly on their efforts.

The scope of the CSDDD is confined to the largest EU companies and to non-EU companies doing significant business in the EU. In practice, however, the CSDDD will have a much broader impact, largely because companies in scope will have to cascade new, higher standards of human rights and environmental due diligence to their suppliers in order to comply. With the CSDDD bringing a renewed focus to the issue of harms to people working in supply chains, we also expect to see sophisticated fashion brands (particularly those actively marketing their ESG credentials) taking steps voluntarily to align with these standards to mitigate risk and protect brand value, even if not required to as a matter of regulatory compliance.

Whether affected directly or indirectly by the CSDDD, the standards of human rights and environmental due diligence required will be a significant step up. See our briefing here for a more detailed run down of the regulation, but the headlines are as follows:

• Due diligence will need to be continuing and dynamic (i.e. responsive to changes in circumstances) and the effectiveness of due diligence will need to be monitored regularly - it is not a 'once and done', pre-contract exercise.
• Due diligence must be 'risk-based' - companies need to identify, prioritise and address the most severe risks by taking 'appropriate actions' - the more severe the risk, the higher the expectations of a company to act. Risk and severity are assessed from the perspective of those harmed, not from the perspective of the company or brand.
• The obligation to prevent/mitigate is not limited to an adverse impact that a company causes directly - companies are expected to use their influence to prevent and mitigate adverse impact caused by a business partner. Influence is broadly defined and may require companies to invest in supplier capacity building, improve their own procurement practices or collaborate with other buyers and stakeholders.
• The obligations to provide remediation for harms caused, means remediation for affected third parties - not remediation as between the parties.

Buyers will need their suppliers to meet these new higher standards for human rights and the CSDDD requires buyers to seek contractual assurances from suppliers to that effect. However, the CSDDD also makes clear that contract clauses should reflect a fair allocation of human rights risks and responsibilities between the parties, and that contractual assurances - by themselves - will not be sufficient to discharge the due diligence obligation. Nor will off-the-shelf supplier audits. Any contractual assurances must be supported by appropriate measures to verify compliance and while companies can use third party audit services, appropriate steps must be taken to ensure they are effective in practice.

The approach taken to negotiating human rights, environmental and related clauses in supply contracts has historically been (as in many commercial contexts) to use contracts to shift risk and cost down the supply chain. However, brands need to be increasingly wary of approaching things in this way – and not just because the CSDDD warns against trying to delegate compliance with human rights standards to suppliers. A 'one way' arrangement in which all responsibility and risk in relation to human rights falls on the supplier may in fact increase, not reduce, the buyer's risks if suppliers are incentivised by contracts to hide serious human rights issues that later result in adverse press coverage, reputational damage and disruptions to supply.

The new EU Forced Labour Regulation (FLR) is also an important consideration, (read more on this in our article here). The FLR applies to companies regardless of size and will prevent goods being placed on the EU market where forced labour has been used at any point in the production lifecycle. Against that backdrop, brands require much more visibility of human rights issues in their supply chain to get ahead of and address any forced labour issues.

For all these reasons, the focus of the contracting parties in a supply chain should increasingly be on how to how they will work together, on an ongoing basis, to identify, prevent, mitigate and remediate harms to people (rather than on who is to blame). Deeper and more regular engagement with suppliers will have cost implications for buyers but is ultimately a much better route to supply chain resilience and profitability.

Marketing

As we have explored in previous articles, (such as this one on the CMA’s open letter to the fashion industry here) greenwashing remains a priority for both consumers and regulators, with claims of many fashion companies seen to be vague and misleading. The scrutiny of the issue (as with many other consumer law focussed issues) has intensified of late, as businesses in the UK are now facing tougher enforcement measures for non-compliance. The CMA says, ‘consumers are increasingly demanding products and services which minimise harm to, or have a positive effect on, the environment. It is essential that they can make informed choices based on environmental claims that they can trust.’ Under the new Digital Markets, Competition and Consumers Act 2024, brands can be fined up to 10% of their global annual turnover for breaches of consumer law (see our full article on this new law here). These powers are likely to (in the first instance) be reserved for the most serious consumer law breaches – and greenwashing likely falls into that category.

The perceived failure of brands to provide sufficiently clear green claims is perhaps not surprising, given that legislation to date has been somewhat lacking in the practical guidance it offers to brands. Our previous article explored how the CMA might build on its current Green Claims Code and we suggested that the CMA provide ‘businesses with specific examples and scenarios as to how green claims should be approached so that ‘best practice’ is clear.’ It is good to see then, and fashion brands should be sure to welcome, the new practical guide issued by the CMA that offers such practical guidance - tailored specifically for the fashion sector. The guide draws on lessons from the CMA’s investigation into certain fast fashion retailers and is based on the UK’s Green Claims Code. The guide aims to drive compliance with consumer law and create a level playing field for all fashion businesses. The ultimate aim is to ‘make sure shoppers looking to buy green can trust the claims that they see.’ As well as setting out the key principles for brands to follow, the guide includes helpful examples of how brands can implement these in practice.

The full guide can be accessed here.

In the EU, the new Green Claims Directive similarly seeks to curb greenwashing by requiring sustainability related declarations and statements to be specific, backed by evidence, independently verified and communicated clearly. It is expected that the finalised Directive is to be agreed and adopted in early 2025. For more information on the new EU Green Claims Directive, please refer to our article here.

Looking ahead…

To be effective, a brand’s regulatory sustainable competence should be a priority for the C-suite and senior management and should be successfully integrated across all business functions. Higher standards need to be implemented across the supply chain and investment will be required in personnel and infrastructure to ensure that brands keep pace with the law. New legislation addressing these issues should empower brands to make better informed choices in terms of the sustainability of the product lifecycle and should help to ensure that consumers are not mislead.

¹ Business of Fashion: The Year Ahead, 4 January 2024 (BoF)
² BoF