“Everyone deserves a more equitable and sustainable future, and I am confident that SHEIN can become a catalyst for that transition.”
Translation: Original comment published in Finnish on 1/4/2024 at 7:20am EET
The title is a quote from the CEO of Chinese-owned ultra fast fashion company Shein. Shein announced at the end of November that it is aiming for listing in the US, possibly already in 2024. Shein is interesting to traditional investors thanks to its significant market position and growth (estimated figures, no public reporting) and appalls those who advocate responsibility. We decided to examine potential ESG risks and opportunities for those who are considering investing in Shein.
However, we would point out that the information concerning Shein is still incomplete, because little is known publicly about the company.
Shein is an online store that sells products from over 5,000 subcontractors under its own brands
Shein is essentially an online store selling products manufactured by over 5,000 subcontractors under Shein’s own brands. So Shein does not have its own factories and the subcontractors are SMEs Geographically, the subcontracting chain is assumed to be mainly located in China, but based on Shein’s reports, we conclude that it is also located in Africa.
Human rights risks and risks associated with working conditions and the likelihood of their materialization are relatively high. From the point of view of working conditions and human rights, SMEs in China or developing African countries are quite difficult to control for any global company.
One of the biggest business challenges from a human rights perspective seems to consist of possible further investigations and sanctions in the US
From a human rights perspective, a major challenge for the business currently seems to be possible further investigations and sanctions on US soil. The Uyghur forced labor act implemented in the US, means, in summary, that products produced by forced labor are banned on the market. The risk that Shein would have to increase the transparency of its subcontracting chain, even modify the subcontracting chain or remove certain products from the US market is theoretically present. In fact, Shein has systematically denied the use of forced labor and said that it is committed to international human rights treaties. The company also reports that it audits subcontractors and requires its subcontractors to, for example, buy their cotton from other countries than, e.g., China.
Fashion trends are identified with AI and new products are manufactured at record speed
Shein says it is developing a production model that reduces waste. AI identifies the latest fashion trends, and initially only 100-200 pieces of a product is manufactured. If sales works, a partner is quickly sought in the huge subcontracting network that will produce the same product with high volume and a limited time frame. How this affects the quality of the product or what other criteria than price are used to make the purchase remains unclear.
From an environmental point of view, the road to become a pioneer in the industry can be bumpy
In its products, Shein emphasize that it will increase, e.g., the amount of recycled polyester in its materials and that it is committed to develop various cooperation with different parties. More specifically, one of Shein’s measurable targets is that 31% of the polyester will be recycled by 2030. According to Patagonia, in fall 2023, the level for Patagonia was already over 93% measured by the weight of the material. The use of polyester and the target levels alone are not enough to describe the environmental aspects of products, but this may reflect the journey that Shein has to complete if the company wants to be a pioneer.
It is still quite typical in the textile industry that global companies disclose, e.g., their greenhouse gas emissions, as well as biodiversity and resource efficiency plans. From the investor’s point of view, interest increases in, e.g., emission analysis because broader emission targets mean either investments or changes in the operating model. In addition, they potentially also have cost and revenue impacts depending on the company’s operating model. However, in Shein' case, emission reporting does not comprehensively comply with international standards, but selectively, so getting an overall picture of the emissions is challenging. Shein says that it has set so-called Science Based Targets, which in practice would mean extensive measures in the value chain. However, in a closer examination, Shein’s objectives are not official SBT targets, so it is impossible to make an assessment of the accompanying measures and their impact in this respect as well. Concreteness in the areas of biodiversity strategy and resource efficiency (recyclability, reduction of waste) remains obscure for the time being.
There are plenty of legislative initiatives that will change the industry in the EU
EU's Green Deal has brought legislative initiatives affecting the fashion industry, but the exact impact and timing of these is still obscure, although a direction has been given. Initiatives include, e.g., banning the export of textile waste, increasing recyclability, banning chemicals, increasing product durability, etc. Not all legislative initiatives are fully clear, and the industry has also interpreted that the legislation would not full apply to online stores operating outside the EU. If they did, we believe Shein would have significant risks related to them, the management of which would entail costs, and even changes in the offering and business model. Shein has not publicly stated what the change would mean for them.
Responsibility legislation can shape Shein's playing field and influence the result
EU has introduced the so-called Corporate sustainability due diligence, which would mean that large companies could be sanctioned by up to 5% of their global revenue if they were convicted of violating human rights or environmental due diligence obligations in their value chain. According to current information, companies outside the EU would only come under the legislation a few years after EU companies. In our view, this represents a significant risk for Shein, as the responsibility work is in its initial stages and the scale will be huge. The subcontracting chain is very challenging due to its size and location and it would not be surprising if risks related to environmental or working conditions were detected. However, implementation of laws takes time, and with a good funding base and systematic work Shein can fix many things over time if it wishes to do so.
Many investors are waiting for Shein's IPO. In the European region, responsibility-related legislation brings significant business risks to the company over time, but its markets are primarily outside Europe, where legislation and operating models associated with responsibility are not as far-reaching. In theory, US legislation poses a significant risk to operating on the US market, but it is difficult to assess what actually will happen. There are clear ESG risks in the business but it is difficult to asses the business impacts at this stage.
Shein has gained a significant market position as a global player, especially in Europe, the US and South America, and acts as a catalyst for competition in the industry. We'll let everyone judge for themselves whether it can also act as a catalyst for a sustainable future.