According to Robeco, the fashion industry is confronted with significant challenges given its poor track record: social inequality (poor living wages), resource intensity (10% of the world’s greenhouse gas emissions and 35% of microplastics sourced back from textile) and a linear value chain based on the take-make-waste model, resulting in 20% of merchandise remaining unsold. Less than 1% of that is recycled into new clothing.
The Robeco fashion engagement equity (FEE) is the latest of several sustainable strategies (€18bn in asset under management) that include themes such as biodiversity and smart energy. Robeco, an asset manager known for its longstanding ESG focus, recently won the in the ESG category ahead of competitors such as Amundi, Pictet and Nordea.
A brand-new engagement strategy
Dora Buckulcikova, portfolio manager at Robeco, noted during an interview on 29 January 2024 that the new fund was launched on 23 October 2023. She could therefore not provide performance figures as Mifid, the Markets in Financial Instruments Directive, requires 12 months of performance history. Robeco stated that they just onboarded their first client in Luxembourg.
Robeco claimed that they have a unique strategy with an active engagement process which does not have any equivalent competitors. The asset manager is trying to make a difference in the fashion sector. In fact, the firm thinks that the closest comparable product is a fashion luxury exchange-traded fund (ETF).
Contrary to that ETF, Buckulcikova claimed that the FEE covers the whole lifecycle of the product, from sourcing to production, consumption, and the end of life in textile and shoes but also in cosmetics, jewellery, manufacturers and retailers.
Extensive and evolving engagements
The type of engagement will evolve to account for improvements or deterioration in their five-engagement focus (decent work, natural resource stewardship, circular model, stakeholder engagement and governance & policies) to assess the sustainability status of the firm (nascent, developing, maturing or advanced).
The extent of the engagement with smaller companies will be more targeted to avoid overwhelming the management. Robeco measures progress in years--not in quarters--as “change takes time.”
Buckulcikova thinks that their approach to combine their investment (margin, cost optimisation, return, etc.) and their sustainability (living wages, investment in sustainability, etc,) calls is unusual compared to competitors. Given the importance of Robeco in the sustainability space, it is not surprising that companies are ready to provide resources for these calls.
As an example, she said that problems within the supply chain that need to be addressed will be looked at with an integrated angle on sustainability and on their investment case. Robeco thinks this approach can make a difference in the fashion industry.
Engagement in the fashion value chain: a bottom-up approach
Yet Robeco’s preference for companies involved in the entire fashion value chain will not prevent it from investing in companies focusing only on the production of garments and fabrics. For instance, the engagement and sustainability objectives for these production companies (human rights, working conditions, toxic water, etc.) will be adapted to account for their specific challenges and will therefore be different from a company involved in end-of-life management (resale platform, recycling infrastructure, etc).
Buckulcikova particularly likes brands as these companies are typically responsible for the sourcing and the design of the product, the choice and sourcing of the fabric, the oversight of working conditions, the supervision of the marketing and the sales process and the end-of-life conditions. She also stressed that despite the extensive outsourcing, the ultimate responsibility (legally and/or morally) lies with the brand.
Questioned by Delano on the engagement impact of a small fund, Buckulcikova was positively impressed by the reaction of companies to their engagement questions. Since the launch, she has managed to organise meetings with about a third of the companies in the fund.
Buckulcikova explained that the portfolio owns companies at various stages of their sustainability journey, but she noted the absence of perfectly sustainable companies in this sector. Even the more advanced companies display shortcomings in their circular models, she noted, pointing out very linear systems. She explained that Robeco is not shying away from companies with very low ESG credentials, as it is where they could have the greatest impact.
What to do with a stock that is performing but does poorly in terms of engagement?
Buckulcikova thinks that all companies in the sector are under increasing pressure from regulation to disclose more and to improve. Robeco has a divestment strategy for companies seemingly doing exactly the opposite of what it is deemed as appropriate. She reiterated that the point of the engagement is to get the message across.
Compared to climate change, where debates are dividing opinion in the US, Buckulcikova believes that the challenges of her sector--the fight for fair living wages or the limitation of toxic waste and forced and child labour, to name a few--are more universally accepted.
Delano questioned Buckulcikova how her firm would tackle the uncomfortable situations whereby some children in countries such as India, Pakistan or Bangladesh rely on a job in the fashion industry to help their family survive. She responded that Robeco subscribes to the basic , which does not support child labour.
Strategy to beat the indices
The investment universe includes around 200 companies (such as Nike, Zalando, Essilor Luxottica, L’Oréal and H&M), which is filtered down to an actively covered universe of about 50-80 companies (qualitative and quantitative in-depth analysis). Robeco intends to maintain around 30-50 stocks in the fund.
In addition to the usual attractive long-term valuation upside based on company fundamentals (growth potential, competitive edge, moat, management quality, risks and financial profile), their analysis also assess progress in “thematic clusters” such as automation, digitalisation and premiumisation.
Importantly, Buckulcikova targets companies with a “thematic fit.” That means that they must be related to the fashion value chain in a meaningful way. For instance, an e-commerce company with a 5% turnover in apparel and 95% in digital devices would not align with a fashion engagement fit.
The article 8 fund, domiciled in Luxembourg, has two reference benchmarks. The first is an in-house built SDR strategic theme reference index covering the 200 companies in the industry; the second BM is the MSCI All Country World Index, which also include emerging markets. Therefore, high performance gaps between the stock and the BMs should be regularly expected by investors.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .