This Insights paper was first published on ampcapital.com.au and represents the views of AMP Capital's investment management team.
 

The spending power of the pivotal and perhaps most talked about generation in history – the Millennials – could ultimately put an end to the modern slavery endemic in the clothing industry.

But it’s the investors in apparel and fashion companies that are paving the way for change by shining a light on supply chain transparency and sustainable practices, according to Kristen Le Mesurier, AMP Capital’s Responsible Investment Leaders (‘RIL’) Balanced Fund portfolio manager.

While consumer trend research shows the eventual impact of Millennials’ spending habits will be significant in this area – particularly in emerging markets, where 85 per cent of the world’s Millennials actually reside – a transition of wealth from the Baby Boomer generation still needs to take place before the broader consumer movement is really felt.

Investors, meanwhile, will push these companies to meet the standards for sustainable practices Millennials are aligning themselves with, Le Mesurier notes.  

“The conversations we have with companies suggest that some consumers consider sustainability when they buy apparel but most are still primarily driven by price,” she says.

“Investors [shareholders in listed companies] are playing a much more significant role in driving change. As a large investor, we can ask listed companies to do a lot more; to audit their supply chains, to provide full transparency over where materials are coming from, who is making them and whether those workers are being paid a living wage,” Le Mesurier says.

Rising Influence 

Typically dubbed as an entitled, pampered and narcissistic generation, Millennials are emerging as the world’s most sustainable-conscious consumer segment, driving demand for sustainable clothing lines to all-time highs and forcing brands to increase transparency in their supply chains and reconsider their carbon footprint.
Research suggests Millennials (those born between 1980 and 2000) consider sustainability to be a key part of their purchasing decisions, as opposed to being a costly premium. 

Researcher Neilson shows that 75 per cent of Millennials are willing to pay more for sustainable goods, up from approximately 50 per cent in 2014. Millennials are twice as likely to purchase a sustainable brand and three times as likely to work at a sustainably minded company, when compared to older generations.
Millennials are quickly becoming the most important consumer segment of our time. There is a great wealth transfer on the horizon, with more than 75 million Millennials born between 1981 and 1997 set to take over an estimated $30 trillion in wealth from their Baby Boomer parents. On a global scale, 85 per cent live in emerging markets and have a spending power that is expected to grow three times by 2025. The opportunities, from a brand perspective, are vast.

Despite the potential change in consumer behaviour powered by the rise of Millennial dollar, this shift is playing out gradually, Le Mesurier notes.

Calling it out 

In the meantime, the Australian Federal Government is forcing companies to track and monitor their supply chains. It is in the process of passing a Modern Slavery Act, following the approach taken in the UK. Some large investors, including AMP Capital, support this approach. 

“Regulation and investor pressure is a double whammy for listed companies. Now, more than ever, companies need to take supply chain issues seriously”, Le Mesurier says. 

The 2013 Rana Plaza tragedy, where 1,134 workers died from a factory collapse in Bangladesh, catapulted the poor and unsafe working conditions of the apparel industry to front page news and to the front of peoples’ minds. The event shocked the collective conscience of consumers and decision makers across the world, helping to accelerate efforts to uphold the rights of workers throughout supply chains. 

“While there are strong links between human rights and business performance, one of the greatest barriers to change is that slavery itself is profitable in the short term. Companies can influence their suppliers to improve working conditions, but there is no incentive from those who profit from forced labour to improve, unless of course, investment managers, such as AMP Capital, continue to press for change and consumers gradually prioritise sustainability over costs”

“Poor working conditions are not only unethical, they also carry significant investment risks [in the longer term] including brand, reputational and business risks,” she adds.

Traditionally environmental, social and governance (ESG) investors have focused on human rights violations and labour standards at the point of manufacture, but in Le Mesurier’s view, this only scratches the surface of the bigger issue at hand. 

“Whether a supply chain is ‘sustainable’ depends on how far down the supply chain you go – whilst clothes marketed as being responsibly sourced may guarantee basic pay for their garment workers – it’s also important to understand where raw materials are sourced from, how hazardous chemicals are disposed of, how waste is managed and what processes are in place for reducing water wastage”. 

Global population growth, climate change, land and water scarcity, and the increasing cost of key resources have a direct impact on the bottom line of every company. Fast fashion only amplifies these fundamental problems for the apparel industry. 

“That’s why we take these factors seriously and only invest in companies, through our ethical and ESG multi-manager portfolios, who adopt truly sustainable and responsible sourcing practices,” Le Mesurier says.