Bylined Articles

The Impact of Corporate Social Responsibility on Fashion Brands

By Christiane Schuman Campbell and Nanette Heide
October 28, 2019
Law.com

Photo of Attorney Christiane Campbell

Christiane Schuman Campbell

Photo of Attorney Nanette Heide

Nanette C. Heide

Corporate social responsibility (CSR) is not new. However, the relevance of CSR to brand valuation for investors and other stakeholders is increasing exponentially year after year. As a new generation of talent and consumers becomes increasingly more "woke" (read: aware) to environmental, political, and social issues, CSR becomes a critical factor in increasing—or diminishing—brand value. This is particularly relevant in the fashion industry where sustainability and other hot-button political and social issues have come to the forefront.

What Is Corporate Social Responsibility?

Unless you’ve been living under a rock, you’re probably hearing about CSR from a variety of sources, multiple times a day. Indeed, almost every recent issue of Women’s Wear Daily (WWD) features news about what fashion brands are doing (or not doing) to embrace sustainability. Brands that refuse to embrace CSR face potential diminution in value or, even worse, the slow and painful death known as irrelevance.

CSR is wholistic and considers environmental issues such as sustainability, pollution, climate change, clean oceans, supply chain transparency, and carbon footprints. It considers social issues such as charitable giving, gun control and violence, human and animal welfare, gender gaps, sex trafficking, and child or other unfair labor practices. It also considers cultural sensitivities such as anti-Semitism and racism. This list of issues is not exhaustive and none of the issues are exclusive.

CSR: The Intangible Metric in Valuation

CSR is important to consumers and, perhaps even more significantly, it is important to investors and corporate buyers. Private equity firms are looking at targets and portfolio company candidates with a wider and more critical lens. In assessing the valuation of a target, CSR has emerged as a key factor and an important intangible metric that can significantly impact a brand’s value and the target’s overall valuation.

Private equity firms typically evaluate a brand based on market share, growth potential, innovative capability, sector, and human capital. "The Rising Value of Brand Purpose in Private Equity," Branding Strategy Insider, Sept. 11, 2018. Arguably, most of these factors can be impacted by CSR. Brand strength is no longer about whether a brand is recognized but instead is about how a brand is recognized, and for what. Put another way, "brand recognition" has been supplanted by "brand perception."

Likewise, negative air around a brand can significantly impact its value. For example, an apparel brand that is exposed for having sweat shops in its supply chain risks losing both consumers and investment dollars. Reputational damage hurts a portfolio brand’s value and in some cases, private equity firms may divest from such investments to avoid reputation damage as well. On the flip side, prominent investment professionals are making a noticeable effort to encourage and facilitate responsible investing, as well as using pressure as a limited partner to drive the investment process to include CSR as a focus by a private equity fund. Among them, BlackRock (id.), Carlyle (id.), and PwC. "Are We Nearly There Yet: Private Equity and the Responsible Investment Journey," PWC.

Measuring by the Metric

In February 2009, McKinsey released a study through which it attempted to use CSR—and specifically environmental, social, and governance programs—as a metric to measure brand value. The study made a number of accurate predictions about the increasing value of CSR on a brand, but its findings showed a great disparity among CFOs, investment professionals, and corporate social responsibility professionals and how these groups perceived the impact of CSR on brands.

Significantly, the data shows that investment professionals were far more likely than the other groups to say CSR adds significant value to a brand. Investment professionals also disagreed with the other groups in terms of the percentage of value CSR may contribute to a brand, responding that in some instances it may add more than 11% to shareholder value. "Valuing Corporate Social Responsibility," McKinsey & Company, February 2009.

The 2019 outlook shows a remarkable increase in awareness from C-suites and CSR professionals. The change from 2009 to today signals that investment professionals’ valuations of CSR were a precursor to corporations’ increasing awareness and embracing of CSR. The buy-side is driving the change.

This means companies and would-be investors are more aligned today than they were 10 years ago, with CSR as a unifying force. Nowhere is this truer than in the fashion industry.

Sustainability

Sustainability is the most talked about CSR issue today in the apparel sector. Historically a linear industry, fashion and luxury apparel posed a significant threat to the environment. However, in the past several years, fashion has woken up to the sustainability mission.

Across the board—from fast fashion brands like H&M and Zara to athletic and luxury brands like Adidas, Nike, and LVMH—brands are making concerted and independent efforts to reduce carbon footprints, improve sustainability, and convert their historically linear industry into a circular one.

In August, ahead of the G7 Summit of world leaders in Biarritz, France, 32 fashion brands, spearheaded by Kering and including Adidas, Hermès, Burberry, H&M Group, Gap, Prada, Chanel, Stella McCartney (who is heading up LVMH’s green initiatives, though LVMH itself is not a signatory), Selfridges, and Ralph Lauren, pledged to reduce their environmental impact. "Fashion Pact: 32 Major Fashion Brands Pledge to Set Science-Based CO2 Targets," BusinessGreen, Aug. 27, 2019.

The Fashion Pact memorializes its signatories’ values by unifying them in the effort to "take action to curb emissions while also harnessing the industry’s global reach and influence to help tackle climate change, restore biodiversity, and better protect the oceans." Id. Indeed, as noted by Burberry CEO Marco Gobbetti, the objectives of the Fashion Pact strongly align with Burberry’s own CSR mission. Id.

Separately, LVMH has pledged that, by 2025, it will ensure full traceability for animal products, compliance with the most advanced animal welfare standards for 100% of raw materials, and a reduction of the environmental impact of the processing of all animal-based materials. "Stella McCartney Steps Up as LVMH Sustainability Sherpa," WWD, Sept. 26, 2019. LVMH has already made marked progress in meeting its 2020 targets for reducing carbon dioxide emissions and using renewable energy, saying CO2 emissions fell by 16% between 2013 and 2018. Id. Simultaneously, LVMH watched revenues increase from $31.7B USD to $51.4B USD. Id.

Activism and Consumer Interaction

Millennials and Generation Z (aka Generation Woke) are "spending powerhouses that are forcing brands to reimagine their marketing approaches and strategies." ("Measuring Brand Impact," WWD, Sept. 20, 2019.) Gen Z alone represents approximately $150 billion of spending power in United States and by 2020 is expected to make up 40% of consumers worldwide. "The ‘Woke’ Squad Says #DoYourThing," WWD, Sept. 17, 2019.

These spenders vote with their wallets and are sharply focused on social and political issues. Significantly, they are loyal to brands that are aligned with their views and their desire to speak up and make a difference. More than just sustainability, this group cares about #MeToo, #BlackLivesMatter, #GunControl, and beyond. Brands are taking note:

  • Patagonia made an effort to disassociate the “Power Vest” with Wall Street firms and is now focusing on "mission-driven companies that prioritize the planet."
  • Nike used Colin Kaepernick in one of the most talked-about ad campaigns of recent years to highlight taking a stand for what you believe in and later this year it walked the walk—when
  • Kaepernick took issue with the Fourth of July release of the Betsy Ross flag edition sneakers, Nike listened and pulled them.
  • Gucci supported gun control by donating to March for Our Lives.
  • Levi’s stood up for gun control and publicly stated "it’s inevitable we’re going to alienate some consumers but we can no longer sit on the sidelines and remain silent on this issue."
  • Procter & Gamble donated $529,000 to the U.S. Women’ National Soccer Team to close the pay gap between men’s and women’s national teams.
  • Kim Kardashian responded immediately to backlash over her Kimono brand’s insensitivity to Japanese culture and changed the name.
  • TOMS and Bombas are startup brands built on a foundation of giving back. Each advertises itself as a "one-for-one" company, matching units sold with units donated to those in need. The popularity of these brands that “give back” is one way consumers are taking an active role in social responsibility.

Id. Although some of these branding and marketing efforts might seem to have a polarizing effect, each of the illustrations above highlights two major factors contributing to brand strength: (1) consumers are investing in brands that are speaking up and taking a stand, and (2) brands are listening to and reacting to consumers’ voices.

The Takeaway

Brands and investment professionals—and the lawyers representing them—must embrace the importance of CSR. It is a critical metric for measuring brand value on either side of the transaction table, and therefore needs to be carefully considered by the brands and the professionals guiding brands through marketing and communications, mergers and acquisitions, exits, expansion, and investments. In the investment world, in particular, CSR is like the 12th man—it is making noise, it heavily influences the game, and it is certainly here to stay.

Christiane Schuman Campbell is a partner at Duane Morris and serves as a team lead for the fashion, retail and consumer branded products industry group. Nanette C. Heide is also a partner at the firm and serves as co-chair of the private equity group and senior advisor to the fashion, retail and consumer branded products industry group.

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