Threading the Needle: ESG Risk in the Fashion Sector

The fashion industry is under increasing scrutiny for its environmental, social, and governance ("ESG") practices.

Regulators, activists, and consumers are demanding greater transparency and responsibility from brands, not only in their own operations but across their complex global supply chains. With new and evolving regulations – such as those addressing modern slavery and environmental risks – and the rise of ESG-related litigation, fashion businesses must adapt to a rapidly shifting compliance landscape.

We examine the sources of the risks arising from fashion industry supply chains and how businesses (and their legal advisers) can identify ESG risks, navigate regulatory requirements, and develop robust compliance regimes to protect their reputations and support sustainable growth.

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Key ESG Supply Chain Risks

The global nature and complexity of fashion industry supply chains, together with the typically high-profile and consumer-facing nature of many brands, means that it is particularly exposed to ESG risks.

The diverse nature of the fashion industry means that businesses may face a range of ESG risks. For example, a significant risk may arise when sourcing from and manufacturing in low-cost offshore jurisdictions, often associated with child labour, forced labour, poor health and safety practices, bribery, and corruption. Other risks may arise in connection with the sustainability of raw materials, including in connection with water use, chemical management, waste treatment and carbon emissions.

The breadth and complexity of global fashion supply chains compounds these concerns and can make effective mapping and monitoring a major challenge. This is especially so for smaller brands with limited leverage or visibility over suppliers.

Regulatory Landscape and Risk

Over the last decade, the regulatory environment for fashion brands has become more complex. Businesses are increasingly required to conduct multi-jurisdictional due diligence of their human rights and environmental impacts in order to comply with environmental laws (such as the EU Ecodesign for Sustainable Products Regulation) and human rights frameworks (like the UK Modern Slavery Act).

This is further complicated by reporting and transparency requirements. For example, in the EU businesses must contend with the Corporate Sustainability Reporting Directive ("CSRD") and the forthcoming Corporate Sustainability Due Diligence Directive ("CS3D"). The UK has, meanwhile, implemented Sustainability Disclosure Requirements and plans to introduce its own sustainability reporting standards which fashion brands must be cognisant of.

Robust supply chain due diligence, aligned with international standards such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, is essential. These standards form the backbone of many legal requirements and increasingly represent not only best practices but strict compliance obligations.

Penalties for failing to meet these requirements can be severe. For example, the CS3D and Germany’s Supply Chain Act can result in fines of up to 3% and 2% respectively of a company’s global annual turnover; France’s Duty of Vigilance Law (a precursor to CS3D) goes further by allowing civil liability claims to be brought against companies that fail to prevent or mitigate abuses in their supply chains – a power already being used against multinational brands, including cosmetics brand Yves Rocher[1] for alleged human rights violations by its Turkish subsidiary.

[1] See case summary here.

The Litigation Landscape

ESG-related litigation also poses real and growing risks for English-domiciled fashion businesses, with regulators, consumers and activists using or threatening claims in connection with alleged ESG-related harm.

Investor claims

Brands are subject to growing scrutiny over supply chain conditions and may face claims from investors alleging that they have suffered harm as a result of ESG failures.

Boohoo, for instance, is facing a novel securities claim, brought under s.90A of the Financial Services and Markets Act 2000. The claim concerns Boohoo's alleged failure to disclose information relating to wages paid to workers at supplier factories. 49 institutional investors allege losses in excess of £100 million due to the decline in Boohoo's share price, which fell by c. 42% in the three days after adverse media reports were published.

More broadly, shareholders are increasing looking for novel ways to bring claims concerning ESG-related harm – a trend we expect to continue in future.

Parent company liability claims

Claimants are increasingly bringing claims in England for alleged harms suffered overseas as a result of activities within the corporate groups or supply chains of English-domiciled parent companies.

For example, the Court of Appeal has recently permitted claims to proceed in England against members of the Dyson Group, in connection with labour rights violations alleged to have taken place at the facilities of its Malaysian suppliers. English-domiciled fashion businesses may face similar risks in connection with their overseas operations, particularly given the typically global nature of their supply chains and exposure to high-risk jurisdictions.

Greenwashing

UK Regulators are taking active action against "greenwashing", i.e., misleading or overstated claims regarding the sustainability or environmental credentials of their businesses.

By way of example, in 2024, following an investigation into ASOS, Boohoo, and George of Asda, these retailers signed undertakings to improve the accuracy and transparency of their environmental claims.

Similarly, the UK Competition and Markets Authority has warned all fashion brands that overstated sustainability messaging could lead to regulatory action and fines of up to 10% of global turnover, following new powers granted in the Digital Markets, Competition and Consumers Act.

In the UK, the “Failure to Prevent Fraud” offence, introduced in September 2025, holds large companies criminally liable if an associated person – be it an employee, subsidiary, or supplier – commits fraud to the company’s benefit, including fraudulent "green" claims made anywhere in the world about a company's or supplier’s ESG credentials.

Reputational harm

The ramifications of ESG failures go beyond legal action – reputational harm in a sector sensitive to consumer sentiment can be swift and severe, with activist consumers and NGOs ready to hold brands publicly accountable.

Managing ESG Risks: Practical Steps for Fashion Businesses

Whilst the landscape is fast-moving, there are practical steps that fashion businesses can take to manage their exposure to ESG-related risks.

Supply Chain Due Diligence

Mapping supply chains is the foundational step – understanding exactly who is involved in developing products at each stage and where and how this occurs. Strong due diligence systems will help to satisfy regulatory requirements and support product traceability initiatives like the upcoming EU ‘Digital Product Passport’.

Following mapping, a risk assessment should identify actual or potential adverse ESG impacts, with a focus on the most significant risks such as forced labour or severe environmental contamination. This is best achieved through data collection systems, engagement with suppliers and cooperation with industry peers to share best practices and increase leverage.

Contractual Protections

Embedding robust ESG clauses into supplier contracts is essential. Such requirements should align with international frameworks like the UNGPs and industry codes, setting out clear expectations and enforcement measures. Some leading brands already use compliance rating systems and sector tools like the Higg Index to monitor supplier performance. Contracts should specify consequences – for example, immediate termination for breaches involving labour abuses.

Ongoing Monitoring and Collaboration

ESG compliance is not a box-ticking exercise. Fashion businesses should foster ongoing collaboration with suppliers, provide regular training, and partner in improvement initiatives. Participation in voluntary industry schemes, such as the Fashion Pact or the Sustainable Apparel Coalition, can both drive standards and signal commitment to stakeholders. However, businesses should be careful to maintain contractual separation with suppliers to avoid inadvertently assuming liability for their conduct.

Reporting and Disclosure

Companies with ESG-reporting obligations should structure their reporting to capture evolving local and international standards and ensure effective internal coordination across teams. Regular staff training on compliance and communication standards, grounded in the latest regulatory guidance, is key.

The Road Ahead

The UK and European regulatory landscapes continue to develop. Simultaneously, regulatory scrutiny, litigation, and stakeholder expectations are accelerating. For the fashion industry, rigorous due diligence will provide businesses with the institutional knowledge and capability to manage ESG-related risks as and when they appear.

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