Fast fashion giant Shein has long courted controversy, with critics calling its sustainability and human rights credentials into question. Founded in China (though now based in Singapore), the company filed on the London Stock Exchange (LSE) for a much-talked about initial public offering (IPO) in June 2024.

Though the listing was seen by many as a major boost for the LSE’s attractiveness, environmental and human rights groups have led the calls for Shein’s listing to be blocked on ESG grounds. The decision on whether to allow Shein’s IPO falls to the Financial Conduct Authority (FCA), which will need to balance corporate governance issues with promoting the UK’s interests as a place to do business.

Commercial Litigation partner Elaina Bailes and associate Francesca Bugg have commented in the media on the implications of Shein’s IPO for both the retailer itself, and the FCA and the London market as a whole.

 

What does Shein’s circularity fund hope to achieve?

Acknowledging the need to consider ESG concerns, Shein CEO Donald Tang has confirmed that the company would launch a €200mn “circularity fund” designed to help tackle fashion waste issues while awaiting a decision on a potential London IPO. Shein has stated that the fund will “support start-ups and businesses throughout Europe and the UK that are developing next-generation technologies and solutions” to address waste in the fashion industry.

As part of a Financial Times article (subscription required) suggesting the fashion giant’s listing could pose reputational challenges while also being a “coup for the City,” Francesca Bugg commented that “Shein’s announcement of a circularity fund is a positive step in proving their commitment to sustainable fashion. It doesn’t, however, contribute to or meet any of the UK’s stringent ESG requirements that will be required of Shein if they list.”

Francesca provided more detail in an article for Retail Week, which noted that the company’s investment targets could either prompt deals with third-party companies to introduce more sustainable fabrics, or even bring in early-stage companies working on recycled materials.

“The London Stock Exchange has high standards of due diligence and the rapid upward trajectory of ESG requirements is meant to act as a safeguard for shareholders”, Francesca elaborated. “Shein wants to avoid being an ESG risk for these investors and shareholders and they need to be alive to the risks and ensure they are prepared to meet the London Stock Exchange requirements for corporate governance standards, working conditions and supply chain transparency so they can ensure they are not subject to any shareholder claims for breaches of these requirements.”

 

What would greenlighting the Shein IPO mean for the FCA?

Writing for The Times, Elaina Bailes noted that “Shein’s ambition to list on the London exchange comes at a crucial moment for financial regulation.” The FCA’s role in regulating ESG credentials has ramped up in the first half of this year: in March the government confirmed that the authority would regulate ESG ratings providers, and as of 31 May 2024 the FCA’s new anti-greenwashing rule will apply to all firms which fall under its regulatory jurisdiction.

This new rule requires any reference to a product or service’s sustainability characteristics to be both consistent with its real sustainability characteristics, and crucially to be clear, fair and not misleading. The new regulation applies not only to products marketed as sustainable but any and all products sold and advertised by FCA-regulated companies.

The clear message issued by the FCA is that it is taking environmental concerns seriously and proposes to hold companies in the London market to a high standard when it comes to ESG. Given Shein’s widespread public perception as a poor performer in this area, the timing of a potential IPO is striking.

“There remains widespread scepticism over whether it would be appropriate to accept Shein on the London exchange given the concerns around supply chain and governance reporting”, Elaina commented in The Times. “Given the recent huge governance failures of several UK listed companies — resulting in criminal prosecutions and investor litigation — the stock exchange must not become a ‘no questions asked’ listing if Shein’s float is successful. If it does happen, Shein would be forced to meet higher standards of disclosure, so investors could have a clear picture of the company and understand how it can improve issues such as allegations of forced labour and its unsustainable fast-fashion model.”

 


 

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