PARIS — Investors should prod luxury goods companies for information about their supply chains and ask about the frequency of factory visits and independent audits, Morgan Stanley suggested in a research note to clients Tuesday.
The bank summed up points from recent roundtable talks led by equity analyst Edouard Aubin on the high-end sector that centered on environmental, social and governance issues — commonly referenced by the acronym ESG.
While fast fashion has been the focus for supply chain concerns, the luxury goods industry is also exposed on this front, noted Morgan Stanley, citing articles in the press highlighting the lack of formal employment contracts, employee insurance and poor working conditions.
In theory, more vertically integrated brands are well positioned to have better visibility over their supply chains, said Morgan Stanley, noting French brands tend to own more of the stages of production than their Italian counterparts that often outsource more. Analysts included a chart of the level of vertical integration of several luxury brands with Loro Piana at the highest end of the range — 90 percent — followed by Louis Vuitton at 78 percent. Salvatore Ferragamo sat at the other end, with 1 percent, according to its figures.
While carbon emissions are on the rise as the luxury sector expands, a number of companies are reporting decreasing emissions in absolute terms, noted the analysts, citing Burberry, GrandVision, Kering, LVMH Moët Hennessy Louis Vuitton, Compagnie Financière Richemont and Tod’s.
The analysts singled out Moncler and LVMH for reporting the highest waste recycling, at 98 percent and 91 percent, respectively.
With Burberry coming under pressure last year for destroying unsold clothing and other goods, companies need to be aware that scrutiny from the investor community is on the rise.
“The rising investor commitment to incorporating ESG within investment frameworks means that red flags are increasingly scrutinized,” the bank noted. “Moving forward, with the rising importance of the circular economy, brands will need to start, whether driven by regulation or investor pressure, thinking about how to consider the full life cycle of their products in a sustainable way.”