Like many Shein customers, Jaleesa King doesn’t expect the Chinese fast-fashion giant’s clothes to last longer than it takes to post a good selfie on Instagram. The 26-year-old reckons she spends as much as $500 twice a month on about 20 to 30 clothing items she’ll barely wear. “Maybe just once or twice, that’s all,” she says, laughing, as she browses Shein’s San Francisco pop-up shop, a special marketing event for the usually online-only retailer. “If I can get a good picture, definitely at least once.”
Turbocharging fast fashion’s business model has turned Shein into the face of the industry and one of the world’s top startups. But as environmental, social, and governance issues become ever more important to investors, the retailer’s promotion of disposable fashion may be evolving into the biggest threat to its continued success. A vast network of contract manufacturers allows Shein to pump out thousands of youth-friendly styles daily at barely believable prices—a few dollars for a dress and even less for a pair of bike shorts.
With sales of at least $16 billion in 2021, up from $10 billion in 2020, and a valuation of about $100 billion, the company has catapulted into the same league as Elon Musk’s SpaceX and TikTok parent ByteDance Ltd. Investors to date include Tiger Global Management, IDG Capital, and Sequoia Capital China. But Shein’s business model is also the source of a potentially toxic image problem that’s sparked allegations of environmental damage, worker exploitation, and copyright theft. Indiana University, which announced a Shein partnership just months ago, has put new plans on hold as a result of concerns about the company. While many of its young customers don’t seem to care, the people and institutions with real power over Shein’s future—investors, regulators, and politicians—have little choice but to pay attention.
As part of its latest fundraising round earlier this year, Shein told existing investors that it hopes to have an initial public offering in the US as soon as 2024, people familiar with the company’s thinking told Bloomberg. Hoping to justify its astronomical valuation, the retailer is rushing to shed its reputation as an ESG villain; a team of new executives is focused on changing the company’s image.
IPO Positioning
The current drive to improve Shein’s ESG performance reflects its preparations for a possible listing, say people familiar with the matter, who didn’t want to be named because the information isn’t public. While many early backers valued growth over sustainability, the company wants to minimize the risk that its practices could stand in the way of a successful IPO, the people say.
Some of the criticisms Shein faces apply to its rivals, too. Fast fashion is an enormously wasteful business, exacerbating the fashion industry’s environmental impact, according to a 2019 report by the World Bank, which said the number of new garments produced had doubled compared to the 50 billion made in 2000. But as ESG’s place in the public consciousness has grown, Western apparel giants such as Inditex SA’s Zara and Hennes & Mauritz AB have made efforts to clean up their image through recycling drives, “eco-friendly” clothing collections, and similar initiatives. To survive among the biggest players, Shein may need to undertake a similar overhaul.
One thing the retailer can’t change is its Chinese roots. Right or wrong, that brings additional scrutiny at a time when the fractious US-China relationship is becoming even more difficult. In the fashion world, those origins also raise the issue of Xinjiang—the region that produces about 85% of China’s cotton and whose name has become synonymous with forced labor allegations. The factories Shein uses are not in that region. But the situation is muddied because of the huge number of suppliers the company uses.
In the US, money managers are putting more pressure on companies over ESG concerns. Environmental and social resolutions received 33% support in the most recent season of shareholder meetings, up from 22% five years earlier, according to Bloomberg Intelligence. BlackRock, Vanguard, and State Street Global Advisors have all committed to vote against directors of companies that don’t act on issues such as climate change. A company’s performance on sustainability can have a big impact on its ability to attract capital, says Jenny Davis-Peccoud, global head of sustainability at Bain & Co. An investor can easily end up “on the wrong side of evolving regulation or consumer sentiment.”
And Shein stands accused of numerous offenses. Nongovernmental organizations allege that some goods sold by Shein are made by low-paid workers with excessively long working hours and dangerous workplace conditions, while regulators and activists say throwaway fashion is so wasteful that no one who cares about the environment can endorse it. “Shein is like a red flag to anyone focused on sustainability,” says Garik Himebaugh, founder of Eco-Stylist, an Austin-based social enterprise group that scores companies on their commitment to sustainability. It gave Shein zero points out of a possible 100 in its most recent analysis. Zara and H&M each got about 30 points. Of about 300 companies surveyed by Eco-Stylist, Shein was the only major brand to receive a score of zero.
Accusations of copyright theft have become another problem for Shein. Since the start of 2021 the company has been hit with at least 40 US lawsuits alleging that it infringed the plaintiffs’ intellectual property. That’s more than three times as many as Urban Outfitters, H&M, and Zara combined, data compiled by Bloomberg show. Adam Whinston, Shein’s new global head of ESG, says its suppliers certify that they do not infringe third-party IP.
Reframing the Narrative
As part of its counteroffensive, Shein last year added executives, most notably Whinston. His goals include strengthening sustainability and reframing Shein as a misunderstood green champion.
According to Whinston, introducing thousands of new items a day is a feature, not a bug, in the company’s sustainability model. The retailer minimizes waste by producing its goods in small batches and then waiting to see how consumers respond before it ramps up production, he told a conference in June sponsored by Sourcing Journal, a trade publication. He argues the strategy makes Shein a role model for other clothing manufacturers. “We believe if the rest of the industry follows this model, it would almost immediately result in 20% less production,” he said at the conference. This approach is part of “an innovative and unique business model approach that has enabled us to be a more sustainable company since our founding,” Whinston told Bloomberg in emailed answers to questions.
Samantha Sharpe, associate professor and research director at the University of Technology Sydney’s Institute for Sustainable Futures, sees it differently. “It’s still a lot of production of clothing that’s not really meant to be worn for a long period of time,” she says. The European Commission has a taken a similar stance. In March it unveiled new production standards to reverse overproduction and overconsumption, design requirements to make clothes last longer, and mandatory minimums for the inclusion of recycled fibers.
Third-Party Problems
Shein’s labor policies are also under scrutiny. In November an investigation by Swiss NGO Public Eye found that some manufacturers supplying the company’s products subjected employees to dangerous workplace conditions and 75-hour workweeks.
These issues pale in comparison to the controversy over Xinjiang cotton. Concerns over forced labor spurred companies such as H&M and Nike to boycott the material back in 2021, and products from the remote Chinese region are now banned from the US unless the importer can prove they were made without forced labor. So far, Shein has not run afoul of Xinjiang sanctions as well as Trump-era tariffs on Chinese imports, thanks in part to a loophole in US trade law that allows companies to ship up to $800 of goods duty free from foreign nations directly to consumers in the US. Many Shein products are purchased online and shipped directly to customers, allowing them to qualify for this exemption.How Trump’s Trade War Built Shein, China’s First Global Fashion Giant
The company has introduced its own requirements for manufacturers, saying it won’t tolerate child or prison labor or the underpayment of workers. Implementing these policies may be tough unless Shein pays its suppliers more to comply—an unlikely move for a business built around rock-bottom prices, say some industry experts in China.
“With fiercer competition and weaker demand, many apparel producers are struggling to survive,” says Lin Feng, general consultant of the Guangdong Optimal Supply Chain Association. “Apparel brands are working to persuade factories to raise their ESG credentials, but the factory owners and workers don’t have strong incentives to do that,” Feng says. “What they want desperately now is to keep the job and keep more cash.”
Shein says it takes all supply chain matters seriously, and contracts with third-party firms to audit its suppliers’ facilities. “When violations are found, we take corrective action,” the company said in an emailed response.
Shein’s third-party business model also plays a part in the brand’s copyright woes. Magdalena Mollmann is one of the many artists and designers who have sued Shein this year. The Jacksonville, Fla., illustrator claims Shein copied an artwork of hers featuring a woman with long black hair and an angular, Picasso-esque nose, selling frameless prints for as little as $4. Her attorneys at Holland & Knight LLP claim a pattern of abuse by Shein, which they say in the past has blamed third-party vendors for alleged infringement of intellectual property.
Mollmann’s court complaint said Shein’s “notorious and well-documented business practices are predicated upon willfully violating the rights and interests of independent artists.” She is seeking at least $100 million in damages. “You constantly hear about it in the artist-designer community,” says Sara M. Lyons, 36, a fashion designer in southern California whose copyright theft case against Shein is still pending. “I don’t think it affects their bottom line enough to care.”
Whinston says Shein takes all claims of infringement seriously. “It is not our intent to infringe anyone's valid intellectual property and it is not our business model to do so,” he wrote in an email. “Suppliers are required to comply with company policy and certify their products do not infringe third-party IP.”
Shein requires suppliers to follow a strict code of conduct and undergo monitoring, Whinston said at the Sourcing Journal event. “We require remediations when violations are detected,” he said. In the case of severe violations, “if those aren’t remediated immediately, then that can lead to being barred from being a supplier to Shein.”
Existential Problem
Last year the company launched Shein X, a program that showcases independent designers’ work to its enormous customer base, with artists receiving a cut of the profits. “Shein X allows designers to do what they do best—create,” the company website says, “while we handle the manufacturing, marketing, and selling.”
Other initiatives the company started over the past year include a fund for nonprofits supporting underserved communities and other causes, as well as a partnership with Indiana University’s business school to provide fellowships to students interested in learning about global supply chains. Shein this year opened a distribution center near Indianapolis which the company says will create about 1,100 jobs.
The IU partnership, announced in March, has stalled, however, while the school takes a closer look at Shein. “The administration of the Kelley School of Business and the director of the Center for Research and Education in Retail have since launched a thorough review of the company, its practices, and responses to the concerns raised,” said George Vlahakis, associate director for communications and media relations at the business school. “Once this review is complete, appropriate actions and responses will be taken. In the meantime, new initiatives will be put on hold to allow us time to conduct this fact-based review.”
Shein says it continually reviews its active partnerships and that its engagement with IU has given it “valuable information” about future academic partnerships in Indiana. “We will assess any new engagements together with IU,” a Shein spokesperson said.
Shein’s announcements have yet to quiet its critics. Following a $15 million donation by Shein in June to the Or Foundation—a charity aiding textile waste workers in Ghana where it operates a community center named the No More Fast Fashion Lab for Community Design—Greenpeace attacked the company for paying lip service to sustainability. “Without any drastic change to its ultra-fast-fashion model,” it said in a tweet, “this is in fact nothing more than a #greenwashing stunt.”
Whinston promises more action. To reduce its greenhouse gas emissions, Shein will try to transport more of its products by ship rather than air, he said in his email. The company also aims to improve the energy efficiency of its factories and to use more recycled fibers. A new set of sustainability goals will be released soon, he said, without sharing details. “They will be aggressive and difficult to achieve,” he said, “but they will also be realistic.” It’s unlikely they will satisfy skeptics who say fast fashion’s real problem is existential: Its business model depends on the overconsumption of cheap clothes on a massive scale.
For Shein’s customers, none of this seems to matter very much. And for some investors, the brand’s potential for growth will override its reputational woes. The ESG movement has hit its own speed bumps in recent months, as more investors start to question what constitutes sustainable investing—and how much good it actually does. Nevertheless, for institutions in particular, sustainability is likely to become an increasingly important consideration. “I don’t think it is possible for fast fashion or ultrafast fashion to ever be truly sustainable,” says Sharpe, of the Institute for Sustainable Futures. “It’s the labor standards or the environmental standards that go in order to keep the machine going.”
In one sign of how Whinston still faces an uphill battle improving Shein’s image, even Or Foundation, the African charity accepting millions of its dollars, is wary about being associated too closely with the company. In her initial discussion with Whinston, Director Liz Ricketts told him she opposed Shein’s business model encouraging overconsumption.
Months later, Ricketts is still quick to make clear that the foundation isn’t on Team Shein. “It’s a transfer of funds,” she said of the agreement. “It’s not a partnership, it’s not a collaboration.” Still, she credits the company with a rare willingness to take some responsibility for its role in the waste crisis. Whinston “heard my hard stance,” Ricketts says, and then went on to work with her. “That’s the first time that any brand has done that.” —With Dong Cao and K. Oanh HaRead next: What Is ESG Investing? MSCI Ratings Focus on Corporate Bottom Line
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