Nicolaj Reffstrup: Sustainability in fashion l Impact/Week 2024

Well, I mean, first of all, can I say thank you so much for being here at this late hour. I know where I come from most people would be at the bar right now, so I really appreciate the turnout because we were a little kind of worried about who would be here at this point. Half of you are my friends anyway, so it doesn't quite count. I come from a background in software and internet and randomly ended up in the fashion industry because my wife was embarking on a project called Ganni. I joined her, ran the company for twelve years. It was pretty random, as life sometimes is. I've had a long-standing engagement with the climate change agenda actually ever since I studied business economics and philosophy. In that sense, the irony of it all, it's kind of weird that I ended up in the fashion industry.

It's a little ridiculous, but obviously the fashion industry is about raw consumption, right? It's about newness. We produce new stuff all the time and sell it to people, so it's a pure form of consumerism. And we all know we don't need more garments. While running Ganni I didn't buy any garments for probably seven years, a bit less than that, so it was a little kind of silly. However, when I joined the fashion industry I wasn't aware that it was much worse off than any other industry. Same way that I would eat red meat for many years. I still do sometimes now, but I've tried to reduce my consumption of red meat big time. I even took it to a point where we would have a mealworm farm in our kitchen. The mealworms would feed on vegetable scraps and I tried to serve the mealworms to my kids to teach them how to eat alternative proteins. It didn't work at all. Kids wouldn't eat it and my wife hated the smell because it was terrible. Anyway, same way with the fashion industry, it's raw consumption, so it can never be sustainable per se. I think as a company we still have the overarching vision for our responsibility effort, as we call it, is to one time be able to create a fashion collection, and by fashion I mean something that's new and fresh and relevant, that carries a positive climate impact. There are ways to get there but they're somewhat elusive and it's many years down the road, but I think we can get close at some point.

Well, first of all, for many years we didn't quite dare to talk about sustainability for fear of being called out for greenwashing, and again because it just sounded shallow being a fashion company. But we conducted a couple of surveys at some point that found that some brands were perceived as sustainable, although I knew they weren't at all. I would know the owners literally. And it taught me a lesson about how consumers perceive not just sustainability but a lot of things. On a day-to-day basis you don't have the capacity to fully understand the products you're buying or the stuff you do and the consequences there are. So if some brands would kind of plaster their concessions in department stores with posters saying that they did organic cotton, then people would connect that and call it sustainable. We felt that if the notion of sustainability wouldn't be too diluted, we needed to take a stance. That's when we started communicating around the topic. Also, when we embarked on our responsibility journey, I was naive in thinking that in the near future, and this goes back maybe ten years, that being sustainable or responsible would be like an insurance policy for being allowed to continue as a fashion brand. I didn't want it to be something that was tied to our USP or how the brand was perceived, because I expected everybody by now to be some degree of sustainable. However, I was surprised nothing happened, and at the moment we're probably even backpedaling, especially with the election that just took place. But that all led us to start communicating around the topic, and that's when we started talking about radical transparency in the sense that we try to put everything we do out there for others to see and help guide us, but also in the hope that there will be no backlash when we don't meet the ambitions or the goals we set out there. Further, it's also an insurance policy for me to ensure that we'll continue to work towards those goals as a company. We're part owned by private equity. We sold half the company to a private equity fund, and although they don't interfere with how we conduct the business, I still just want to put all the targets out there because then there will be less backpedaling. It's getting harder at least when you're transparent about what you do.

2027, perfect, even better. I sometimes feel like totally an impostor, that somebody's going to call my bluff at some point, because I think a lot of what we've been doing so far is actually pretty much low-hanging fruits that everybody else could do the same thing literally. But it all comes down to your willingness to invest in the area. There's so many things you can actually do. On the carbon reduction, our ambition is to reduce our footprint by 50% in absolute terms in 2027 compared to 2021. So despite growing on average 18% annually since 2021, we've managed to reduce our carbon footprint by 7% in absolute terms. When you look at that as a graph, it looks pretty cool. It's a big achievement. Whether we'll get to the 50%, I frankly doubt that, because at the moment we rely on two major overarching factors. One is the innovative materials we can get access to that are viable at scale, and then it's a matter of implementing a circular business model into the core of our business. In particular, that area has failed, I wouldn't say completely, but close. We had high hopes for rentals, recommerce, repairs, returns, stuff like that, but that's just not working out for us in all transparency.

We've always operated with a matrix that has impact along one axis and awareness along the other axis, to try and navigate how we allocate resources towards the area. We're extremely or acutely aware that some of the things we do have very little impact, but they can sometimes create a lot of awareness. The classic example I always pull out is how, many years ago, we started growing oyster mushrooms on the coffee grounds from the espresso machine in our canteen. We literally have oyster mushrooms on display in the canteen, and they grow up every Thursday. We harvest them and somebody gets to take them home, fry them, salt, cream, bit of butter, it's really tasty. So it's extremely Instagram-friendly, it's easy to relate to, and it teaches you a lesson about circularity. However, it obviously has literally close to zero impact at scale. At the same time, you have the most boring stuff, in my opinion, don't tell my team, but it's a full-time job keeping track of our supply chain and creating transparency around our value chain. It's hardly relevant to anyone, but stuff like that can have a massive impact. That's how we try to navigate that. I think it's important, and in particular being in the fashion industry, it's a huge obligation for us to make the whole topic of sustainability or impact or responsibility palatable for a wider community, because that's what we're good at. We're good at telling stories, we're good at making things sexy and exciting. That's what we also try to do with the impact agenda.

We're pretty transparent about what the cost of this is. I remember speaking at the Global Fashion Summit some years back where I tried to introduce this idea of the fashion industry benchmarking their effort, because I was trying to understand how much do you need to invest in the area in order to achieve whatever ambitions you have as an industry. We typically spend on average a little less than 1% of total sales on direct costs related to sustainability. I don't know if that's a lot or not too much, but probably we could do even more than that. That's the direct cost, so that's typically the team working within the space, some certifications, a couple of platforms, stuff like that. But quite early on it turned out to be extremely difficult to compute the actual cost of doing what we did, because there's a lot of indirect cost that goes into this. There's a lot of sacrifices, and that's the real cost. It's getting the whole organization to navigate within this paradigm and have impact as a default mindset. I would come to work and sometimes people had bought another twenty office chairs without thinking about circularity or cradle-to-cradle principles or anything like that. So it's so important that everybody's in on it, everybody's kind of bought into the vision and driving in the same direction, so that you avoid the sustainability department being like the internal police department. Because the minute it's perceived as that, that's when people work against the agenda. On top of that, in a product-driven company like we are, sustainability or responsibility starts with the design team. Traditionally in most design-driven companies, design teams are kind of reluctant to accept any kind of framework that will limit their creativeness, in particular luxury but also across the board. There's a lot of sacrificed materials that goes into that. Our design team, they have to undergo circularity training and they have to comply with a framework that we put forward. On a daily basis they say no to a lot of great materials that we know we could have sold a lot of, or we force them to phase out products that we cannot call responsible. An example of that was when we phased out virgin leather. We had two cowboy boots that were selling exceptionally well, but two colorways where we couldn't find a leather alternative in those colorways. It was around $500,000 in annual sales for us, so it was real money for a company of our size. Ultimately we decided to stop producing them. That's a real sacrifice, and that was a hard decision to make, but it was a proud moment for me. It's stuff like that that's hard to calculate when you try to understand how much you need to invest in this topic.

Well, it helps being a majority shareholder. And that's basically it. If you have the backing of your shareholders, or your CEO has the backing of your shareholders, then it's a whole different story. I probably, if there are any startups trying to sell products or platforms or materials that pertain to impact to established companies, know how difficult it is finding the right decision maker. Because typically you get to talk to the sustainability department, but guess what, sustainability has very little bargaining power internally with most organizations. That's a topic I often talk about. Typically the crowd I'll meet at conferences will be mostly Chief Sustainability Officers or people from a sustainability department, but they are having a hard time making a change. So you need to literally engage shareholders basically in order to be allowed to invest in this space, because unfortunately this is a cost center. There's literally no money to be made on impact so far. I don't know if that's ever going to change, it looks unlikely at the moment. But it's a sacrifice you need to decide you want to make. Any sustainability officer in the audience that is having tough times, not bad, not bad.

Roughly speaking, it changes from season to season obviously, but around two-thirds of our carbon footprint is derived from the actual product, and 65% of our carbon footprint is from the actual materials we put into those products. Given that carbon reduction is a huge priority for us, that was the natural place to start. That's always been huge. Also, the ultimate dream for us is to create a collection that's actually impact-neutral or even impact-positive. I dream of the day where you take a laboratory cellulosic material that's made out of sequestered carbon, so literally carbon-negative or however you want to phrase that, and then turn it into a cellulose pulp that can then be spun and turned into a jersey or viscose. We want to create that situation. Until we get to that point, we've created a virtual department or team called Fabrics of the Future, where we constantly monitor around thirty different innovative new materials. We help them get to the market, so we support them in their journey to commercialize what they do. We test our products for look and feel, aesthetics, their ability to scale, price point, how they're configured, if they fit on a drop-in structure with our existing supply chain. We introduce them to suppliers, etc. Then we slowly graduate them and ideally transition them into the core of our business. It does happen, but it's extremely hard. I think we've had nine graduates that are baked into the core of our business.

So that's materials like Simplifiber that makes a cell-like material you can make shoes of, for instance, or Polybion that's a leather alternative. Stuff like that. I think seven of them are working out at scale, but most of that is somewhat fragile. We never know at what scale they can necessarily supply the materials, etc. So it's not easy. We had a show in Paris a couple of months ago, and out of 36 looks, 35 looks had innovative new materials on them. Depending on how well they sell, hopefully they'll be baked into the core of our collection. But it is a huge issue from my point of view, and also working as an investor. Both on the supply side through the companies we invest in, but also on the demand side through Ganni buying the materials. Most of the supply-side solutions that we're presented with are from startups. There are literally no incumbents working in this space, and that's a huge issue. Because in all honesty, I'd rather have the supply side present to me their ability to build a factory that would work at scale rather than startups presenting me with their ability to overcome scientific challenges. Looking at it from a Ganni point of view, I don't care too much about science. I know it sounds a little cynical and it's a little sad, but I don't have the luxury to dive into the scientific side of things. I don't do that with my current suppliers either. So we need to get to a point where a lot of these innovative new materials or recycling technologies can deliver at scale, like we saw Susanna presenting Sire an hour ago. That's an example of a company doubling down on the ability to scale rather than the scientific side of things.

Basically, we appoint a person internally with Ganni that helps them ease their way into our environment. As I said, we test them out and let them understand what the demand side expects from them, what we need from them. We also teach them about price point, etc. Then what we can offer them on our side is a platform for launching their product. They get to get in touch with our audience through all of our channels and the platforms that we have, and we get to tell a story about how amazing these materials are. Ultimately, hopefully we can also bake them into the core of our business, so we also offer them a longer-term, financially viable business case. But we're still relatively small. We're a 200 million euro business, so within an international context we don't make a huge difference.

In that sense we're pretty standard. We work like most other fashion companies. We don't control our supply chain. We have long-standing relationships with a lot of them, but given that we're a fashion company, we do new stuff all the time, so we also switch suppliers. It's hard to establish a long-term relationship with most of them. That's one thing I learned when I joined the fashion industry and it actually took me by surprise, is that even huge companies know very little about their supply chain, have no control of it, have no PhDs or engineers employed that are experts in material science for that matter. It's mostly actually product design and marketing. Anyway, we try to reach out to our suppliers. We have, that's another story, a big social project also going on with living wage projects. That sounds easy but it's also hyper-complicated. And then we have an insetting program. Since 2016 we've been mapping out and compensating for our carbon footprint, but after a couple of years we thought it was a little shallow and it was being used as a way to buy indulgence. It was a license to continue to do what you did for a lot of companies. So we slowly transferred to an insetting strategy, by which you take full responsibility for your own supply chain. We took the money we would use for compensating and used them so far to install solar panels and storage capacity with our suppliers, although we don't control them. In that sense it's kind of a write-off and helping our competitors. On average, our order volume makes up maybe less than 20% with these suppliers, but those are awesome projects. We get to install solar panels with them, storage capacity, but we also build in a biodiversity component whenever we do so. We map out the biodiversity of an area and ensure that once we're done installing the solar panels, the biodiversity and the biomass is kept intact and hopefully improved. We also build in a social component, so that we have lunch areas for people. It's projects like those I love because it's very tangible action. Imagine everybody did that. We're rolling it out to eight suppliers now out of a supplier base of maybe forty-five suppliers. I can't help but think if the entire industry just did that and every buyer did it, and it would trigger down through the supply chain, that would have huge impact.

In many ways it was, I've always felt a bit like an orphan in the fashion industry. I was never comfortable there, so selling to private equity was a way for me to transition out of the industry. I no longer run the company, but I look after responsibility along with our team there. We sold to Eurazeo, I think they're the world's largest investor in consumer brands. It's a private equity firm based in Paris and New York. They've been a great help for us in professionalizing and scaling up the company. They've never gotten involved with the responsibility agenda, never tried to limit what we do. I've been extremely happy with their help. I couldn't have taken the company to where it is so far. And it's given me an opportunity to reinvest the money I made from the transaction into climate tech, basically.

I don't think you have to convince them at all. I think you don't convince private equity funds, you just deliver numbers. If the numbers look all right, they don't ask any questions. That's it, period.

Yeah, I don't know what we call it. I launched the project with my friend Tommy. We have a small office out of Copenhagen where we launch our own projects. It's pretty random, a little opportunistic. We've learned along the way that we end up investing a little bit too much in hope rather than business fundamentals, and we easily get excited about the science part and technology, and the potential and the promise that it typically entails. We still do launch our own projects. We're working on a platform for aggregating demand in the market in the form of off-take agreements, in order to create transparency in the market for innovative new material suppliers to get access to that demand. Hopefully we can use the aggregated demand to raise funds to support those startups on their journey to building the first factory. We continue to do stuff like that. At the same time, we've also joined forces with a great venture capital fund out of London called Giant Ventures, that are also partners with the Norrsken program. We invest mostly from their growth fund. So we now have access to a team, infrastructure, and some people that can teach us to say no. And we in return get access to their growth fund, because we really want to get involved with that area, because we need to see solutions scale.

Thank you very much. Awesome. See you soon. Thanks for showing up.