The fast fashion company once called the “TikTok of e-commerce” is the subject of what could be the hottest initial public offering (IPO) of 2024. But SHEIN’s shady record of alleged human rights violations and poor environmental record flies in the face of Wall Street’s new ESG philosophy.
Will U.S. financial giants like Goldman Sachs, J.P. Morgan, and Morgan Stanley, the lead underwriters of the potential IPO, look past these Environmental, Social, and Governance concerns for the sake of a substantial payday?
SHEIN, a Singapore-based company originally founded in China, took the Gen Z fashion world by storm last decade with its cheap clothing and free shipping and returns. At the onset of the COVID-19 pandemic, SHEIN worked with entertainers, including Katy Perry, Lil Nas X, and Madelaine Petsch, for a digital event.
SHEIN was valued at $66 billion last May with hopes that it would reach $90 billion before going to the stock market. With its rise in popularity, however, came more intense scrutiny. Regulators, politicians, activists, and attorneys are studying its labor practices, environmental footprint, and potential copyright violations.
That caused SHEIN’s value to drop to $45 billion and raised questions about whether it could reach its lofty goals of being the most valued Chinese company to hit the U.S. market.
“SHEIN faces an uphill battle,” Matthew Kennedy, a senior strategist with Renaissance Capital, a company that studies IPOs, told DCJournal. “Companies typically want to go public riding a wave of positive publicity. They want to show investors a sea of green lights and minimize any red flags. With the recent developments, they certainly have some headwinds.”
SHEIN’s headwinds are a combination of political and self-inflicted wounds.
A 2021 report from research firm Public Eye portrayed SHEIN as a company that used a host of micro-companies in China to produce apparel. Images from the so-called “SHEIN Village” near Nancun Village showed hallways full of stuffed clothing bags.
Workers claimed they worked 75 hours per week, with some shifts reaching eleven and a half hours per day, in violation of Chinese labor law. SHEIN officials claim they require suppliers to “arrange working hours reasonably and shall comply with local laws and regulations.”
SHEIN also faces accusations that it uses cotton from China’s Xinjiang region for U.S. sales. Xinjiang is where Uyghur Muslims are routinely abused and forced into slave labor. Products from Xinjiang are banned in the U.S.
The labor condition accusations caused a group of U.S. attorneys general to ask the federal government about new stock market rules. In a letter to the U.S. Securities and Exchange Commission (SEC), they requested foreign-owned companies use a “truly independent process” to prove that the company doesn’t use products made by forced labor.
“Lip service is not enough,” wrote the attorneys general. They argued the SEC should conduct a ‘trust, but verify’ system on companies like SHEIN “before it receives the privilege of being listed on an American securities exchange.”
Congress wants SHEIN to explain itself.
Reps. Cathy McMorris Rodgers (R-Wash.) and Gus Bilirakis (R-Fla.) of the House Committee on Energy and Commerce sent a letter to SHEIN executives requesting that they make sure company products aren’t made in Xinjiang or with Xinjiang-farmed materials. The letter also questions whether the company has taken “additional steps or increased scrutiny” on any products from Xinjiang. It’s not known if SHEIN has responded to the letter.
What may give SHEIN its biggest headache involves Chinese regulators—the Financial Times reported executives met with the Cyberspace Administration of China and the China Securities Regulatory Commission. It’s believed the meeting happened because SHEIN uses Chinese workers to create its products.
That puts SHEIN in a strange place, according to Rui Ma, a China tech analyst and co-founder of Tech Buzz China.
“There is a lack of clarity on exactly what the process is for a company like SHEIN…to achieve approval for listing,” Ma told DCJournal. “The entire process is new and relatively untested…and it may not be clear for some time. “
Another problem for SHEIN involves intellectual property (IP) theft allegations. It has faced up to 100 lawsuits, from small artists to massive designers like Oakley, Ralph Lauren, and Deckers.
“SHEIN’s various entities continue to sell flagrant infringing copies of our artist clients’ works, and that is hugely problematic for these artists,” Andrew Gerber, a trademark and copyright attorney, told DCJournal. His law firm, Kushnirsky Gerber PLLC, represents four clients who have sued SHEIN. “When a massive company like SHEIN has such little regard for the intellectual property rights of independent artists and actively sells identical or near-identical copies of these artists’ works for two dollars. There is no possible way these artists can compete with that and earn a living.”
But SHEIN also faces questions about its environmental practices. As a fast fashion company, SHEIN’s clothing is made with cheaper material, like polyester, that can be produced quickly but tends to wear out faster than other clothing. That can lead to items ending up in landfills and taking years to decompose.
“They’re selling their products to Gen Z, which is a little bit more environmentally conscious,” said Kennedy. He believed it could eventually backfire on SHEIN if the company isn’t careful. “I don’t think that would be like necessarily top of mind, but I think it will be certainly a risk factor for their audience.”
Given the West’s apparent focus on environmental, social, and governance framework, why would investors put their money into a company that apparently flouts the environment? J.P. Morgan declined to comment on the story, while Morgan Stanley officials did not return email and phone requests.
Gerber hoped SHEIN’s desire to be on a stock exchange would lead to changes within the company. “Perhaps the additional sunlight…will lead to some good here,” he said. “But on the flip side, if a company is engaging in such widespread recidivist unlawful conduct, I’d be curious about investors and future owners of the company and what they think about that.”
