While shedding does indeed occur as previously stated, it is a well known occurence that dense and curly fur/wool tends to get clutted even after releasing from the hair folicles (ask anyone with a hairy cat or dog or look into "deshedding", its a whole industry in itself). This is especially the case for livestock that has been selectively bred for their coat. Some of these domestic breeds are unable to adequately shed their coat, which can cause infections and other health problems.
Another thing to take into account is that various locations are too hot to naturally inhabit sheep. In this case, the sheep could die from overheating unless sheared.
From an ethical point of view, this situation only really occurs because these sheep are bred in the first place. In the wild, they'd probably end up dying quite fast in most parts of the world.
Suggested Reading: Official Statement from the American Society of Animal Science Board of Directors on sheep shearing