Climate inaction puts 34% of fashion industry profits at risk

The fashion industry is heading for a 34% drop in profits by 2030 unless companies move quickly to rein in their climate footprint, according to a report by the Apparel Impact Institute.

As global warming becomes increasingly politicised, the financial case for action is becoming harder for executives to ignore, said Lewis Perkins, president and chief executive officer of the Apparel Impact Institute. The report details the rising costs of inaction, from supply-chain disruptions to higher operating expenses, underscoring the risks climate change poses to corporate earnings.

“You are already assuming some of these costs whether you know it or not,” Perkins said in a phone interview. “We are talking quarters, not decades.”

The AII report flagged three pressure points that may have the greatest impact on corporate profits within the next four years: higher carbon prices, rising raw-material costs and more expensive energy. Together, the risks threaten margins and long-term competitiveness unless brands factor climate exposure into cost planning and investment decisions, the report said.

“Volatile carbon, energy and material markets are no longer theoretical,” according to the report. “They are shaping supplier pricing and operating costs across the apparel value chain.”

Climate inaction could shave three percentage points off companies’ operating margin by the end of the decade, translating into a 34% drop in profits, the report said. If those trends persist, as much as 70% of the $1.8 trillion fashion industry’s value could be wiped out by 2040.

Perkins said “collaborative investment” is crucial to maintaining business stability in the face of climate change.

Carbon pricing is emerging as a growing hurdle as companies face expanding regulatory and fiscal measures, the report said, citing the European Union’s Carbon Border Adjustment Mechanism, which effectively acts as a carbon import tax on certain goods and materials entering the bloc.

Most emissions from the textile industry fall under Scope 3, meaning the largest opportunities for cuts are tied to decarbonising supply chains, said Kristina Elinder Liljas, AII’s senior director of sustainable finance.

There are obstacles, however, because brands don’t own their suppliers, they share them, Liljas said, making it harder to drive change. Efforts to tackle Scope 3 emissions often stall because companies are reluctant to pay for the required upgrades, she said.

The report’s authors said many fashion companies lack the capital to decarbonise supply chains on their own, recommending that brands co-invest with suppliers to share the burden and tap financial tools such as sustainability-linked loans to fund the transition. They also said finance chiefs should embed risk-adjusted climate costs into their budgeting and capital-spending plans.

“We fully support that meaningful change requires collaboration from all relevant actors across the entire supply chain," said Ulrika Leverenz, head of H&M Group's green investments, adding that the company backs the idea of accelerating “the decarbonisation of our supply chain.”

A separate study published last month by the World Benchmarking Alliance found that redirecting a larger share of existing capital spending to low-carbon investments could unlock as much as $1.3 trillion for the clean-energy transition. The analysis of about 1,600 companies worldwide showed the median share of capex currently devoted to such projects is 7%.

Even when the capital is available, getting finance chiefs to act remains a hurdle, Liljas said.

“We need to speak their language,” she said. “They answer to a board and shareholders,” which means “they still need to make the business case.”