Despite the increasing political rhetoric surrounding global warming, the financial impact of climate change is becoming increasingly difficult for corporate executives to ignore, according to a recent report by the Apparel Impact Institute.
According to the report, if inaction on climate issues continues, companies’ operating margins could fall by about 3 per cent by the end of the decade, which could lead to a decline in profits of about 34 per cent.
“Whether you know it or not, you’re already paying these costs. We’re talking about quarters, not decades,” said Lewis Perkins, President and CEO of Apparel Impact Institute.
The Apparel Impact Institute report identified three factors that could have the biggest impact on corporate profits over the next four years. These are
- Rising carbon prices
- Rising raw material costs
- Rising fuel costs
The report says that failing to address these risks will hurt brands’ competitiveness in the long run. If this trend continues, about 70 per cent of the value of the global $1.8 trillion fashion industry could be at risk by 2040.
Kristina Elinder Liljas, Senior Director of Sustainable Finance of Apparel Impact Institute, said that most of the textile industry’s carbon emissions fall under ‘Scope-3’, which is mainly associated with the supply chain.
“Brands do not directly own their suppliers, so it is difficult to bring about change. Often, initiatives are stalled due to a lack of interest in the necessary investment.”
The report mentions that most fashion companies do not have sufficient capital to decarbonise their supply chains on their own. Therefore, joint investments with suppliers and the use of financial mechanisms such as ‘sustainability-linked loans’ have been recommended.
In this context, Ulrika Leverenz, Head of Green Investments at H&M Group, said, “Meaningful change requires collaboration across the entire supply chain. We are in favour of accelerating decarbonization.”
Meanwhile, a separate study by the World Benchmarking Alliance said that if a large part of existing capital expenditure were invested in low-carbon projects, about $1.3 trillion in funding could be raised.
The study found that currently, on average, only 7 per cent of the capital expenditure of companies worldwide is spent on low-carbon projects.
However, even if there is money, Liljas finds it difficult to activate financial officers in many cases. “We have to speak their language. They are accountable to the board and shareholders. So, it is important to show a strong business case behind climate initiatives.”
According to experts, the financial risks for the fashion industry will deepen in the future if effective action is not taken now to combat climate change.