The Cost of Inaction: New Report Warns Climate Risks Threaten Trillions in Apparel Value

An analysis released by the Apparel Impact Institute (Aii) has delivered a stark warning to the global fashion sector: inaction on climate change isn’t just an environmental issue – it’s a looming financial crisis. The report, The Cost of Inaction, lays out how rising climate-linked costs and policy pressures could slash profits and erode market value across the $1.77 trillion fashion industry if companies fail to accelerate decarbonisation and resilience strategies.

Conducted with analytical support from Accenture and insights from ten leading apparel brands, the report reframes climate risk as balance-sheet risk. It translates potential climate impacts into measurable effects on cost of goods sold (COGS), operating margins and long-term enterprise value, signalling that delayed action could harm competitiveness and shareholder value.

Profits Under Pressure: Near- and Long-Term Projections

The analysis underscores three principal drivers of financial risk if industry players fail to respond effectively:

• Carbon Pricing: As climate regulation tightens worldwide, carbon taxes and emissions-based tariffs such as those seen in the European Union are expected to escalate. Without decarbonisation, brands face sharply higher costs passed down from suppliers.
• Energy Volatility: Many textile and apparel factories rely on fossil fuel-based power, leaving production costs vulnerable to fuel price swings and regulatory penalties as grids decarbonise.
• Raw Material Disruption: Climate variability can spook raw material markets, especially for fibres like cotton, and increase input price volatility.

Under one scenario modelled in the report, operating margins could shrink by three percentage points by 2030 translating into an estimated 34 per cent drop in profits for conventional operators compared with accelerated decarbonisation peers. By 2040, the cumulative effect of climate costs, policy penalties and material disruptions could erode up to 67 per cent of profits, with the broader enterprise value of the sector potentially contracting by about 70 per cent relative to a proactive net-zero pathway.

These figures are significant given that apparel and footwear generally operate on relatively thin margins; even small shocks to COGS can materially impact bottom lines. The modelling highlights how climate risks initially manifest in supplier costs and eventually permeate brand budgets and financial planning.

From Climate Awareness to Financial Strategy

A key insight from the report is that much of the industry’s emissions and climate exposure originates in supply chains known as Scope 3 emissions which comprise the majority of the sector’s carbon footprint. Because fashion brands often do not directly own these upstream operations, reducing emissions and managing risk requires collaboration, financing solutions and strategic engagement with suppliers around energy and process improvements.

The report urges industry executives especially chief financial officers and finance teams to integrate climate risks into core strategic planning rather than treating decarbonisation as a peripheral sustainability initiative. According to Aii, early investments in decarbonisation measures such as electrification, renewable energy adoption and energy efficiency upgrades can not only reduce long-term exposures but also support near-term cost relief and greater operational resilience.

Collaborative Financing and Supplier-Level Action

One of the report’s more practical takeaways is the identification of investment-ready supplier measures that can shield brands from worsening climate costs. These include:

• Electrification and renewables to reduce reliance on fossil fuels
• Heat recovery and energy efficiency upgrades to lower running costs
• Collaborative capital-pooling mechanisms to help suppliers access affordable financing for climate technologies

The analysis also highlights that early action can significantly lessen future exposure; supply chains that invest in resilience today could face four to five times less climate risk by 2040 compared with those that delay mitigation. Moreover, decoupling profitability from volatile inputs such as fossil fuels and climate-sensitive raw materials enables brands to maintain steadier cost structures and compliance readiness.

Beyond Fashion: A Broader Business Lesson

While the report centres on fashion, its implications extend to other sectors facing similar climate and transition risks. Aii’s leadership emphasises that climate pressures are no longer future concerns but current financial realities shaping supplier behaviour, regulatory landscapes and capital allocation decisions.

Industry stakeholders quoted in the report characterise climate action as essential to long-term competitiveness rather than optional sustainability reporting. As Ulrika Leverenz, Head of Green Investments at H&M Group, put it, mere awareness of climate risk is not enough robust, collaborative action is key to meeting science-based targets and preserving profitability. Likewise, Aii President and CEO Lewis Perkins stresses that collective investment across the apparel ecosystem is crucial to scaling decarbonisation at the pace required to safeguard business stability.

Urgency and Opportunity

As climate science and policy evolve, the financial stakes for the fashion industry are becoming clearer. The Cost of Inaction serves as a wake-up call, revealing how deeply climate risk is already embedded in global supply chains and financial plans and how failing to address it could imperil profitability and long-term industry value on an unprecedented scale.

In the coming years, brands that proactively invest in sustainable supply chain transformation and climate resilience may not only mitigate risk but also unlock new avenues for capital efficiency and competitive differentiation in an increasingly climate-conscious market.

References:

https://apparelimpact.org/wp-content/uploads/2026/02/COI-Report.pdf

Banner Image: Photo by Michael Lee on Unsplash

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