PARIS — Fashion and apparel chief financial officers face a stark financial risk if they delay investment in decarbonization, according to a report from the Apparel Impact Institute.
The institute’s research found that climate-related costs could erode roughly 34 percent of net profit by 2030 and up to 67 percent by 2040 if companies fail to act, alongside significant potential losses.
The report, titled “The Cost of Inaction” and developed with Accenture, frames climate change as a financial issue rather than a “sustainability” side project. It translates rising carbon pricing, energy volatility, and raw material costs into hard numbers that speak to margins, spreadsheets and shareholders for the financial corner office.
“These are not future costs — they’re emerging in current cost structures,” the institute’s senior director of sustainable finance and engagement Kristina Elinder Liljas told WWD. “It’s tomorrow’s problem, or a future problem. But no, it’s happening now.”
The findings are designed to reframe rising risks across the apparel sector for finance teams that have traditionally treated environmental benefits as “nice to haves.”
But by casting emissions, energy and raw material volatility in the language of cost of goods sold and profit hits, the report positions climate change as a core risk to a company’s value.
Rising raw materials costs, particularly climate-driven impacts on cotton and other natural fibers, and energy market volatility, especially in fossil-fuel-dependent manufacturing countries, are already pressuring margins, Liljas said.
Carbon pricing mechanisms, including the European Union’s Carbon Border Adjustment Mechanism, are expected to add further costs for emissions-intensive imports to the bloc, while climate-driven weather disruptions in key sourcing regions are creating massive price swings.
Liljas said sustainability and business goals are often siloed within companies, leaving CFOs and treasury teams to see climate action outside of their models.
“Traditionally in these companies, the departments don’t necessarily work together and are not integrated. You have the sustainability goals, and then you have the business goals. We’re trying to argue that these belong together. They need to be incentivized, because now we have a business case to support that,” she said.
Scope 3 supply chain emissions are a key driver of financial exposure. While brands do not directly control these emissions, they ultimately bear the cost through higher supplier pricing. “If they’re going to reach Net Zero, they need to address Scope 3, which sits within the manufacturing hubs, and the suppliers themselves cannot finance this,” Liljas said.
Capital expenditures for supplier decarbonization projects are often delayed because of long payback periods that suppliers cannot handle alone. “Typically the payback period for a supplier [on infrastructure investments] can be four to five years and beyond, which makes it a very hard case for them to invest in [upgrades], simply because they don’t have the forecast overview of incoming revenue and orders, because traditionally, this sector doesn’t have the long-term purchase agreements,” she said.
The institute works to make these investments more attractive to suppliers through deployment gap grants, which partially fund the upfront cost of renewable energy, electrification and efficiency projects. The funding comes from brands, ensuring that while suppliers carry some burden, companies share responsibility. “Any profit-making business will try and increase margins, whatever industry you’re in, but I think everybody that we speak to recognizes that this needs to be a shared responsibility and cost [between] the brands and suppliers,” Liljas said.
Policy uncertainty is not helping. The constant change in trade and tariff policy, particularly in the U.S., as well as climate regulation backtracks in the EU, all add up to make companies hesitant to commit capital to long-term projects.
“This is not just textiles, but there’s a hesitancy — people are waiting. It’s hard to know what to invest in. If we talk about these larger costs, if you don’t know from one day to another if there’s going to be tariffs, are you going to invest 10 million in that facility, in that market?” she said. “People sit and wait because these investments, they won’t pay off in a quarter or six months. The ROI will come in three to five, maybe even 10 years. So it needs to be long-term and strategic.”
The report emphasizes that collaboration, pooling resources and aligning investment priorities across brands and suppliers can amplify impact and reduce risk.
“Because it is a fragmented industry, we need to pull the funding toward these larger capex investments and create the financial tools and vehicles to drive these projects,” Liljas said.
Liljas argued that taking early action on decarbonizing suppliers will make the industry more resilient. “If you’re a conventional operator, you’re the one that’s going to take the biggest [hit],” she said. “The pioneers are the ones that are going to be the most resilient. Everybody will face a cost of some sort, but the opportunity cost will be less for them.”
For CFOs, who report to a board as well as shareholders, integrating climate risk into budgets is also a matter of seeing past the constant reporting cycles and looking at long-term strategy. “We can make the business case integrated with sustainability, so it’s not one excluding the other — they can serve each other. In fact, it is a win-win,” Liljas said.
CFOs should no longer see climate change as an abstract sustainability concern, she emphasized, with rising energy costs, volatile raw materials and regulatory developments being new financial realities that must be incorporated into margins, forecasts and capital allocation.
While the potential profits at risk are the headline number, Liljas stressed the urgency lies deeper and is reliant on industry-wide action. She emphasized the need for collaboration. “We are not on track, frankly, in terms of reducing emissions. We’ve set out to reduce emissions by 100 million tons, and to date, I think we’re sitting at about 9 million,” she said. “The capital is out there. It exists, but the best way to leverage it is to collaborate and to pull it together, and then it can become catalytic.”