Water-related risks rising for the fashion industry | Planet Tracker

INSIGHT by the Planet Tracker

Planet Tracker has released a groundbreaking report uncovering the significant water-related risks faced by major fashion brands and retailers, including Adidas (ADS.GR), Gap (GPS.US), H&M (HMB.SS), Inditex (ITX.SM), Levi Strauss (LEVI.US), Nike (NKE.US), PVH Corp (PVH.US), Ralph Lauren (RL.US) and VF Corp (VFC.US).

With water stress on the rise in key manufacturing regions, the report urges companies and investors to prioritise water risk management for long-term sustainability.

While the direct operations of these companies may seem to have low water-related risks, the report suggests that indirect impacts could pose significant threats to their operations.

Planet Tracker identifies three main classes of water-related risks facing the fashion industry:

1. Physical Risks: Operations and supply chains could be jeopardized by water scarcity.
2. Regulatory Risks: Potential changes in water costs, access rights, or social license to operate could impact profitability.
3. Reputational Risks: Adverse coverage of a brand’s water impacts could damage its reputation.

The report points out that water stress is already significant in many major apparel supplying regions, and projected changes could exacerbate the situation. North American brands, in particular, face a notable increase in water stress, according to Planet Tracker’s analysis.

“Water risk should be seen as a strategic threat by major apparel corporates. Developing plans to manage and reduce this risk over time is essential for long-term sustainability”.

-Richard Wielechowski, Senior Investment Analyst (Textiles) at Planet Tracker

The report also highlights the financial implications of water-related risks. A typical apparel brand operating with a 55% gross margin and 15% EBIT margin could see a 3% decrease in operating profit from just a 1% increase in COGS (cost of goods sold) due to water-related disruptions.

“Investors in the apparel sector need consistent and comparable data to appropriately price water-related risks. Currently, the textile sector falls short in meeting this need, but investors should work with their holdings to address this data gap”.

-Richard Wielechowski, Senior Investment Analyst (Textiles) at Planet Tracker

The manufacture of apparel involves significant water usage across various stages, from dyeing to raw material production. Companies in the industry need to discuss and report on their water usage and exposure to water-related risks.

Water availability is expected to become increasingly stressed in key manufacturing regions due to climate change, inefficient usage and untreated disposal, potentially disrupting supply chains.

Much of the apparel supply chain operates in areas of moderate to high water stress, with the situation projected to worsen in the medium-term, posing risks to sales and margins for brands and retailers.

Financial institutions should consider water-related risks in their investment decisions and engage with companies to disclose water usage and risks while supporting strategies to mitigate these risks, such as setting Science Based Targets for water.

Ripple Effects provides hard evidence that water poses a social as well as operational risk for stakeholders across the textiles value chain.

Planet Tracker has created a new interactive dashboard overlaying datasets from two open-access sources, WRI Aqueduct 4.0 and Open Supply Hub, producing a geospatial snapshot of nearly 800 brands across the globe. Users can delve directly into the data, by selecting of one of the following:

• A specific Brand
• A group of Brands whose headquarters are in a particular region (ie. North American vs European Brands)
• A group of Brands by latest Revenues figures

 According to the selection made, users are then able to evaluate:

• Where supplying facilities are located
• The intensity of current and forecasted Water Stress
• The aggregated Water Stress and projected increase faced at selection level

Read the Report here

| Further resources

• Interactive Dashboard 
• Water Impact Calculator

| about

Planet Tracker is an award-winning non-profit think tank focused on sustainable finance with the purpose of ensuring that capital markets’ investment and lending decisions are aligned with planetary boundaries and support a just transition. Its mission is to create transformation of global financial activities by 2030 to bring about real world change in our means of production so that they align with a resilient, just, net-zero and nature-positive economy. Planet Tracker serves both as a watchdog on corporate behaviour, including issues such as greenwashing, and serves as an ally to support finance and business to know how to undertake transition. Having identified the companies causing the worst environmental and social damage within targeted supply chains, Planet Tracker then identifies the investors and lenders in these companies whose financing is enabling these practices to continue unchallenged.