Planet Tracker’s new report highlights the growing concerns regarding water-related risks among leading global fashion brands and retailers such as Adidas, Gap, H&M, Inditex, Levi Strauss, Nike, PVH Corp, Ralph Lauren, and VF Corp.
The report emphasises potential significant indirect impact of these risks on the viability of these brands. It delineates water risks into three primary categories including physical risks to operations and supply chains due to water scarcity, regulatory risks affecting water costs and access rights, and reputational risks stemming from negative publicity regarding water usage.
The analysis underscores acute water stress in key regions supplying apparel and warns of an aggravating scenario, particularly for North American brands facing an upsurge in water stress levels. The financial stakes of ignoring water risks are substantial; a mere 1 per cent increase in the cost of goods sold (COGS) from water disruptions could lead to a 3 per cent decline in operating profits for a brand operating at a 55 percent gross margin and 15 per cent EBIT margin.
Highlighting the water-intensive nature of apparel manufacturing, the report urges industry players to o openly discuss and disclose their water usage and exposure to related risks. According to it, factors like climate change, inefficient usage, and untreated disposal exacerbating water scarcity in essential manufacturing locales are increasing the risks of supply chain disruptions in the industry. .
The report expects, apparel supply chains, predominantly situated in regions already facing moderate to high water stress, to deteriorate, impacting sales and profit margins for brands and retailers. It encourages financial institutions to factor water-related risks into their investment decisions and promote transparency and mitigation strategies among companies, including the adoption of science-based targets for water.
It is essential for companies to develop plans to manage and reduce this risk over time, says Richard Wielechowski, Senior Investment Analyst (Textiles), Planet Tracker.
