The Cost of Climate Inaction Could Reach 34% of Fashion Industry Profits

By Antonio Vizcaya Abdo | Published 4 hours ago | About a 5 minute read

Image: Photo by Konstantinos Papadopoulos on Unsplash

Two weeks ago, I wrote about how extreme weather is increasingly showing up in financial results. Floods, droughts, heatwaves and storms are disrupting operations, damaging infrastructure, affecting productivity and creating new costs across supply chains. As more organizations disclose their experiences, the connection between climate impacts and business performance becomes increasingly visible.

The evidence continues to accumulate.

While every sector faces some degree of exposure, vulnerability is not evenly distributed. Industries that depend on global sourcing networks, agricultural commodities and energy-intensive production systems face a particularly complex combination of physical and transition risks.

The apparel and footwear sector sits squarely within that group.

A recent analysis from the Apparel Impact Institute (Aii), The Cost of Inaction, estimates that climate-related pressures could reduce profits for a representative apparel company by up to 34% by 2030. Under the longer-term scenarios evaluated, the reduction could reach 67% by 2040.

Those figures are striking, but the financial pathway is even more relevant. Higher energy bills, volatile cotton prices, carbon costs and supplier investments can all move directly into cost of goods sold, operating margins and capital-planning decisions.

The analysis focuses on three sources of exposure that are becoming increasingly relevant for apparel companies: carbon pricing, raw-material volatility and energy costs.

Carbon, energy and materials are becoming margin variables

Among the risks analyzed, carbon pricing generates the largest projected impact.

Governments around the world continue to expand carbon markets, emissions trading systems and other mechanisms that place a financial value on greenhouse-gas emissions. The European Union's Carbon Border Adjustment Mechanism, China's expanding emissions trading system and India's carbon market developments all point in a similar direction.

For apparel companies, this means emissions embedded within manufacturing processes increasingly carry economic consequences.

According to Aii, carbon-related costs could increase the cost of goods sold by nearly 13% by 2040 for organizations that make limited progress in reducing supply-chain emissions.

The analysis estimates that carbon pricing alone could reduce operating margins by more than six percentage points under certain scenarios. In an industry where margins are often measured in single digits, changes of that magnitude have the potential to influence competitiveness, valuation and long-term profitability.

Raw materials represent a second source of exposure.

Cotton remains one of the industry's most widely used fibers and is highly sensitive to changing climatic conditions. Drought, water scarcity, shifting rainfall patterns and extreme temperatures can affect both yields and quality. Consequently, volatility in agricultural production can translate into volatility in sourcing costs.

Aii projects that climate pressures could reduce global cotton production over the coming decades, contributing to higher prices and greater uncertainty across procurement strategies. For companies heavily dependent on virgin cotton, these dynamics introduce an additional layer of exposure that extends well beyond commodity markets.

Energy creates a third pathway through which climate-related pressures can affect business performance.

Many manufacturing hubs continue to rely heavily on fossil fuels for thermal energy and electricity generation. Therefore, fluctuations in fuel prices, evolving regulations and future carbon costs can all influence production economics. Facilities that remain dependent on coal and other carbon-intensive energy sources may face increasing cost pressures as policy environments evolve and energy systems transition.

Viewed individually, each of these factors may appear manageable. However, their combined effect begins to reshape the economics of production across the apparel value chain.

The Aii analysis also highlights an important point. Climate-related costs rarely arrive in isolation. A drought can affect crop yields. Higher temperatures can influence labor productivity. Flooding can disrupt transportation networks. Energy shortages can affect manufacturing output. Regulatory responses can create additional compliance costs. As these pressures interact, they can amplify volatility throughout sourcing, production and distribution systems.

Why finance teams are becoming central to climate resilience

One of the most interesting aspects of this work is its intended audience.

Rather than targeting sustainability practitioners, the analysis is written primarily for CFOs, finance teams and business leaders responsible for capital allocation and financial performance.

That distinction is important because many of the decisions that influence climate resilience involve investment choices, procurement strategies, supplier relationships and long-term planning horizons.

Aii estimates that approximately 99% of apparel brands' emissions sit within Scope 3 categories, including material production, manufacturing, processing and transportation. As a result, a significant portion of climate-related exposure originates outside direct corporate operations.

This reality changes the conversation around decarbonization.

Reducing emissions increasingly requires engaging suppliers, supporting technology upgrades, improving energy systems and strengthening resilience across the value chain. In many cases, the discussion becomes less about reporting emissions and more about determining where capital should be deployed to reduce future exposure.

The analysis repeatedly returns to supplier investment as one of the most effective levers available. Electrification, renewable energy deployment, energy-efficiency improvements and supplier financing mechanisms all emerge as strategies capable of reducing long-term cost exposure while strengthening operational resilience.

Importantly, these investments are framed through a financial lens. Delaying action may avoid short-term expenditures, but it can also increase future costs associated with carbon pricing, energy volatility and supply-chain disruptions. Conversely, earlier investments can help stabilize costs, improve predictability and reduce exposure to future regulatory changes.

Although the analysis focuses specifically on apparel and footwear, the broader implications extend much further.

Agriculture, food production, consumer goods, manufacturing, transportation and other sectors are encountering similar dynamics. Physical climate impacts increasingly affect operations and supply chains, while policy responses create additional economic signals that influence business decisions.

Consequently, climate adaptation, scenario analysis, transition planning and supply-chain resilience are becoming increasingly relevant within enterprise risk management frameworks.

The Aii analysis contributes to this conversation by translating climate-related pressures into metrics that business leaders routinely use. Cost of goods sold, operating margins, profitability and enterprise value provide a common language for discussing risks that often originate far from corporate headquarters.

As the body of evidence continues to grow, the conversation is becoming increasingly practical.

Companies are assessing how changing climate conditions may affect sourcing decisions. Investors are evaluating exposure across portfolios. Financial institutions are incorporating climate considerations into lending and risk assessments. Procurement teams are examining supplier resilience with greater scrutiny.

The apparel industry provides a useful case study because its supply chains are extensive, globally distributed and closely linked to climate-sensitive inputs. Yet the underlying lesson reaches beyond fashion.

Climate-related impacts are increasingly influencing costs, investment decisions and competitive positioning. The organizations that understand these connections early will likely be better positioned to navigate a business environment shaped by both environmental and economic change.