Industry

Fashion Sector Lets Water Risk Slide

Planet Tracker report identifies water-related risks as a major strategic threat for apparel brands and retailers, highlighting investors’ role in raising awareness. 

Companies and investors in the fashion sector have been urged to prioritise water risk management for long-term sustainability, amid water stress rising in key garment manufacturing regions globally.

In a new report focused on quantifying such risks in the apparel supply chain, sustainability-focused think tank Planet Tracker examined 29 top brands on their propensity to report their water impacts and dependencies, and to fix targets to reduce their water footprints.

Of the 29 surveyed companies, 15 reported on their water usage to non-profit CDP, which runs an environmental impact disclosure system for investors and companies. Planet Tracker interpreted this as a “fairly positive starting point”, saying it showed that management teams paid attention to the issue.

Incidentally, CDP published its 2023 global water report last week – sponsored by Norges Bank Investment Management – in which the apparel sector ranked a close second behind the food, beverage and agriculture industry on the reporting of water risks in supply chains. The fashion sector however did come first on setting water-related targets, with 26% of disclosing companies having done so – compared to a mere 4% across all the 3,163 companies included in the CDP report.

“The apparel sector is leading the charge…assisted by initiatives like ZDHC’s Roadmap to Zero Programme – underlining the significance of multi-stakeholder, sectoral commitments to champion supply chain change,” CDP said in a statement.

“It’s clear that more companies need to step up. As the Taskforce on Nature-related Financial Disclosures and Science-Based Targets Network (SBTN) gain momentum, alongside the potential rise of mandatory supply chain due diligence regulations such as the Corporate Sustainability Due Diligence Directive, we anticipate seeing a gradual increase in supply chain targets for water.”

In its report, Planet Tracker also stressed the need for more companies to set science-based targets, following SBTN’s recently published guidance on corporate stewardship for freshwater.

“We see widespread adoption of the SBT framework as a critical step for the sector as a whole to address its water impacts and dependencies and mitigate the risk of water-related disruption,” the report mentioned. “We note that this framework also encourages collective action with local communities and civil society in areas of impact, so will help ensure that the targets and plans developed are equitable for those directly impacted by the issue.”

Mixed record

Despite the apparel sector’s broadly positive record on water risk reporting and target-setting compared to other industries, there remains much room for progress.

Major fashion brands and retailers, including the likes of Adidas, Gap, H&M, Levi Strauss, Nike and Ralph Lauren, are facing significant water-related risks, according to Planet Tracker. While their direct operations seem to have lower exposure, indirect impacts could pose major threats to their activity. In many cases, these risks are discounted or underestimated.

“Water is an under-appreciated risk for apparel corporates and their investors, which many corporates barely mention in their reporting,” Richard Wielechowski, Senior Investment Analyst for Textiles at Planet Tracker, told ESG Investor. “This lack of discussion is surprising as water is critical for many steps of textile manufacture, and many key manufacturing regions already experience high water stress. This is expected to worsen in the medium term, raising the risk of water-related disruption to supply chains.”

The report identified three main classes of water-related risks currently facing the fashion industry: physical, whereby operations and supply chains could be jeopardised by scarcity; regulatory, whereby potential changes in costs, access rights or social licenses to operate could impact profitability; and reputational, whereby adverse coverage of a brand’s water impacts could damage its reputation.

“This timely and important analysis shows how unprepared the fashion industry is in the face of the climate crisis,” said Kate Jelly, Labour Rights Researcher at the Business & Human Rights Resource Centre. “The outlined water risks carry huge implications for garment workers, who are already some of the world’s most vulnerable. As the report makes clear, garment production is threatened by both water stress – which could reduce the ability of factories to operate or perform certain functions, like dyeing – and flooding.”

North American brands, in particular, face a notable increase in water stress, Planet Tracker noted. The report also highlighted some financial implications, saying that a typical apparel brand operating with a 55% gross margin and 15% earning before interests and taxes (EBIT) margin could see a 3% decrease in operating profit from just a 1% increase in cost of goods sold (COGS) due to water-related disruptions.

“Given the potential material impact to revenues and margins from water risk, major apparel corporates need to consider this as a strategic threat and develop plans to manage and reduce it over time,” said Wielechowski.

Investors’ role

Beyond risks to the corporate sector, Planet Tracker stressed that one of the most important findings from its analysis was that investors rarely seemed to ask about water-related risks “in public fora”.

The think tank recorded very few mentions of such risks in transcripts from earnings calls or capital market events, with only 1% of all mentions recorded. As such, it encouraged investors to bolster engagement with corporates on the subject.

“Investors should demand that corporates transparently disclose the water dependencies and impacts of their direct and indirect operations, so they can appropriately price water risk,” Wielechowski suggested. “They should then push them to develop water transition plans with science-based targets to minimise their impacts, and thus better manage risks.”

The report also recommended that investors include water risks in their due diligence and investment decisions when appraising apparel industry corporates, and consider those in their interactions with them.

“ESG investors have primarily concentrated on the energy transition and reducing emissions, often overlooking critical issues like water scarcity and biodiversity – which might be even more pressing due to their irreversible tipping points,” said Sharvari Johari, a Senior Sustainable Research Analyst at American Century Investments who recently published a paper on global water scarcity challenges.

“Once these resources are depleted, they cannot be easily replenished. A focus on these topics might lead to new ideas for a best-in-class portfolio, with potential investment themes being water filtration technologies and testing, or regenerative agriculture products.”

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