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The global fashion industry faces a serious financial risk if it fails to accelerate its response to climate change, according to a report released by Apparel Impact Institute, a nonprofit organisation.
The report, The cost of inaction, delivers a stark warning to the global fashion sector.
It estimates that by 2030, failure to act on emissions reductions could result in a 3 per cent loss in operating margins, with 34 per cent profit cuts. The outlook becomes even more severe by 2040, when projected losses could reach as high as 67 per cent.
These estimates highlight the growing financial exposure brands and manufacturers face as climate-related pressures intensify.
The analysis identifies three primary drivers behind these risks: carbon pricing, raw materials, and energy. Carbon pricing is expected to rise dramatically, from an average of $10 to $350 per tonne by 2040. As a result, apparel manufacturing costs are likely to climb substantially. The report estimates that carbon costs alone could increase the cost of goods sold by 13 per cent by 2040.
Raw material sourcing, particularly cotton, presents another major vulnerability. Cotton accounts for roughly 19 percent of global fiber production and is highly sensitive to climate conditions. Increasing droughts, heatwaves, and shifting rainfall patterns are driving greater water stress and weakening agricultural resilience. These challenges are compounded by deforestation, land-use changes, and biodiversity loss linked to raw material production.
These climate pressures threaten cotton yield, quality, and growing seasons, increasing production volatility and supply risks for apparel brands. In 2022, extreme weather events including heavy rains in India, heat waves in China, and droughts in the United States caused cotton prices to rise by 30 per cent in a single year. By 2040, approximately 50 per cent of cotton-growing regions are expected to face higher temperatures and water scarcity, while 40 per cent may experience shorter growing seasons. Such instability threatens both supply reliability and cost predictability for apparel brands.
Energy use in textile manufacturing further compounds the sector’s exposure. Much of the industry’s carbon footprint stems from Tier 2 production processes, such as dyeing and finishing, which often rely on coal-powered energy grids in major sourcing countries. Without swift investment in renewable energy and efficiency improvements, suppliers may confront escalating fuel costs and regulatory penalties that could ultimately be passed on to brands.
The fashion industry is a major contributor to global emissions. It contributes 2 per cent or more of global carbon emissions, with 99 per cent of brands’ emissions classified as Scope 3, including manufacturing, sourcing and garment assembly, which most frequently occurs in Asia.
The assessment emphasises that early investment in supplier-level decarbonisation, including electrification and renewable energy adoption, can mitigate long-term financial risks.
The report urges business leaders in various sectors to recognise the financial risks associated with postponing climate mitigation and to take steps to strengthen resilience and protect long-term business performance.