Who wouldn’t be happy about that? A new cosy jumper in the new autumn/winter trend colour 2023, “butter yellow”! The new trendy garment is quickly pulled from the shelf and after thoughtlessly inserting the ATM card at the checkout, you are the official owner of a new jumper.
Shortly after leaving the air-conditioned shop, you are shocked for a moment that it is still 27 degrees outside at the beginning of October and you can’t help but think of climate change. Immediately, you are plagued by thoughts like “Do I really need this jumper?”. As we all know, the most sustainable piece of clothing is the one that was never made…
The environmental impact of the textile industry
On the one hand, the textile industry depends on numerous natural resources; on the other hand, it is precisely these dependencies that result in various impacts on the environment. In addition to water (N.B. an average of 2,700 litres of water is used to produce one cotton T-shirt), land is also needed to grow cotton. The dyeing and finishing of textile products with chemicals alone are estimated to be responsible for about 20% of global wastewater.
In addition, the fashion industry produces about 10% of global CO2 emissions. At around 4-5 billion tonnes of CO2 emissions, this is about tantamount to what all international flights and global shipping combined generate. These figures push the textile sector to near the top of the list of major drivers of global water pollution and land consumption (N.B. in 2020, the textile sector was the third largest source of water pollution and land consumption). 
In 2020, an average of 400 m2 of land, 9 m3 of water, and 391 kg of raw materials were needed to meet the textile needs of one EU citizen. This corresponds to a carbon footprint of approximately 270 kg. 
Source: European Environment Agency
What is climate risk actually?
Even the booming fashion industry is confronted with a wide variety of challenges due to climate change that could make the entire industry rethink its ways. These “new”, extensive risks that are only becoming apparent as part of the climate crisis are called climate risks and include all uncertainties that can arise in connection with climate change.
Mark Carney, former Governor of the Bank of England and co-founder of the Task Force on Climate-Related Financial Disclosure (TCFD), said in a speech more than eight years ago: “Climate change is the tragedy of the horizon”.  The famous sentence, as well as the entire speech, was seen by many as a turning point in the global discussion on the challenges of climate change in the financial industry.
The TCFD was originally created to provide investors, lenders, and other financial market participants with better climate-related information.  The idea was that this would facilitate more informed decisions regarding climate-related risks (and also opportunities!). In its recommendation report, the TCFD divides climate change and carbon-transition risk factors into two categories: physical risks and transition risks. 
The frequency of heat waves and extreme weather events has increased compared to pre-industrial times. The costs associated with these actual, tangible, physical impacts of climate change are referred to as physical risks. Physical risks can be divided into acute and chronic risks. Extreme weather events (e.g. floods) are examples of acute physical risks. Longer-term changes in climate patterns that could lead to a warmer environment or rising sea levels, on the other hand, are chronic physical risks. 
The risks associated with the transition to a low-carbon economy are referred to as transition risks. These risks can be divided into four sub-categories:
- Reputational risk: e.g. the increasing stigmatisation of CO2-intensive economic sectors.
- Market risk: e.g. the change in customer behaviour, rising prices for raw materials
- Technology risk: e.g. the development of new technologies with lower CO2 emissions or the substitution of current technologies.
- Legal and political risk: e.g. increased pricing of GHG emissions, increased reporting of GHG emissions, increased vulnerability to litigation.
Climate risks in the textile industry
As pointed out above, all kinds of raw materials and natural resources are needed to produce new garments. Besides cotton, leather and wood are among the most important commodities in the textile world. From this, some risks can be derived that could be of great relevance to the industry in the future. Once certain risks for the textile industry have been evaluated, it is also necessary to assess how exposed one is to the identified risks and how these risks can best be managed.
Biodiversity, land use, und water use:
The cultivation of cotton goes hand in hand with enormous land use and dwindling biodiversity in the growing areas. On the one hand, heat waves, droughts (and at the opposite end, cold spells), and floods can have an impact on the cotton crop. With a constant change in climate, the current cultivation areas may no longer be able to meet the cultivation needs of the crop in the future. These are classically physical risks, as the textile sector is directly impacted by extreme weather phenomena and long-term climate change. On the other hand, regulatory risks related to land use and biodiversity also play a role. In addition, production sites in areas with less water could be increasingly confronted with reputational risks in the future.
The textile industry is therefore highly dependent on various natural resources, which is why the loss of biodiversity and sufficient water is one of the main risks. Some of the approaches used by companies in the textile industry to address water scarcity include water optimisation programmes (frequently in cooperation with local communities), water reduction programmes together with agricultural suppliers, and the measuring of water efficiency.
Carbon footprint of the product:
The textile, apparel, and luxury goods industries face regulatory risks regarding the carbon footprint and environmental labelling of products. Higher and more volatile energy prices upstream along the value chain (affecting raw materials, input, and distribution costs) could lead to higher costs. Companies are more vulnerable the higher the CO2 intensity is of the business unit whose operations are located in countries where regulations are becoming more stringent. To better manage the risks, the carbon footprint could be measured through a product life cycle analysis. Furthermore, the emissions of the suppliers (across the entire value chain) should be collected and reduction targets should be defined.
Raw material procurement:
Companies depend on raw materials such as cotton, leather and wood. The production of these raw materials can have serious environmental effects, such as deforestation, water and pesticide use, and the release of hazardous chemicals. Cotton fields are often monocultures, which is why the use of pesticides is on a continuous rise. However, as the use of certain pesticides is not entirely safe for both humans and the environment, new regulations in this area may be introduced in the future. Poor impact management could also lead to reputational and brand damage.
Risk management in the supply chain of fashion companies includes, for example, the procurement of raw materials (cotton, leather, …) that are environmentally certified by third parties. In addition, the handling of controversial raw materials should be evaluated and, if necessary, guidelines should be developed. It should also be noted that cooperation with suppliers in the procurement of raw materials is becoming increasingly important.
Exactly what additional challenges and risks climate change will bring remains uncertain. What is certain, however, is that the relationship between the environment and businesses in the fashion and textiles industry is characterised by significant interdependencies. Just as the industry has a serious impact on the environment and the climate, climate change also has significant implications for businesses in the industry, particularly when they are affected by natural disasters caused or exacerbated by climate change. Extreme weather conditions can also affect supply chains and operational processes.
To better evaluate the risk situation, the development of resilience plans and the implementation of environmentally friendly practices is part of reducing the impact on the environment. It is also important that companies reduce their dependence on fossil fuels and use renewable energy to reduce their emissions and minimise their carbon footprint.
Read more articles from the ESGenius Letter on the topic of “Climate Risks” here!
For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management
Prognoses are no reliable indicator for future performance.