Profitability for a conventional operator could decline by as much as 34% by 2030 under delayed transition scenarios as climate-related costs intensify across supply chains. Rising carbon pricing, energy volatility and raw material pressures compress margins for conventional operators that delay decarbonisation. Comparative scenario modelling contrasts accelerated transition pathways with continued fossil-fuel dependence, mapping enterprise value and cost impacts through 2040. The findings have been revealed in a new study released Tuesday last.
- Profit margins may shrink by up to 34% by 2030 as carbon pricing and energy costs escalate under delayed decarbonisation pathways.
- The fashion sector, valued at approximately $1.77 trillion globally, faces systemic exposure where fossil-fuel reliance persists across sourcing and manufacturing operations.
- Early supplier decarbonisation can reduce long-term climate-risk exposure four to five times by 2040 compared with postponed mitigation strategies across supply chains.
- The study, The Cost of Inaction by the Apparel Impact Institute (AII), calls for pooled funding structures and greater finance leadership to accelerate coordinated supplier investment.
THE REPORT: The analysis models financial exposure across fashion supply chains under accelerated and delayed climate transition pathways through 2030 and 2040. It evaluates impacts on enterprise value, operating margins and cost of goods sold using scenario-based comparisons. A sector valuation baseline of $1.77 trillion frames the scale of exposure, with modelling structured around carbon pricing, energy cost volatility and decarbonisation investment timing.
- The modelling contrasts early supplier decarbonisation with continued fossil-fuel dependence to measure differential financial outcomes over two time horizons.
- Financial indicators assessed include profitability, valuation shifts, capital expenditure requirements and cost transmission across sourcing and manufacturing.
- Scenario assumptions incorporate carbon pricing escalation, regulatory tightening and energy market volatility affecting conventional operators.
WHAT THE MODELLING REVEALS: Delayed transition pathways materially weaken financial performance across fashion operations compared with accelerated decarbonisation. Profit margins compress sharply under rising carbon pricing and energy costs, while enterprise value declines more steeply where fossil-fuel reliance persists. Under the conventional operator archetype modelled in the report, up to 70% of projected market value is exposed to climate-related risk by 2040 under delayed-action scenarios. Comparative modelling quantifies the divergence in outcomes across 2030 and 2040 scenarios, isolating the cost burden borne by conventional operators.
- Profitability declines by as much as 34% by 2030 under delayed mitigation pathways compared with early action scenarios, and could fall by up to 67% where regulatory compliance and transition planning are deferred.
- Carbon pricing and energy volatility drive measurable increases in cost of goods sold, which could rise by up to 12.94% by 2040 for the conventional operator archetype under worst-case transition scenarios, tightening margins across sourcing and manufacturing stages.
- Enterprise valuation shifts more negatively under fossil-fuel-dependent pathways as regulatory exposure and transition costs accumulate over time.
THE EARLY ACTION ADVANTAGE: Financial exposure narrows significantly when supplier decarbonisation is accelerated rather than deferred. Early investment in electrification, renewable energy adoption and efficiency measures reduces cumulative climate-related risk four to five times by 2040 compared with delayed pathways. The modelling shows that upfront capital deployment alters long-term cost trajectories, moderating margin erosion and stabilising enterprise valuation across operating segments.
- Early-action scenarios demonstrate materially lower exposure to carbon pricing escalation across sourcing and manufacturing operations.
- Supplier-level investment reduces volatility in operating costs and moderates enterprise value contraction over time.
- Transition timing directly influences cumulative financial impact, with delayed pathways compounding regulatory and energy-related cost burdens.
THE COST ACROSS TIERS:Climate-transition risk extends beyond corporate balance sheets into upstream manufacturing and sourcing networks. Fossil-fuel-dependent facilities absorb rising energy and compliance costs that transmit through supplier contracts and pricing structures. The modelling traces how regulatory tightening and carbon price escalation alter cost distribution across tiers, increasing financial strain on conventional production hubs over successive transition phases.
- Energy-intensive manufacturing operations face escalating input costs where coal and fossil fuels remain embedded in power mixes.
- Regulatory tightening increases reporting, compliance and financing pressures across supplier networks tied to export markets.
- Cost transmission across tiers reshapes supplier margins and affects long-term sourcing strategies under delayed-transition pathways.
LONG-TERM COMPETITIVENESS: Long-term competitiveness hinges on how quickly capital is redirected towards supplier decarbonisation and energy transition. Persistent fossil-fuel reliance compounds exposure to carbon pricing and regulatory tightening, affecting valuation stability across the $1.77 trillion sector. The modelling positions transition timing as a determinant of margin resilience, capital allocation efficiency and enterprise risk management over successive compliance cycles.
- Delayed capital deployment increases cumulative exposure to carbon pricing and energy cost volatility across multi-tier supply chains.
- Transition-aligned investment supports valuation stability by moderating long-term margin compression.
- Financial planning that integrates decarbonisation timelines reduces systemic risk across sourcing and manufacturing portfolios.
FINANCING THE TRANSITION: Coordinated supplier investment and pooled funding mechanisms are positioned as structural responses to transition risk. The modelling identifies finance leadership and board-level decision-making as catalysts for accelerating electrification, renewable energy adoption and efficiency upgrades across production networks. Early capital mobilisation alters exposure trajectories and reduces cumulative financial strain over successive compliance and carbon-pricing cycles.
- The study highlights pooled funding structures to unlock supplier-level decarbonisation at scale across sourcing regions.
- Finance teams are positioned as central actors in aligning capital allocation with transition timelines and risk management.
- Accelerated investment in electrification and renewable energy reduces long-term exposure relative to delayed mitigation pathways.
WHAT THEY SAID
The fashion industry has long discussed climate risks, but awareness without strong action will not make the industry reach science-based climate targets. This report highlights the financial consequences of that gap. We welcome the report’s clear articulation of the financial risks of inaction and the importance of accelerating supplier decarbonization.
— Ulrika Leverenz
Head of H&M Group’s Green Investments
H&M Group
Collaborative investment remains a crucial pillar to maintaining business stability in the face of climate change. Mitigating these impacts will take effort from players in the industry ecosystem working together to scale deployment-ready decarbonization strategies while investing in long-term operation stability.
— Lewis Perkins
President & CEO
Apparel Impact Institute
From boardrooms to CFOs, this report is a call to action to accelerate impact across the entire supply chain through collaboration and co-financing, and leverage resources like Aii’s Fashion Climate Fund. The Cost of Inaction puts a clear price tag on delay and underscores the urgency of scaling proven solutions.
— Kristina Elinder Liljas
Senior Director of Sustainable Finance
Apparel Impact Institute
