Apparel Industry Must Adapt Sourcing Practices or Face Credit Risk: Moody’s

(Credit: Ralph Lauren)

by | Apr 9, 2021

(Credit: Ralph Lauren)

The apparel industry, like other industries today, faces increasing environmental and social scrutiny. Apparel companies will have to adapt to sustainability, invest in decarbonization, and increase sourcing transparency to face the challenges caused by this increased attention, according to a new report from Moody’s Investors Services. Those that fail to adapt may face credit risk.

Consumers are becoming more aware of the strain that apparel production practices put on on raw material resources and the environment. As sustainability becomes more important to consumers, fast fashion and discount brands are the most at risk. In order to remain competitive, companies will have to transform their value chains, including reducing emissions, which will increase input costs over the long term and may erode many brands’ credit quality, Moody’s says. However, rising consumer awareness also brings growth opportunities, the report states.

Small Brands Suffer Most

Small brands already suffering from the pandemic will struggle more than large international brands and luxury companies, which have more financial means to adapt. Brands like H&M, Nike, Adidas and Ralph Lauren will fare better, according to Moody’s. On the other hand, these companies have more complex supply chains and are more at risk because they are well-known brands with publicly stated sustainability goals.

Companies face up to $120 billion in costs from environmental risks in their supply chains by 2026, according to new research from CDP, a global non-profit environmental disclosure platform.

In addition to scrutiny from investors and consumers, Covid-19 is driving sustainability action. A recent report from ING, Now or never: A new bar for sustainability, indicated that 57% of companies say they are accelerating green transformation plans.

The Moody’s report points out that the fashion industry’s production methods come at a “high environmental cost.” The footwear and apparel industry contributes about 8% of global greenhouse gas emissions, according to a survey by environmental impact assessor Quantis. The fashion industry is also the second largest user of water globally after agriculture, using 10% of total industrial supply. And industry experts estimate that the industry’s environmental impact will worsen by 2030 and triple by 2050, as production volumes increase thanks to growing emerging market demand.

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