Building a Climate-Resilient Business in the Fashion and Luxury Goods Industry

Building a Climate-Resilient Business in the Fashion and Luxury Goods Industry
November 17, 2023 7 mins

Building a Climate-Resilient Business in the Fashion and Luxury Goods Industry

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Understanding the physical and transition risks will be key to successfully managing climate risk and developing a climate resilient luxury goods business.

Key Takeaways
  1. There are many climate-related factors affecting the luxury goods sector, from disruptions in manufacturing sites to supply chains.
  2. As a role model in the industry, luxury brands must pay extra attention to increasing regulation and source sustainable products and materials.
  3. Technology is another key part of transition risk — how low-carbon technologies will impact the production of goods and services.

Every industry is exposed to the risks from a changing climate — and the luxury goods sector is no exception. Given the size and complexity of the issue, it can be challenging to know where to start mitigating the effects and ensuring operations and the future sustainability of the business are not impacted by either the physical risk itself, or the fast-changing regulatory environment.

Understanding the Physical Risk of Climate

The climate issue can be broken down into two broad areas. The first is the physical risk: What is happening to the climate? Will it get hotter, windier, drier, wetter? All of these factors will affect the luxury goods industry in several ways, including the supply chain, which can also be hit from extreme weather — ranging from floods disrupting manufacturing sites and droughts restricting the use of water in the manufacturing process, to extreme heat forcing the relocation of operations.

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Many of these risks might be nothing new, but the frequency and unpredictability of supply chain disruptions related to the physical risk of climate change is going to increase.

William Bruce
Global Head of Climate Risk Consulting

Understanding the Transition Risk of Climate

The second broad area of concern around climate is the transition risk. What are the threats and opportunities to organizations in the luxury goods sector as the world transitions to a low carbon economy?

There are several lenses through which to look at transition risk — the first is regulatory and policy. Fashion and apparel are large contributors to overall carbon emissions. Since luxury brands serve as a role model function in the industry, it is of the utmost importance to source products and materials from low carbon sources, particularly given developments in terms of carbon pricing and other government plans to decarbonize.

The subject of carbon credits is also gaining importance across the industry. Legislation is providing the framework to drive positive change with initiatives like carbon footprint labeling and extended producer responsibility for retailers to bring additional transparency to the end consumer.

Non-compliance with any of these regulations is closely linked to reputational risk related to not reducing carbon footprints, especially during production and end of life for products.

Climate Risk Disclosure

With all eyes on climate, how a business discloses its climate risk is increasingly important. The Task Force on Climate-related Financial Disclosures (TCFD) to “improve and increase reporting of climate-related financial information,” is already mandated for many listed companies.1 Many organizations are also involved in some form of disclosure, whether publicly listed or private.

While the framework was designed from an investor perspective, other sectors, such as the insurance industry, are now beginning to take this reporting into account. This is certainly true on the physical risk side, as insurers look to understand the resilience of a company’s physical assets against climate risk — and not just over the next 12 months, but over the next ten years.

The Taskforce on Nature-related Financial Disclosures (TNFD) to “develop and deliver a risk management and disclosure framework for organizations to report and act on evolving nature-related risks” is also gaining traction.The TNFD published its final recommendations in September 2023.

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Being able to demonstrate what your physical risks are and show you have a resilient portfolio is not relevant just to investors and shareholders, but also — increasingly — to getting access to insurance capacity.

William Bruce
Global Head of Climate Risk Consulting

Designing a Sustainable Future to Drive Change

In addition to regulation and policy, another aspect of transition risk is technology — how low-carbon technologies will impact the production of goods and services. The most discerning of customers with the financial freedom to make choices, which is the target for the luxury goods sector, will be the ones who want to ensure their goods are sustainably, ethically and low carbon sourced. This is particularly relevant among the younger generation.

Take the use of water, for example, as a precious commodity under pressure from climate change. Kering signed a deal in the beginning of 2023 to pilot low impact dyeing for their denim production across their houses.Balancing the demands of the customers on issues like this and driving positive change, while also meeting financial objectives will remain essential.

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It’s likely that, from a climate perspective, it will be the consumers of luxury goods who will be the biggest driver of change as opposed to top-down regulation.

William Bruce
Global Head of Climate Risk Consulting

Want to learn more about the latest key trends and issues impacting the luxury goods industry? Download our Designing a Sustainable Future for the Fashion and Luxury Goods Industry paper.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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