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Ripple Effects
Quantifying Water Risk across the Apparel Supply Chain
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The Textiles Industry has a Water Problem 💧
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Water is fundamental to the production of textiles
From the growing of natural fibres to the dyeing and finishing of fabric
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However, water can also be a significant threat to the textile supply chain
Increasingly, Water Stress is mounting in areas where the textiles value chain has a heavy footprint
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This brings about numerous considerations
Both environmental and financial ones
With Ripple Effects, Planet Tracker sheds light on the potential business risk that Water poses to apparel brands
Marrying multiple sources, including water stress projections from WRI Aqueduct and Textiles factories' locations from Open Supply Hub, our interactive dashboard examines the relationship between water risk and brands' suppliers locations.
While apparel brands and retailers are likely to have fairly low direct water-related risks, multiple concerns surround the extended value chain. Much of the apparel supply chain is already operating in areas of moderate to high water stress, with the problem expected to worsen in the medium-term. This represents a potential risk to future sales and margins for apparel brands and retailers.
Investors and lenders to apparel brands should pay close attention. Water risk represents more than just a sustainability concern; it could materially impact sales volumes, and in turn profitability as well as margins. Financial institutions should therefore be factoring this risk in their investment decisions.
Water is the driving force of all Nature
Deeply Intertwined
Water and Textiles Production have an inherently deep relationship.
Water is critical to the production of apparel garments across multiple stages of the textiles value chain
The whole Textiles value chain depends on and impacts Water in multiple ways, across multiple stages.
Supply Chain Tier | Activities | Water Dependencies | Water Impacts |
---|---|---|---|
0 | Retail/Brands | Sanitary | Consumption |
1 | Garment Production | Sanitary | Consumption |
2 | Fabric Manufacturing | Sanitary, Dyeing, Washing, Finishing, Heating | Pollution, Consumption |
3 | Fibre Production | Sanitary, Dyeing, Humidification | Pollution, Consumption |
4 | Raw Materials | Sanitary, Irrigation | Eutrophication, Pollution, Consumption |
Water dependencies and impacts across the Textiles value chain stages
Yet, the potential operational risks that water indirectly poses to apparel brands are seldom mentioned in investor documentation
A Business Risk?
Water can impact operations across multiple channels.
We see three major operational risks around water use:
- Physical risks to operations and supply chains from lack of water
- Regulatory risks from potential changes to water costs, rights or licence to operate
- Reputational risks from adverse coverage of a brand’s water impacts
So, what regions are poised to be most impacted?
Planet Tracker's new report and interactive Dashboard seek to bring clarity on how and where these risks may materialise
Planet Tracker new interactive Dashboard
According to WRI current and projected water stress scores,
we find that the median textile factory is likely to face significantly higher water stress by 2050.
Countries that are already Medium-to-high water stressed, are likely to feel the heat.
This is the case of Turkey, global hotspot in Textiles production.
However, the projected change will be highest in areas which have typically brushed off water concerns up until now.
This is specifically the case of Brazil, another apparel producing powerhouse.
Higher Water Stress not only bears an environmental cost
Financially, increased water stress comes at a price too
The potential avenues water-related disruption could impact the P&L of apparel brands/retailers
Odds and size of impact from water-related disruptions both play a part in determining financial materiality. For a brand operating with a typical 55% gross margin and 15% EBIT margin, a +1% increase in COGS would see a -3% fall in operating profit, arguably material when margins are tight.
However, potentially small investment could reduce supply chain water risk
Given a potential material impact to revenues and margins, major apparel corporates need to consider water risk as a strategic threat and develop plans to manage and reduce this risk over time.
For investors to appropriately price water-related risk in the apparel sector, they need consistent comparable data. However, today the textile sector remains some way from meeting this need. Investors need to work with their holdings to address this data gap.
Once data is available, investors should work to push corporates to set targets (preferably based on Science Based Targets for freshwater) and develop a water transition plan, where they reduce their negative water impacts and move to a sustainable water footprint for both direct and indirect operations.