Planet Tracker has released a groundbreaking report uncovering the significant water-related risks faced by major fashion brands and retailers, including Adidas, Gap, H&M, Inditex, Levi Strauss, Nike, PVH Corp, Ralph Lauren and VF Corp.

With water stress on the rise in key manufacturing regions, the report by the award-winning not-for-profit think tank (which is focused on sustainable finance) is urging companies and investors to prioritise water risk management for long-term sustainability.

While the direct operations of these companies may seem to have low water-related risks, the report suggests that indirect impacts could pose significant threats to their operations.

Planet Tracker identifies three main classes of water-related risks facing the fashion industry:

• Physical Risks: Operations and supply chains could be jeopardized by water scarcity.
• Regulatory Risks: Potential changes in water costs, access rights, or social license to operate could impact profitability.
• Reputational Risks: Adverse coverage of a brand's water impacts could damage its reputation.

The report points out that water stress is already significant in many major apparel supplying regions, and projected changes could exacerbate the situation. North American brands, in particular, face a notable increase in water stress, according to Planet Tracker's analysis.

"Water risk should be seen as a strategic threat by major apparel corporates"

"Water risk should be seen as a strategic threat by major apparel corporates," says Richard Wielechowski, Senior Investment Analyst (Textiles) at Planet Tracker. "Developing plans to manage and reduce this risk over time is essential for long-term sustainability".

The report also highlights the financial implications of water-related risks. A typical apparel brand operating with a 55% gross margin and 15% EBIT margin could see a 3% decrease in operating profit from just a 1% increase in COGS (cost of goods sold) due to water-related disruptions.

"Investors in the apparel sector need consistent and comparable data to appropriately price water-related risks," Wielechowski comments. "Currently, the textile sector falls short in meeting this need, but investors should work with their holdings to address this data gap".

The manufacture of apparel involves significant water usage across various stages, from dyeing to raw material production. Companies in the industry need to discuss and report on their water usage and exposure to water-related risks.

Water availability expected to become increasingly stressed in key manufacturing regions

Water availability is expected to become increasingly stressed in key manufacturing regions due to climate change, inefficient usage and untreated disposal, potentially disrupting supply chains.

Much of the apparel supply chain operates in areas of moderate to high water stress, with the situation projected to worsen in the medium-term, posing risks to sales and margins for brands and retailers.

Financial institutions should consider water-related risks in their investment decisions and engage with companies to disclose water usage and risks while supporting strategies to mitigate these risks, such as setting Science Based Targets for water.

Ripple Effects provides hard evidence that water poses a social as well as operational risk for stakeholders across the textiles value chain.

Planet Tracker has created a new interactive dashboard overlaying datasets from two open-access sources, WRI Aqueduct 4.0 and Open Supply Hub, producing a geospatial snapshot of nearly 800 brands across the globe. Users can delve directly into the data, by selecting of one of the following:

• A specific brand
• A group of brands whose headquarters are in a particular region (ie. North American vs European brands)
• A group of brands by latest revenues figures

According to the selection made, users are then able to evaluate:

• Where supplying facilities are located
• The intensity of current and forecasted Water Stress
• The aggregated Water Stress and projected increase faced at selection level

Click here to download the Ripple Effects report in full