How Supply Chain Decarbonisation Protects Business Value

Supply chains around the world are having to adapt to increasing sustainability demands, as global governments are enforcing green regulations and consumers are pushing for more eco-friendly products.

For many years, sustainability implementation was viewed as a costly transformation – an added bonus to strategy but expensive.

Now, however, H&M Group and EY argue that investing into supply chain decarbonisation actually solidifies business value and delivers long-term results, meaning that sort-term costs are proving worthwhile.

Decarbonising supply chains

The need to decarbonise fashion is vital, as the industry faces major carbon emissions due to its intensive supply chains. Despite the recognition that action is needed, the industry is met with barriers due to unclear value of decarbonisation, fragmented supply chains and a lack of financing tools. 

However, H&M Group has collaborated with EY, with insights from HSBC and the Apparel Impact Institute (Aii), on a whitepaper exploring the business case for accelerating supply chain decarbonisation. It explains that sustainability is a major contributor to risk management and should be implemented to safeguard long-term value creation. 

The paper, Accelerating Fashion Decarbonisation – An Efficient Approach to Unlocking Corporate Value and Financing the Supply Chain Transition, determines that industrywide collaboration is needed to mitigate fragmented supply chains, as is reframing the role of decarbonisation to link it with financial value. Through bringing supplier projects into sector-specific models, capital can be co-invested at a scale where value can truly be unlocked. 

"The cost of inaction on climate change is simply too high – for the planet and for our industry," explains Adam Karlsson, CFO of H&M Group.

"CFOs have a fiduciary responsibility to safeguard long-term business resilience, not just short-term profitability. As CFOs, our role is not to debate whether sustainability targets should be met, but to ensure how they are delivered. This requires a conversation combining cost efficiency and value creation: reducing risk, strengthening resilience, and safeguarding long-term corporate value."

The financial burden

Accelerating Fashion Decarbonisation provides insights into accelerating sustainability investment in the fashion industry through a scaled approach, aiming to share solutions that demonstrate how fashion brands can add corporate value by investing in decarbonisation. It argues that sustainability is a strategic value driver, enhancing operational resilience, reducing long-term risk exposure and improving the financial competitiveness of fashion value chains.

Global temperatures show no signs of cooling, so it is critical for the world to decrease their greenhouse gas (GHG) emissions. Climate disasters are escalating, with supply chains around the world facing constant disruption as a result. Since 1980, climate disasters have cost the global economy nearly US$3tn. 

"Investing in climate mitigation today can help to reduce long-term costs and business risk," says Clair Smith, Head of Sustainable Trade Solutions at HSBC.

"CFOs can play a critical role by embedding climate risk into capital allocation decisions and championing collaborative financing models."

The biggest shifts in sustainable finance are coming through electrification and the increased use of renewables. According to the Aii and Fashion For Good (FFG), the total investment needed to reach net zero in fashion by 2050 is at an estimated US$1.04tn. As a result, trying to get suppliers to invest in decarbonisation can be a difficult task, despite energy efficiency measures often having quick payback periods and are relatively profitable. 

However, more substantial changes, such as replacing carbon-based energy sources with renewable energy, have a long payback time or are less overtly directly financially beneficial. The report states that fashion brands need to be willing to share the financial responsibility to ensure change, by committing to co-finance decarbonisation efforts and reduce the strain on suppliers. 

Closer collaboration

The fashion industry accounts for 2-8% of global GHG emissions, as well as producing a range of climate-related challenges which include plastic use, clothing waste, water consumption, microplastics, pollution and resource intensity. More than 95% of GHG emissions from leading fashion brands are labelled as Scope 3 – a result of complex, fragmented and long supply chains.

Brands must be willing to collaborate closely with one another, as well as with organisations such as NGOs. governments and financial institutions. Through these conversations and building of transparency, brands can help themselves and one another to decarbonise their operations and reap the benefits.

Businesses that collaborate can build shared infrastructure, standards and financing models which are needed for more resilient supply chains. In doing this together, they are splitting the costs significantly and growing the potential for stronger infrastructure. 

"Fashion has a unique opportunity to work together to solve these challenges. We are seeing growing momentum for industry-wide collaboration and an openness to explore new financing models that can help accelerate the green transition," adds Anna Ryott, Nordic Chief Impact Officer and Partner, Ernst & Young AB.

"Many industry leaders already recognise that supply-chain decarbonisation not only strengthens resilience but also builds long-term confidence, and they understand that this is the moment to act. The case studies in this paper show that the foundations are already in place, and the ongoing initiatives signal that this is the time to strive for greater impact and global collaboration. Fashion brands must be active stewards of their value chains, not just customers of them."

Fragmented supply chains creates more opportunities for risk, including mistakes, hidden financial costs or missing data. By implementing collaboration across both the supply chain and the industry, there is a greater opportunity to unlock value, mitigate risk and develop resilience.