Dive Brief:

• Fashion brands and apparel companies risk their reputation and sales if they don't address the environmental impact of their businesses, though they'll also incur cost increases and risk credit quality when they do, according to a Moody's Investors Service report this week.

• The industry faces increasing pressure from consumers and regulators to decarbonize their production, reduce waste and increase sourcing transparency, Moody's researchers said. Scarcity of raw materials like water and cotton is looming, along with higher production and supply chain costs.

• In responding, smaller companies are at a disadvantage compared to better resourced, larger rivals. In general, fast fashion and discount brands are likely to face the most competition as the issue gains traction among consumers, according to the emailed report.

Dive Insight:

Moody's makes clear that the fashion industry can no longer ignore the obligation to address the waste inherent in apparel sourcing and production, but also emphasized that there's opportunity in making the necessary changes.

"Changing behavior among environmentally conscious and socially aware consumers will put more competitive pressure on global fashion brands to adapt to sustainability measures," Moody's Assistant Vice President Guillaume Leglise said in a statement. "Longer term, environmental and social factors will put the apparel industry's profitability at risk."

The apparel industry is notoriously polluting, and so far efforts to correct that have been inadequate. Moody's notes that the sector is the second largest user of water globally (after agriculture) and produces 8% of global greenhouse gas emissions, and that garment dyeing and textiles finishing produce 20% of global industrial water pollution. Moreover, Moody's cites experts who estimate that apparel's environmental damage will worsen by 2030, tripling by 2050.

Resource scarcity is already pushing up prices, as with the near two-year high reached in cotton prices in part due to dry weather in the United States, Moody's said, adding that scientists have warned that water needs will exceed supply by 2030. 

Meanwhile, the call from consumers is getting louder in part because younger shoppers are more focused on the issue. In their semi-annual report on teens, also released this week, researchers at investment firm Piper Sandler said, "GenZ is unique in that they appear to care more about social justice & the environment versus former generations."

There's evidence that consumers are less keen on fast fashion and more interested in sustainably produced clothing, even if it costs more. Renting and buying secondhand are also increasingly seen as ways to obtain higher quality clothing at better prices.

That's likely behind the eco-minded efforts from fast-fashion giant H&M, though critics charge that those products represent just a fraction of its output. But it may be difficult to sustain any strategy to have it both ways in what Moody's describes as a near future where less wasteful apparel production is an imperative derived from societal, regulatory, consumer and practical concerns.