When climate risk hits fashion’s bottom line with Apparel Impact Institute

For years, sustainability in fashion has often been discussed almost as a parallel conversation to the business itself. Some brands publish reports, set targets and talk about responsibility, while others turn their sustainability credentials into a marketing tool. 

Yet, at the corporate level, many of the real decisions are still being driven by the old metrics of margins, supply chains and growth – but that's beginning to change. 

Behind the scenes, there is a vast global industrial system increasingly exposed to climate volatility, energy prices, material shortages and carbon regulation. And its stakeholders have realised that sustainability is crucial to competitiveness: climate change can affect energy prices, raw materials and supply stability.

In this episode of Shaken Not Burned, Felicia speaks to Kristina Elinder Liljas, senior director for sustainable finance and engagement at the Apparel Impact Institute (AII), about how climate volatility is set to upend many companies' forward strategies within the next five years. From supply chain disruption and rising sourcing costs to carbon pricing and energy volatility, they explore why sustainability is shifting from a reporting exercise or a worthy side conversation to a core business issue.

In its Cost of Inaction report, the AII looks at the literal price tag of climate risk in fashion. The findings are striking, and the message is clear: inaction may just be the most expensive strategy on the board.

For an industry built on speed, scale, and razor-thin margins, sustainability is a matter of corporate survival.

This is week one of our four-part fashion arc. Over the next month, we are tearing down the curtain on global supply chains to see how this industry impacts people, the planet, and the bottom line.

If you enjoyed this episode, subscribe to our newsletter and follow us on LinkedIn, TikTok and Instagram – and why not spread the word with your friends and colleagues?

Transcript

Felicia Jackson (00:40)
Hello and welcome to the latest episode of Shaken Not Burned. Today we're going to be talking about fashion.

For years, sustainability in fashion has often been discussed almost as a parallel conversation to the business itself. Some brands published reports, set targets and talked about responsibility. Some led with their sustainability credentials. But inside companies, many of the real decisions were still being driven by the old metrics of margins, supply chains and growth. Today, that's beginning to change. Increasingly, the argument coming

from investors, from policymakers and even from organisations like the World Economic Forum, is that sustainability isn't a separate agenda at all. It's about competitiveness. If climate change can affect energy prices and raw materials and supply stability and carbon costs, then it isn't an environmental issue. It's a central business issue.

In other words, the question is no longer simply how fashion becomes sustainable. The real question is what it costs companies if they don't. So a report from the Apparel Impact Institute has been exploring exactly that idea. Rather than focusing on emissions or commitments, it looks at the financial consequences of climate risk in fashion supply chains, from rising energy costs to carbon pricing and disruptions to raw material supply.

According to the research, companies that fail to act could see significant pressure on margins within the decade. That's less than five years away. And the important thing to remember is that climate risk that begins in the supply chain eventually ends up in the balance sheet. So we're to be talking today with Kristina Liljas from the Apparel Impact Institute about their report, what it tells us about the financial reality of climate risk in fashion.

Kristina Elinder Liljas (02:17)
Thanks.

Felicia Jackson (02:26)
and what it means when sustainability stops being a reporting exercise and becomes a strategic business issue. So Kristina, welcome to the show.

Kristina Elinder Liljas (02:35)
Thank you, Felicia. It's lovely to be here.

Felicia Jackson (02:37)
Can I start with the name of your recently published report, The Cost of Inaction? What was it that made you decide to frame climate risk in financial terms rather than environmental ones?

Kristina Elinder Liljas (02:49)
Well, in short, the answer is that the report is really written for CFOs and finance teams. for the longest time, climate has been discussed based on environmental issues

wording addressing and directed towards CSOs. And of course

that's really important. But the people that ultimately decide where to invest, other people in the finance teams, the treasury teams, and that set and manage the capital flows. they are being measured not so much on climate, but on margins, and long term value, and especially if they're publicly listed towards their shareholders. So the goal of this report was really to translate the

the climate exposure into a language and wording that resonates within these finance teams. So we're talking about COGS, which is cost of goods sold. We're talking about margins, cost volatility, all those words that these people live with every day and that kind of pops out to them.

Felicia Jackson (03:51)
Now that makes a lot of sense to me the whole issue of sustainability has been siloized. It's environmental, it's seen as a soft issue. But what we're seeing with a lot of the banks now is they're increasingly concerned about the risks to the assets that they own. So what I suppose the cost of inaction is exploring

Kristina Elinder Liljas (04:05)
Mm.

Felicia Jackson (04:08)
is what are the costs that the finance function isn't really aware of or not integrating yet?

Kristina Elinder Liljas (04:13)
Yeah, 100 percent. It's about how do they stay competitive? How do they future proof their own business? And they need to take climate into account. And you can see it as an insurance or as a profit shield or any term like that they need to take into account the cost of I mean, I the cost of an action is exactly that right. is the alternative cost? It's not that it's not going to be a cost, but

Felicia Jackson (04:33)
Yeah.

Kristina Elinder Liljas (04:37)
the cost is going to be even greater by doing nothing. And you need to make the business case because ultimately a business is a business. They're profit making entities. So everything needs to be a business case.

for them, the brands, as well as the suppliers. And we'll talk about them later in order to invest. There's got to be a purpose, a value proposition. And that's what this report aims to convey or to communicate.

Felicia Jackson (05:04)
before we get into the details of the report, one of the things I think gets left behind in a conversation about sustainability is that one of the things you have to be to be sustainable is still here in the future. And that I don't think is discussed enough. There is an issue about timeframes and when you actually take these actions and when the costs are going to hit. Do you think the industry is yet at a point where sustainability has been understood as a competitiveness issue?

Kristina Elinder Liljas (05:25)
Hmm.

Frankly, no, I think, I mean, there are certainly companies out there, brands out there who have integrated or at least are starting to integrate ESG or, you know, environment into the operating model and business. But still, many and most, I would say, are holding off because it is too far away.

I think it's struggle like, it's

it's the right thing to do certainly, but is there a financial case? Is there a return? And we've tried to make the report, like we really tried to bring it as soon as possible to make the case, but even then it is a challenge, which is why we also bring the case as well. No one brand or no one buyer will be expected or is able to do this alone. It's all about collaboration. It's all about let's work together.

pool the funds and then it's not such a high risk. Then it's easier to kind of pass that hurdle of something that seems very costly and scary now and to put that money into something which might pay off in three, four, five years, if that makes sense.

Felicia Jackson (06:38)
Well, I suppose part

of it is that historically, I think,

when you didn't really know what was going on, you could wait and see if more information made the situation clearer, made the decision easier to make. These days, there's so much uncertainty in so many different areas that you can't really wait for certainty to make a decision.

Kristina Elinder Liljas (06:53)
Yeah.

you simply

don't know and some would argue well therefore it's better to take action now and others will argue well it's best to just not rock the boat and just observe. So I think you'll see both because there's tremendous uncertainty in general.

Felicia Jackson (07:16)
⁓

Kristina Elinder Liljas (07:16)
I think also the short-term cycles of those making those sourcing or purchasing decisions.

Felicia Jackson (07:22)
Well, I suppose in fashion, because for much of the industry, it's still seasonal, that that is really challenging.

Kristina Elinder Liljas (07:28)
Yeah, it is. they will negotiate orders based on quantity, material choices, lead time. There's a range of key performance indicators, KPIs that drive where you'd place an order. And also strategic relationship with the supplier if you have a long term strategic relationship, which the bigger brands typically do. ⁓

So there's a lot of different things that factor in when you place an order, but rarely has sustainability been integrated into those decisions, at least for a number of brands, maybe not so much the bigger ones, but it's always come kind of as a last thing, or great if that supplier then has a green facility, whatever that means, but it's not been the main driver.

exactly that.

Felicia Jackson (08:15)
there is a general

view within the sustainability world that no matter what is going on in terms of reporting, actually, it doesn't matter what you're reporting on unless you're using the information you have to make better decisions. And I think that integration of knowledge and information into decision-making is something that I think a lot of companies are still struggling with. Not for any other reason than...

There's a lot of pressure, there's competing when we talk about uncertainty, it's not just climate change and sustainability.

So perhaps you could talk me through the three major financial risks that the report identifies, because I think this is something relevant not just to the fashion industry, but almost to every industry.

Kristina Elinder Liljas (08:52)
Mm-hmm.

Yeah, no, absolutely. so we were developing the scope and doing the in-depth interviews together with Accenture. And we recognize that there are a lot of risks facing supply chains. I mean, we've mentioned a couple of them already in terms of terrorism, war and, you know, breakouts, pandemics which delay logistics, etc. But if we just

in on the actual cogs in terms of what's needed when you produce a t-shirt or a pair of trousers and that really hit the landed cost for the product. It's the energy consumption, materials is a huge part where again depending on material but if we look at cotton which to date still is

a big share of the material used. Again, depending on what brand you are, if you're doing sports and swimwear, you might use more Lycra and polyester materials, but cotton otherwise is raw or natural fiber that is very volatile depending on climate. So energy materials and then carbon, carbon tax. or carbon pricing. So those three were the ones that

after a round of discussion, we felt that, well, we can't cover all because the report would be focus on these three and how they affect then the financial value of the product and what will happen in the various scenarios that we looked at.

Felicia Jackson (10:29)
Those are the three environmentally related risks, which are seen as having the most potential financial impact.

Kristina Elinder Liljas (10:36)
Exactly. mean, they stand out because carbon pricing, for instance, we were increasingly seeing how when we talk about ETS and the trading and different regulations that come in, really has a financial value on emissions and energy volatility. As you mentioned, what happens if energy costs go up? I mean, we see it in Bangladesh where natural gas has increased in pricing and, you know,

importing coal there is also very expensive and you need that type of thermal energy to create the steam and heat needed in the dying and finishing processes. So immediately then the energy costs go up and then material costs again maybe not in the past year but was it 2022 I think. There were tremendous floods in Pakistan which is a major cotton producing country.

In India, it happened also, I think it was back in 2010, where, you know, season, a cotton crop can quadruple in price. So these three were the ones that we looked at.

Felicia Jackson (11:35)
Yeah. And we're not exactly on a trajectory

away from extreme weather events.

Kristina Elinder Liljas (11:41)
No, no, contrary. in those cases, there were floods, but then it could be drought. It's like these extreme weathers that just it's very, very hard to predict. But and the question is, well, how long back a cycle do you look? Do you look in five years or 10 years? I mean, it could be a good year and everything is great. But still you need to start putting these costs, into your risk calculation. It's really about adding risk to your forecast.

and kind of doing a shadow pricing, what if scenario, and then how can we mitigate that? What can we do in order to mitigate that risk?

Felicia Jackson (12:18)
so I can see how this would end up on the balance sheet. you have a country suddenly imposes a carbon tax or a carbon import tariff or something like that. And suddenly you are ending up paying 25 % more to bring your clothes into the country to sell. And from what I understand of fashion margins, that's probably going to knock out the margin on that completely. So we can see how that

Kristina Elinder Liljas (12:29)
Okay.

That's right.

Felicia Jackson (12:45)
would have a direct impact on the finances of the business. I think what's difficult is that it's very hard for people to think about counterfactuals. It hasn't happened yet. We don't know if it will. Well, I can't afford to do that differently because I know what that cost is going to be. and maybe, I don't know what the impact is of that bad event, but maybe it won't happen.

So it won't be a problem. So I think what I'm trying to understand is, do you have any examples of where this kind of pressure has really had an impact?

Kristina Elinder Liljas (13:14)
I I think we see, for instance, when it comes to fossil fuels and replacing fossil fuels wherever possible. Again, we see in Bangladesh where prices have gone up for natural gas, for instance. and of course, that's a tricky country when it comes to solar because they don't have the grid stability. I mean, if...

If you could work to electrify there and phase it out, that would be something I think long term, which I know that we're looking into as well. And you have to work closely with the local government and policy and regulations. So it's not just investment. It's about the infrastructure and framework around it. But in Vietnam, for instance, ⁓ H have been replacing coal boilers with

electrified heat pumps and biomass when that's sustainable and available. And so once these type of projects are complete, those facilities will essentially be operating within their zero carbon intensity, which is extremely important for dye houses and tier two or three facilities.

And also where the financial ROI then makes sense because it's actually very affordable to do so. mean, the payback period is relatively quick because renewable is more affordable. So it's really market by market understanding what's available, what infrastructure there is supporting.

there might be local incentives and tax levies that suppliers can access. And then, you know, we can help. And I say we as an AII can use our Fashion Climate Fund to put funding into financial tools and vehicles to support these suppliers in their transition. And I know that the report itself doesn't go into detail on that, but I think it's important to...

stress that this report is really to make the case that, of course, we don't know exactly what's going to happen. But based on the modeling that we've done and the forecasting that we've done and the scenarios that we've used, we do see that there is a high risk of brands do nothing.

By 2030, they will lose up to 34 % of their net profit. 34 % and by 2040, 67%.

We know that CBAM, it will become operational now 2026 and likely covered textiles as well in the future. So if you do those calculations, you do the shadow pricing, this is these are the margin hits that we see now.

to kind of get that first, wow, okay, maybe we need to look at this. We are then saying, okay, what budgets do you have? And this will depend depending on the size of the company, know, come to us or speak to your peers, industry stakeholders, what can we do as an industry to support? You're not alone in this, you know, it's a really wake up call to not just the brand, but the industry as a whole.

Let's pull the funds and then we have then the financial tools to support and to make sure that investments are being made in the most cost efficient, impactful and scalable way so that everything that we do, really, it's not a one off, that it can scale.

Felicia Jackson (16:37)
I actually think I'd like to continue this conversation about the finance because what you're talking about is absolutely critical companies need to understand how much the risk they face is. But at the same time, I think there's a connected element, which many companies are not yet.

paying that much attention to, which is even if you choose to ignore this risk and are lucky enough to not be affected by anything, you are seeing moves from the financial sector to start factoring in climate risk. You're seeing the insurance industry not being comfortable ensuring factories in floodplains.

Kristina Elinder Liljas (17:11)
Yeah.

Felicia Jackson (17:15)
you're seeing banks increasing the cost of capital. So actually there's an internal and an external element to this whole conversation. And in the same way that we have immediate short-term concerns and then longer-term concerns, we're not bringing it into one conversation. Now, do you think that's because it's all too much for people to handle or what do you think it is that is slowing uptake of or even acknowledgement of the problem?

Kristina Elinder Liljas (17:16)
That's right.

Mm-hmm.

I think it's a transition that's happening right now. That awareness has increased, I would say, certainly just in the past five years and maybe 10 for those who've been working on this for a longer time. But I would say for most brands, middle size, maybe, but they don't have a local office or...

their sourcing team sits in another country far away from the sourcing market. They're not there in present. They're not. They haven't been fully on board, but now they're slowly understanding how volatile and important, but also challenging it is. And if they are committed to net zero targets and science-based targets, then they're starting to look around to see, well,

what are we able to do? it's kind of the, well, little me, what can I do? It doesn't matter if, you know, but it all adds up and not one actor can do everything, but everybody can do something and certainly together.

Felicia Jackson (18:43)
think the fragmentation of the fashion industry is one of those things that makes the human and the individual analogy really powerful because we're all told in many ways that we're responsible and we should shop differently and we should eat differently and we should travel differently. But a lot of the challenges around systemic problems, the way that systems are set up to operate, if you come together, you can have an outsized influence on what is going on.

And I think that's what you're talking about with collaboration. It's bringing people together to work together at minimizing the downside, I guess. Would that be right?

Kristina Elinder Liljas (19:10)
Yeah.

Absolutely. And it's interesting that you raise the whole individual kind of blame game to. mean, of course, the end consumer, you, me or anyone else, of course, we should be mindful of what we consume. Absolutely. But sometimes or often I've heard, you know, well, it's we shouldn't be buying from X brand or that brand. And ironically, many times I like, actually, that brand is one of the brands doing the most. And by pulling out of a market is not solving any

problem at all and don't for a second think that someone better will come in and start sourcing. In fact, these countries, when I say these countries, there's many of them, but in South Southeast Asia, the manufacturing hubs, India, Bangladesh, Vietnam, Indonesia, their economies are dependent on it. the garment export and the industry is a significant percentage of their GDP. And their middle...

income sector and going from poverty to kind of middle income countries has happened thanks to amongst others, the textile industry. So I think it's about then doing things the right way. And this is where we have we as in the West in this case and the big international global buyers have a responsibility which

Coming back to said fragmented textile industry. Yes, because they don't own their supply chain, right? So they place orders and in one facility you might have 10, maybe even 15 brands sourcing. Some are big, some are small, but even the big ones might just have, I don't know, 10 % share of a factory's business. Now, the challenge is for that brand who might be doing a whole lot, but for them to invest millions and millions of dollars,

which maybe they're willing to do, but if they can only take account for the share that they're sourcing at that facility, well, obviously they can't go off and pay and everybody else benefits from that or piggybacks from their good industry will. It's the free rider problem. Exactly. And that's what I'm saying. Everybody can do their bit in relation to their market share or their ability. And some will always

Felicia Jackson (21:13)
Yeah, well, it's the free rider problem.

Kristina Elinder Liljas (21:25)
carry more weight. so I think this report is also, I mean, our lead partners, in a way, we're not really trying to convince them. We're hoping this will raise awareness amongst partners that we're not yet working with. And we, as in the Parallel Impact Institute, because the more we operate together, and I keep coming back to that, but rather doing things in silos, because that feels meaningless. But together, we can really

have an effect and do something great.

Felicia Jackson (21:50)
Well, speaking of having an effect, you mentioned the challenge for brands investing in the supply chain when they only have a small percentage share. And I can see that that is a major challenge.

Kristina Elinder Liljas (21:59)
Mmm.

Felicia Jackson (22:02)
but at the Apparel Impact Institute, you actually have a fund which you're using, as I understand it, to help prime these sorts of arrangements, these sorts of approaches. So there are ways to actually address this gap. Could you tell me something about that?

Kristina Elinder Liljas (22:17)
Absolutely. And that was a really lovely way to put it to prime because the fund that we have, so it's a 100 % philanthropic fund funded by some of our lead brand partners as well as philanthropic partners. And the fund can be used to both develop and deploy financial tools. And by that, I mean different

⁓ blended financing components and incentives that will

Felicia Jackson (22:45)
Can you talk me through some

of the examples though? Because one of the things that happens a lot when we talk about this kind of finance is we talk about blended finance, but people don't always necessarily know exactly what that means. And it's recognizing a tool or a lever that you can use, whether it's in the fashion industry or in another industry that has similar problems, that's really powerful.

Kristina Elinder Liljas (22:48)
Yeah!

Yes.

Yeah, no, absolutely. And I was going to get to that. And it's good because it's all these terms. Because you start by framing it and it becomes a little bit cliche. But what does it actually mean? So one example, for instance, is it's called a brand backed guarantee. And what that means is so you have a supplier who might be wanting to replace a coal fired boiler.

Felicia Jackson (23:10)
sorry.

Kristina Elinder Liljas (23:31)
⁓ So in order to generate steam, you need to really boil the water to a certain level. It's all very technical. it's very expensive and it's typically done with fossil fuels or with coal. And in order to replace that, who's going to pay for that? Now, the supplier might say, well, we're willing to put some money into this, but we need to finance the rest. Let's say it costs one million dollars, for instance. And they might have...

200,000 to put into it. They go to the bank and the bank says, right, but we will only lend you money if you can prove that you can pay us back through future purchase orders. And this is the crux of the problem because typically the supplier won't be able to, you know, put that on paper because they simply don't know

Felicia Jackson (24:18)
is that because of the way the fashion procurement cycle works? Okay.

Kristina Elinder Liljas (24:22)
Well, exactly,

because it's seasonal. you will have strategic relationships, but you won't have a five year commitment of volume order to a specific supplier. What I'm trying to say is very difficult, often for at least the smaller medium sized suppliers to access that financing because it's deemed too risky for any financial

institutional lender. So what this guarantee then does, so it's essentially the brands depositing in a percentage of that investment into a lending bank saying, well, we will back this investment. We will back this $1 million investment by depositing in 25%, 250k. It will sit there throughout the tenor period, say three years, which

not only enables the loan itself, because then the bank feels comfortable with that this brand is not going to pull out during the tender period. So they know that there'll be incoming revenue for the supplier, but it also brings down the interest rate to the supplier, because whatever interest rate that the brand would normally be getting from that amount, they offset in order to create lower than market rate interest rate to the supplier.

So the supplier then gets access to financing and they get it on concessional terms, meaning, you know, more attractive terms. So everybody has skin in the game. And the beauty of this is once the loan is repaid, it's revolving, meaning that the brand will get the deposit back and they can put that into another loan If the supplier needs a loan, not all suppliers need a loan, but you see my point.

So that is one of the tools that we are supporting. Another one is what we call a deployment gap grant, which is a grant. But what it does is it brings back the payback period for an investment that has been vetted by our climate solutions portfolio, meaning that it's high impact. mean, there's certain criteria for us to

Felicia Jackson (25:59)
do completely.

Kristina Elinder Liljas (26:24)
to give a supplier a grant, but assuming it's an investment of a million dollars, we can then decide, and we know that the payback period for that for this particular supplier might be three years. And what we've learned from suppliers is that anything longer than two years, because again, it's got to do with the forecasting and what they can project as incoming revenue, but anything longer than two years, it's very difficult for them to get approval even though the impact.

impact of an investment might be there, but in terms of financial ROI. So, we can then give them a grant to bring back the payback period to around two years. So, that's also what we're deploying. We have two cases right now in India. This is all on our website. It's all public information with two suppliers who have

applied for this for heat pumps, in fact.

Felicia Jackson (27:15)
what you're talking about is recognising structural problems within a specific industry and identifying and implementing financial tools that solve the structural problems because there's a mismatch between the way the fashion industry works and the way the finance industry wants to supply money. Would that be fair?

Kristina Elinder Liljas (27:34)
Yeah.

Felicia Jackson (27:34)
That's fascinating. Cause I think that's one of the really big things that we have to do across all sorts of different industries. mean, we talk about brands only having a share in a particular suppliers. manufacturing capacity or textiles capacity. The thing is that you would think that would make it easier.

to collaborate on working together and providing support. In reality, are we seeing a lot of collaboration or are there structural problems that prevent that happening?

Kristina Elinder Liljas (28:03)
So the question is if we see collaboration across the brand.

Felicia Jackson (28:06)
Basically,

yes.

Kristina Elinder Liljas (28:07)
from my perspective, from AI's perspective, yes, we do, because that's the reason for our existence. That's how we originated, right? the need to collaborate around these things because Scope 3, again, sits at the facilities and the facilities aren't owned by the brand. So they recognize, well, we need to come together and pool our funding in order to address our Scope 3 emissions. So we do see it. But then, of

course, I guess the challenge is the long term commitments. And this is also very political. It's changed a lot just in the past year or so. So these things don't happen overnight. You need to be in it for the long run. That's why we are really also arguing and working for long term strategic commitments.

were the brands equally so they can be long term and strategic were their suppliers. Because if everybody, you know, pulls back to their own, it becomes very short sighted and you're not going to see the results. you need to think five, 10 years ahead. And I think that is the challenge for this industry and most industries, because they operate on quarterly and mid year and annual rep...

and everybody wants to, yeah, it really is.

Felicia Jackson (29:19)
Yeah. Well, I think it's that challenge that

everybody's job is aligned to KPIs in the short term, even if the long-term benefit of the business as a whole needs strategic action over the long-term and the KPIs will always be prioritized. So that what you're talking about is saying to CFOs.

Kristina Elinder Liljas (29:30)
Mmm.

Correct.

Yeah.

Felicia Jackson (29:44)
You need to understand this is just as important and you've got to integrate this kind of decision making into what people do on a day-to-day operational basis.

Kristina Elinder Liljas (29:52)
That's exactly right. And I think a really good case or example, and, you know, I don't mean to single out H all the time, but they are one of our lead partners and they are also very public about, you know, what they're doing. They're also scrutinized for it. But, you know, their annual report, which was released I think it was in January and their CEO, Daniel Lovier,

went out and showed that they have managed to reduce since 2019, their carbon emissions by 30%. But last year, their operating margin increased by 8%. So it's not either raw. It's yes and you can do both. and they are one of the brands and there are others as well. you know, investing a lot and it can also support their margins. So it's not just

Felicia Jackson (30:29)
I think that's really important.

Kristina Elinder Liljas (30:42)
a cost. And I think that's an important message for the industry who are, know, we can't afford to take the risk. if we don't get the return, that's a sound cost. Well, no, you know.

Felicia Jackson (30:52)
only

in isolation.

Kristina Elinder Liljas (30:54)
Yeah, exactly. Only in isolation.

Felicia Jackson (30:57)
And that comes back to our earlier discussion about resilience and the fact that if you invest in certain things, you can be more resilient to a range of different shocks. It doesn't necessarily have to be climate. And if you are managing your business differently, it doesn't have to be a cost. actually that relates to what I was saying about sustainability reporting, which is

Kristina Elinder Liljas (31:08)
Yeah.

Felicia Jackson (31:19)
It's only if you use the data to make better decisions that you can actually then increase your margins and build a stronger, more resilient business. my question then would be, what advice would you give to a CFO of a global fashion brand? I'm not talking about the small brands which really do have, for lack of a better phrase, less money to play with. What decisions would look different?

Kristina Elinder Liljas (31:23)
Yeah.

Mmm.

Felicia Jackson (31:40)
once you started factoring in the cost of inaction? What two or three investments might make the biggest difference?

Kristina Elinder Liljas (31:46)
before you go into investments, I think the first thing that needs to be done is to look into the supply chain visibility and risk modeling and see, where are you sourcing from? What markets? What are the strategic suppliers? Comes down to data. You were talking about that as well, like looking at the data to help guide you

Where is the most impactful investment opportunities? And then once you know that, then you can model. And this is actually something that we're looking into developing a platform for this, where brands can plug in their numbers, know, the emissions, type of investment they would be able to and within their budget to put into this and what the impact would be because the

Felicia Jackson (32:29)
Brilliant.

Kristina Elinder Liljas (32:32)
the type of project or solution again will be very different depending on which market. Vietnam has got different opportunities than Bangladesh, than India, than Cambodia, China, for instance. So to assess your supply chain and risk modeling. And then once you've got your targeted, I'm just making up a number now, like top 10 suppliers, come back to us because our

uniqueness is that we work with the global 40, 50 brands and then we can say, OK, you're interested in these 10s ones. Well, we have brand XYZ also interested in those suppliers. Let's talk. Let's sit around the table and talk. ⁓ and we also know the industry stakeholder and the philanthropic partner X in India who are wanting to put money into this as support. OK.

let's all work together and then look into what tool together with the suppliers would make sense for them, even better if you can cluster them in a region, right? once you know you have the supply chain visibility and then to sit down with a collaborative kind of investment mechanisms or opportunities. So that would be, to start by assessing what your landscape

looks like using data. I mean, CFOs and treasury teams, love data, everything is numbers. So this is where the data transparency and proper assessments and calculations are needed that they can play around with and see on financial terms what it means. OK, if I take this cost now, how long will it take until I get it back?

And what are the risks if I don't? How hard will my margin be affected then? it all looks very simple and kind of straightforward on paper. But then, of course, it's very complex. you might be working with hundreds of different suppliers.

But it boils down to, if you look at your own house, for instance, you know that you have a really old heat pump that's gonna lay off and you don't wanna upgrade because a heat pump's really, really expensive, but energy prices are going through the roof, which they did after Ukraine and gas pipes and whatnot were cut off. And that heat pump breaks down and then all these added costs.

which had you just made that investment from the very beginning, because once you need that heat pump, suddenly there's a shortage. And this is a true story, by the way. And this heat pump, suddenly there was a shortage. once you wanted to import it, prices had gone up by three times. you just bought that heat pump at the very beginning when the trouble started.

You would have saved yourself a whole lot of concern, worry and money and just gotten the job done rather than pushing that worry down further down the line. Equally, if you have a house that sits in a ditch, well, maybe you should buffer up with, I don't know, for in case of flooding because insurance costs go up. Yeah, know, a drainage system or because again, insurance, you know, things that eventually might not cover it.

Felicia Jackson (35:28)
Maybe move the fridge off the ground floor.

Yeah.

Kristina Elinder Liljas (35:40)
And the same thing, well, you goes for a business. It's kind of future proofing your own business.

Felicia Jackson (35:44)
I'm fascinated by this perspective.

What I find interesting about this is that it's something that is really easy to understand and obvious when it comes to an individual. It seems like common sense when it comes to a business. And yet we know that countries have the same problem in making decisions at the right time. Because I saw some research when the Ukrainian war started and there was obviously a huge peak.

in gas prices in the UK. there was a piece of research which showed that if the early UK government commitments to renewable energy had been fulfilled and not watered down, by the time that happened, there would have been a significant percentage lower demand for energy generated with international fuel. So it works on every level.

Kristina Elinder Liljas (36:33)
Well, that's right. That's exactly it.

Yep. It works on every level, not just the textile industry.

Felicia Jackson (36:37)
But

this is fascinating because it comes back to this idea of uncertainty. So how do you decide when to do it? Because, the UK government decided it was a really good idea to invest in renewable energy. Then for various reasons, which may have had to do with politics and cost and timing and international whatever, decided not to. So how do you make that decision? ⁓

Kristina Elinder Liljas (36:44)
Mm.

Mm.

Felicia Jackson (37:02)
To be honest, I think that's a really unfair question because I don't think anyone knows. But what would you say the signals companies should be looking for to know when it's time to move?

Kristina Elinder Liljas (37:11)
Well, again, I think it's about doing the supply chain mapping. every facility will be at a different maturity stage. Not every facility is ready to transition and to electrify. They shouldn't even be doing that. So it's about understanding the road map. Again, your strategic suppliers, 10, 20, 50, whatever they are, putting them through an assessment. I mean, it's a lot of work.

It's not one thing, but you have to do it step by step and understand, okay, well, these are the 10 suppliers, they are ready for this. These are the 10 suppliers that have come further. And because in some cases, it might not even be a big investment. It might be energy efficiency, which is an instant ROI. It might just be improving this insulation and screwing something here and then it's job done. But for some, might be end of life for some other equipment anyway.

Well, that's the opportunity to identify the opportunity to put then funding into that. And it is about seeing it as a, some of the brands we've spoken to, it's like they nearly see it as a marketing cost. Like we're going to trial this. We're going to see. And if it doesn't work out, well, then it didn't work out just like a campaign, a sales campaign. It didn't work out, but we put money into it, hoping it would work out. But if all goes well, it will work out. And then if you have

five of those companies doing something, then we can really showcase and we can crowd in more funding and we can probably bring in development aid money and then we can scale it. But I think it's about identifying the...

the opportunities and what type of investment is needed. Is it always financial? It could also be capacity building. It could be educating and putting that supplier through a carbon tech assessment program.

Felicia Jackson (38:54)
then really the big question is what do you think is going to happen over the next decade? There are different opportunities that as you say, there's energy efficiency or investment in new processes, but the fashion industry is often involved in both.

very old fashioned processes and very cutting edge. Do you see technologies transforming the industry? I suppose what I'm asking is, what are we looking at? Are we looking at technological change? Are we looking at structural change? Are we looking at process change?

Kristina Elinder Liljas (39:12)
Mmm.

Well, think technology certainly will play or is playing a big part. But what we see is not a lack of innovation in technology. What we see is a lack of the supporting financial structures to deploy the existing technology. So certainly, great that we can keep innovating around more efficient processes.

Many of them already exist and we know that they're hugely impactful like heat pumps or steam heat pumps even better, but they are extremely costly. They're seen as very risky for the supplier, both in terms of financial risk, but also what if such an investment disrupts the whole production flow line, delays, quality issues, who's going to pay for that? So it's about risk mitigation and beyond CAPEX, pooling in

the support, the framework before and after to do the assessment, to have someone there present on the ground, holding the supplier in the hand, guiding them, and then the after implementation support. think beyond brands, because I think at least the brands that we work with, they

asked for this report for one because they needed a pitch or a showcase to bring to their treasury teams to ask for funding. So we work mainly with the sustainability teams, but they're like, we know the plays, we have your brand playbook, we know what needs to be done, but we don't have the business case for it. that's kind of the, reason for this report. So now we've given them something to showcase a model around the financial risk, but then

Brands alone will not be able to finance this transition. You need the local market infrastructure, the policy regulation support. You need philanthropy. I see an increased need or role where philanthropies are going to play a big part. And, you know, they have different KPIs altogether. For them, it's really financial. will be on social, economic,

labor, gender equality, health, mean, all these things come into play, right? So, again, all those actors together, they can support with capacity building and they can do local policy lobbying or be part of diplomatic relationships, all these things. I think often these actors don't necessarily speak with each other. So it's about bringing them all

into the room. Because the capital exists, the solutions exist. It's about coming together and aligning on, well, let's do this at scale and trial it. That sounds contradictory, trialing something at scale. But you know what I mean,

Felicia Jackson (41:59)
It's about starting, trialing, accelerating and doing it in a way that's manageable and effective. what I love about the way you described it is there is an ecosystem around the operation of the fashion industry, far beyond brands and suppliers. And that we do have to bring together finance, policymaking, politics.

Kristina Elinder Liljas (42:10)
Ecosystem is the word. That's exactly it. Yeah.

Mm-hmm.

Felicia Jackson (42:20)
consumers, brands, supply chain, logistics, and actually try to work together. One thing I'd love to know is, do you have any thoughts on what will separate the companies that have navigated the transition successfully from those that don't?

Kristina Elinder Liljas (42:36)
Well, I mean, I would have to link back to our report where you have the three stereotypes, right? You've got the conventional operator, business as usual does nothing. You have the pragmatist and then you have the pioneer. And our report shows that it's the pioneers who are investing in beyond who will take the least hit. Everybody will have to pay. So it's not like you win anything, but the hit will be

lesser, they'll be more resilient. the conventional operator will likely be out of business, you know, by 2030, 2040. Because you're not building a resilient company. and the margins aren't big enough to take that. I mean, we see companies

crumbling all the time and I think that's what's gonna happen.

Felicia Jackson (43:28)
thank you for that. I really wanted to bring that out. This idea that what we're looking at is this isn't a winners or losers. the industry and the environment around it is going to change no matter what. And those who are actually taking action are more likely to minimize the hit that they take. that's a really important lesson, not just for the fashion industry, but actually

Kristina Elinder Liljas (43:31)
Yeah.

Yeah.

Felicia Jackson (43:50)
for industry as a whole. Now, is there anything I haven't asked you about that you wish I had?

Kristina Elinder Liljas (43:55)
I'm glad you did ask about the financial tools because that's the kind of matching component to this report. OK, so hopefully with this report, we create awareness. There's activation at the brands that they, double click on the numbers. And really if anybody's listening to this out there and they're like, we want to learn more that you

reach out to me or anyone at AII and we're happy to have a conversation around the modeling and we can bring Accenture to that as well. But really, we want to build out this platform, the system platform tool to enable the brands to plug in the numbers and calculate and play around, but then also to link it to these financial mechanisms. Because again, that's the key. So that's what's going to drive it exactly. And then to engage the suppliers, which again is what we

Felicia Jackson (44:34)
That's what drives transformation.

Kristina Elinder Liljas (44:42)
come with because many times, the brands wouldn't want to share their supplies with each other. They don't speak to each other on that. But we are working with all the brands and we know where there is overlap and where there's not. And as an NGO, our interest is to support the industry and ultimately the supplier to do this. So

Felicia Jackson (44:48)
No.

Kristina Elinder Liljas (44:59)
I guess one final word around, we're not on track. I mean, if you've committed to net zero, I mean, and we've gone out publicly to say that if we can raise 250 million in our fashion climate fund, we can use that funding to reduce approximately 100 million tonnes. Now we're sitting at our last annual report. We produce an impact report every year. It was close to nine million.

So we are far off the 100 million. And that is because we're also far off the 250 million. I mean, we've raised a fair amount, but we need to pull the funding. So that's a call to action to anybody, both brands and philanthropy or any other ⁓ funding partner out there who can support this. Yeah, let's work together.

Felicia Jackson (45:42)
Well, do, I

I think Let's Work Together is an excellent call to action and a very positive note on which to end our interview. So Christina, thank you so much for joining us. what struck me most about this conversation is how the language around sustainability is changing. it's not anymore around responsibility and targets and reporting.

Kristina Elinder Liljas (46:00)
Yeah.

Felicia Jackson (46:04)
It's about the fact that business risk is very hard to differentiate from climate risk today. And it doesn't matter. Rising energy costs, carbon pricing, disruptions to raw materials, supply chain fragility. they're not abstract environmental issues. They affect how companies produce, how supply chains operate, and ultimately how profitable the industry and an individual company can be. So in other words, to borrow the title of your report,

The cost of inaction isn't just environmental, it's economic. And that's something increasingly true across the board for companies, countries and people. So as ever to our listeners, thank you for joining us. And if you know someone grappling with questions about how to deal with the structural, operational or financial challenges of decarbonisation, why not send them this episode? And if you happen to be involved in philanthropy and want to make a difference to the fashion industry,

I advise you to get in touch with Christina and I will add the Apparel Impact Institute's details to the show notes. Don't forget to like, subscribe and share and we'll be back soon.

Kristina Elinder Liljas (47:07)
Thank you so much, Felicia, for having me on the show.