According to a recent article from Fitch Ratings, apparel and durable goods and consumer electronics (DGCE) have been identified as the retail segments most vulnerable to climate risk, while food and online segments remain lower risk. This DGCE segment risk is attributed to changing consumer behaviour, relative to other retail segments, and greater emissions, particularly when it comes to supply chains and manufacturing processes (also known as a retailer’s scope 3 emissions).
Changing consumer behaviours include growing concerns around fast fashion and the rise in the second-hand economy promoting reuse and repair. In addition, “low-margin-high-turnover business model[s]”, mean that consumers may be only willing to fund part of the cost to reduce emissions through premiums for sustainable products. In part, due to the number of alternative products on the market and need for companies to remain competitive.
Meanwhile, food and online retail segments continue to see strong consumer demand and while investing in electric fleets and energy efficiency has a cost, these investments are not anticipated to greatly affect free cash flow as companies look to reduce emissions.
Moving forward, DGCE retailers will need to “gradually shift their offering towards products made with more sustainable materials and with much-improved reparability and durability characteristics.” This is also expected to result in additional investments in consumer education and spare part availability as regulators are increasingly looking at ways to extend product lifespans and hold producers responsible for the full lifespan of the product. Beyond this, there are opportunities for retailers to work with suppliers to get visibility into emission hotspots and provide funding to support emission reductions.