Credit ratings agency Fitch Ratings announced today the publication of Climate Vulnerability Scores for the retail sector, examining the exposure of companies in the sector to long-term low-carbon transition risks. The report identifies the apparel, and the durable goods and consumer electronics (DGCE) segments as the most vulnerable to climate risk.
Fitch’s Climate Vulnerability scores provide the agency’s view of the creditworthiness impact of sectors, companies and debt securities to a rapid low-carbon transition between 2025 and 2050. According to Fitch, the scores were developed in response to a need by investors for a long-term view of transition risks, recognizing the implications for instruments of different maturities and strategies, to help manage these risks and support security selection, portfolio management, risk management, monitoring and reporting.
Fitch initially launched Climate Vulnerability Scores last year for the utilities, oil and gas, and chemicals sectors, recently adding auto manufacturing, aerospace and defence, transportation, and technology, media and telecommunications, and announced plans to extend the scores to cover all sectors.
The agency’s new report found that the retail sector will be among the least affected by the climate transition, particularly for companies in the food and online retail segments, with generally high adaptability to regulations relating to energy transition, waste reduction and sustainable packaging.
Apparel and DGCE companies, however, are somewhat more vulnerable, according to Fitch. Apparel companies face the prospect of difficult to pass on higher costs, driven by higher materials costs due to increasing carbon prices, and required changes in production processes to comply with waste reduction and circular economy government requirements. The vast majority of emissions in the clothing industry is derived in the value chain (Scope 3 emissions for retailers), but Fitch noted that “retailers are likely to participate in funding the efforts to reduce emissions at their suppliers.”
For DGCE companies, Fitch writes that the transition to a low carbon economy will require retailers to shift to products made with more sustainable materials, and with improved repairability and durability. Fitch sees risk to demand in this segment through the rise of the second-hand and sharing economy, the shift to products with longer use-life and evolving consumer preferences.
Click here to access Fitch Ratings’ Climate Vulnerability report for Retail.