Fashion executives looking to raise money are schooled in talking up their sales projections, brand penetration and sell-through rates. But increasingly, there’s a new metric investors want to know about: exposure to climate risk.

The issue’s relevance has been fuelled by a potent mix of rising consumer demand, international policy signals and immediate business threats created by increasingly frequent environmental disasters. Now, financial regulators are introducing new rules that will require large fashion companies to publish details about their risk profile and impact.

On April 6, the UK introduced requirements for companies to disclose the financial risk that climate change poses to their business operations. And last month in the US, the Securities and Exchange Commission proposed a similar rule. The EU is planning to expand sustainable finance disclosure regulations introduced last year, and Asian business hubs like Singapore and Hong Kong are pursuing similar initiatives.

While the regulations don’t require companies to take any specific action to tackle environmental impact, they’re emerging against a backdrop of broader international policy moves taking aim at issues like pollution, waste and labour abuse across the industry. They could put real teeth behind efforts to improve transparency about the industry’s contribution to climate change and create more comparable data across brands. Fundamentally, they’re designed to make it easier for investors to take environmental impact and climate risk exposure into account when deciding which companies to back.

“There’s been a very broad consensus amongst investors that they care about climate-related issues because they create risks to the prospects and performance of business entities,” said Ellie Mulholland, director of the Commonwealth Climate and Law Initiative. “And regulators see that as well — not just risks to entities, but risks to financial systems.”

Many of fashion’s biggest players have already started to prepare for new regulations. Companies including Gucci-owner Kering, Zara-owner Inditex and British luxury giant Burberry have said they are aligning their sustainability reporting with a G20-backed framework that forms the basis of much of the planned regulation. When H&M Group published its annual financial report earlier this month, it embedded its sustainability updates for the first time, a move designed to signal the closer integration of financial and environmental reporting, the company said.

There’s been a very broad consensus amongst investors that they care about climate-related issues.

What mandated disclosure will mean for brands more broadly is that they’ll need to hire consultants and auditors with climate expertise who can supply information about physical risks and emissions footprints. The UK law covers a range of companies, including those with over 500 employees and a turnover of more than £500 million ($653 million); meaning it will apply to brands like Burberry and Boohoo Group. And in the US, the proposed SEC rule will apply to all publicly traded companies, which means companies like Nike and Tapestry will be impacted.

There are two main categories that a business’s climate risks can fall into, noted Mulholland: physical risks and transition risks. For apparel companies, the former might include the way that a warming world increases instability in the supply chain, whether that’s the risk that warmer winters pose to global cashmere supply, that drought poses to cotton prices or that flooding poses to Bangladesh, which is both one of the most vulnerable countries to climate impacts and also one of the world’s largest garment exporters.

Transition risks, on the other hand, are those that arise from changes in society and policy: think of a future where greenhouse gas emissions are more closely regulated and penalised, or where customers demand lower-impact goods — a trend many brands already appear to be anticipating, at least in their marketing.

While transition risks aren’t guaranteed and may be years away, investors of all kinds are taking such risks ever more seriously and they want to be able to include them in their assessments of which businesses are worth backing, said Cynthia Williams, Osler Chair in Business Law emerita at Osgoode Hall Law School at York University.

The companies that figure their supply chains out and understand what’s embedded in the products that they sell, and the production processes that they use to make those products, are going to come out ahead.

Larry Fink, CEO of the world’s largest money manager BlackRock, made waves in 2020 by telling company executives that “climate risk is investment risk.” And investor activism on the subject is rising, with shareholders in companies like Exxon Mobil enacting boardroom shakeups to appoint directors who are more likely to take climate risk into account when guiding the future of the company.

Pressure on fashion companies has been less public, but scrutiny of the sector is growing. For instance, Allbirds had to drop some of its sustainability claims when it went public late last year due to SEC objections. The company said the changes reflected the regulated process involved in going public and that it remains committed to achieving its sustainability goals.

While it will take time for all the implications of these rules to become clear — the UK law just came into effect this month, and the US regulation is currently in a public comment period — long-term, they are expected to empower investors to financially reward companies that are more forward-thinking about climate risks and opportunities.

“Investors are being pretty aggressive about making companies adopt net-zero goals,” said Madison Condon, associate professor of law at Boston University. “So these two forces working together means that as companies start to adopt net-zero goals, they’re going to start having to make them more real and reflected in their financial statements if they’re going to be allowed to keep saying them.”

Brands that are slow to take action may find themselves less attractive to investors.

“A smart fashion industry executive probably doesn’t want to bet on ‘nothing’s going to be required of me in terms of thinking about my emissions,’” said Dan Firger, the managing director of Great Circle Capital Advisors and former leader of sustainable finance and climate programs at Bloomberg Philanthropies. “The companies that figure their supply chains out and understand what’s embedded in the products that they sell, and the production processes that they use to make those products, are going to come out ahead in the medium- to long-term — and be better positioned for the future.”