To meet the goal of curbing global-warming greenhouse gas emissions by 2050, the fashion industry will need to spend an estimated $1 trillion to transition from polluting practices to more environmentally friendly ones.
However, efforts to mobilize resources so far have been hampered by structural challenges and competing interests, and have only just scratched the surface of this enormous sum.
A new white paper by leading manufacturers including Pakistani denim maker Artistic Milliners, Sri Lanka's MAS Holdings and Hong Kong's Tal Apparel says this situation puts the industry's entire environmental agenda at risk and that change will require new ways of working and financing.
“If we don’t come up with more creative and innovative financing models, we will not achieve our own climate goals. [neither] “No brand or whole industry will do that,” said Nemansi Koolagamage, MAS's director of sustainable business. “Our goal is to find creative and more widespread ways for the industry to work together to fund decarbonization.”
Why is it so hard to fund the fashion industry's climate goals?
Most of fashion's environmental impact occurs during energy-intensive manufacturing activities, such as dyeing and treating fabrics. Yet most of the industry's profits go to the big brands. Many of the fashion industry's biggest companies have set impressive sustainability goals, but few are committing funds to support the transition.
Meanwhile, many of these manufacturers are small businesses in emerging economies that struggle to access affordable capital, much less find funding for long-term climate-related projects with uncertain payback periods. The short-term, trend-driven nature of the fashion industry doesn't help, creating a volatile environment that makes raising capital even more difficult.
“The pressure to decarbonize and the financing to decarbonize is all on the supplier,” said Saqib Sohail, responsible business project leader at Pakistani denim manufacturer Artistic Milliners. “The risk doesn't feel shared across the supply chain.”
What other models are possible?
To address this issue, the fashion industry needs to simultaneously address the accessibility, affordability and availability of capital – to fund both long-term projects and non-repayable endeavours.
The white paper envisages several innovative fundraising approaches.
Fair Climate Fund
Similar to the Fairtrade model, each member of the value chain is required to contribute a set amount (for example, 1% of their sales revenue) to a shared fund, which is then distributed as grants to finance the decarbonization of the supply chain.
An alternative approach would be to address this issue at the consumer level, introducing products that explicitly advertise a small price premium that goes towards decarbonising the associated supply chain.
Credit considering business uncertainty
The volatile nature of the fashion industry means taking on debt can be very risky. What may be fine one season can quickly weigh on the balance sheet if trends change. One proposed way around this problem is a debt repayment scheme that introduces production discounts.
When big brands extend credit, repayments can be structured through discounts on future product orders, meaning that if orders fall off for a few seasons, repayments fall, helping to cushion the pain of business uncertainty.
Another way to address this is through cyclical insurance, which protects manufacturers during periods of reduced demand or major disruptions. Similar schemes already exist in other sectors, such as agriculture.
Green Finance Tools
Sustainability-linked financing mechanisms such as green bonds are an increasingly popular source of financing for climate-friendly initiatives. Several fashion companies, such as the H&M Group and Chanel, have already experimented with issuing bonds linked to their climate goals, but there is still plenty of opportunity to use such tools to funnel funds to decarbonize supply chain projects.
Financial institutions focusing on Islamic finance (financial activities compliant with Sharia law) are also increasingly turning their attention to green investments. Islamic finance is an interesting area for manufacturers because it prohibits the charging of interest and is instead based on equity-based and asset-backed models, eliminating the risk of debt-financing long-term climate projects. Many of the fashion industry's largest manufacturing bases are in Islamic countries, but this form of financing can also be deployed more broadly.
A “Just Transition” tax on fashion imports
Many governments have established Just Transition Funds to support regions and communities that may be harmed by efforts to transition to a low-carbon economy.
In the case of fashion, such a fund could be backed by a climate tax levied on imports to wealthy consumer countries, with future funds allocated to both decarbonization and climate adaptation projects.
What will it take to make a difference?
These creative solutions highlight the possibilities, but they all face hurdles, not least because most of them would impose a slight premium on the price of production.
Policies that incentivize decarbonization through subsidies, taxes, tariff provisions or regulations would help. Also helpful would be greater transparency about how companies with ambitious sustainability targets will finance them. Crucially, investment plans need to be protected from the chronic volatility of the fashion industry.
“We cannot achieve our goals unless we decouple the business cycle from the investment cycle,” said Bidula Lalapanawe, head of sustainability and innovation at global apparel maker Epic Group.
