What Will It Take to Tackle Fashion’s Climate Financing Gap?

It will cost the fashion industry an estimated $1 trillion to make the shift away from polluting practices to greener ones required to meet goals to curb planet-warming greenhouse gas emissions by 2050.

So far, however, it’s barely scraped the surface of this mammoth amount, with efforts to mobilise funding hampered by structural challenges and conflicting interests.

The situation is putting the industry’s entire environmental agenda at risk, and change will require new ways of working and financing, according to a new white paper by leading manufacturers, including Pakistan-based denim maker Artistic Milliners, Sri Lanka-based MAS Holdings and Hong Kong-based Tal Apparel.

“If we don’t come up with much more creative and innovative financing models, we ourselves will not hit our climate goals. In turn, [neither] will the brands and nor will the industry as a whole,” said Nemanthie Kooragamage, director of sustainable business at MAS. “Our goal is that the industry will find creative and more expansive ways to come together to collectively fund decarbonisation.”

Why is funding fashion’s climate goals so hard?

Most of fashion’s environmental impact takes place during energy-intensive manufacturing activities like dyeing and treating fabrics. The majority of the industry’s profits, however, go to large brands. And while many of fashion’s biggest businesses are setting impressive sustainability goals, they’re mostly not stumping up cash to help support the transition.

Meanwhile, many manufacturers are small and medium-sized businesses in emerging economies that already struggle with access to affordable capital, let alone find the financing for long-term climate projects with dubious payback prospects. The short-cycle, trend-led nature of the fashion business doesn’t help, creating an unstable environment that makes it more difficult to raise funds.

“All the pressure of decarbonisation and the funding of decarbonisation lies with suppliers,” said Saqib Sohail, responsible business projects lead at Pakistan-based denim manufacturer Artistic Milliners. “The risk, we feel, is not shared across the whole supply chain.”

What other models are possible?

To address the issue, the fashion industry needs to tackle accessibility, affordability and availability of finance all at once. Funds need to be found for both longer-term projects and no-payback initiatives.

The white paper imagines a number of innovative funding approaches:

A Fair Climate Fund

Similar to the fair-trade model, this would require each member of the value chain to contribute a defined amount (for example, 1 percent of sales revenue each) into a shared fund. The money would then be distributed as grants to finance supply chain decarbonisation.

Another approach could be to address this at the consumer level, introducing products that explicitly advertise a small price premium to be spent on decarbonising the associated supply chain.

Credit That Accounts for Business Volatility

The unstable nature of the fashion industry means taking on debt can be very risky; repayment sums that feel comfortable one season may quickly weigh on the balance sheet if trends change. One proposed way around this is to introduce a debt-for-production discount system.

Were large brands to provide credit, repayment could be structured through discounts on future product orders. That would mean if orders went down for a few seasons, so would the repayment amounts, helping to smooth out any pain caused by business volatility.

Another way to handle this could be through business-cycle insurance that covers manufacturers for periods of reduced demand or significant disruption. Similar schemes already exist in other sectors, like agriculture.

Green Financing Tools

Sustainability-linked funding mechanisms, like green bonds, are a growing source of capital for climate-friendly initiatives. A few fashion companies, like H&M Group and Chanel, have already experimented with issuing bonds linked to climate targets, but there’s more opportunity to use such tools to funnel funds into supply-chain decarbonisation projects.

Financial institutions focused on Islamic finance (financial activities that comply with Shariah law) are also increasingly looking to make green investments. It’s an interesting area for manufacturers to explore because Islamic finance prohibits charging interest, resting instead on an equity-based and asset-backed model that can help remove risk associated with using debt to finance long-term climate projects. Many of fashion’s largest manufacturing hubs are located in Islamic countries, though this form of financing could be deployed more widely as well.

A “Just Transition” Tax on Fashion Imports

Just transition funds have been set up by a number of governments to support regions and communities that may suffer from efforts to transition to lower-carbon economies.

In fashion’s case, such a fund could be supported by a climate levy on imports to rich consuming countries, with prospective funds earmarked both for decarbonisation and climate adaptation projects.

What will it take to drive change?

Such creative solutions highlight what may be possible, but all face hurdles. Not least, most would result in a small premium on production prices.

Policy that incentivises decarbonisation through subsidies, tax and duty provisions, or through regulation, can help. So can more transparency around how companies with ambitious sustainability targets plan to finance them. Crucially, investment plans need to be protected from the chronic volatility of the fashion business.

“Unless we decouple the business cycle and the investment cycle we will not hit our targets,” said Vidhura Ralapanawe, head of sustainability and innovation at global apparel maker Epic Group.

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