Achieving net-zero in the apparel supply chain by 2050 will require huge investment. Experts say the money is there, but that only joined-up efforts, with brands and manufacturing partners working together, will secure the necessary funding.

A new, supplier-funded white paper has outlined the urgent need for innovative funding models in the clothing sector’s journey towards decarbonisation. The document, ‘From Catwalk to Carbon Neutral: Mobilising Funding for a Net Zero Fashion Industry’, offers a deep dive into the challenges and solutions for funding climate action in apparel manufacturing.

Representing the denim industry, sustainability platform Transformers Foundation and German sustainable development organisation GIZ (through a project it runs called Fabric Asia) have supported the publication of the report. Transformers Foundation has commented: “The apparel sector is currently responsible for an estimated 2%-8% of the world’s greenhouse gas emissions. By some estimates as much as 80% of those emissions are in the supply chain.”

Online discussions took place in March to present the white paper and help inspire a broader examination of this issue. Supplier organisations involved in commissioning the white paper and in the March discussions included Artistic Milliners, Epic Group, MAS Holdings, NITEX, TAL Apparel, Pactics Group and Simple Approach.

Key challenges

It is clear from what she said during the March discussions that the director for sustainable business at MAS Holdings, Nemanthie Kooragamage, believes that, although each of the companies in this diverse group has its own approach to decarbonisation, they all share one key challenge: funding. “If we do not come up with more creative and innovative funding models,” Ms Kooragamage says, “we will not hit our climate goals and nor will the brands. Manufacturers’ voices are a missing piece in this conversation.” 

Interviews with more than 20 manufacturers and stakeholders have informed the new report and give, the commissioning companies say, a fair representation of where the apparel industry finds itself now on the road to net-zero. To meet the promises and pledges that are already in the public domain, stakeholders will have to reduce supply chain emissions by 50% by 2030 and to be net-zero by 2050. “Clearly, this will require significant investment,” says another sustainability practitioner at MAS Holdings, Dhanujie Jayasapala.

He points out that the players in the supply chain who have the highest emissions and, therefore, the most work to do, also have the lowest share of profits from apparel sales. This affects their ability to access loans and other revenue streams that could help them carry out the necessary work on cutting emissions.

Funding bottlenecks

Something Saqib Sohail, who is responsible for sustainability projects at Artistic Milliners, emphasises is that the white paper takes into account that mills and manufacturers in different parts of the world have to come up with strategies for cutting emissions that are in keeping with the particular context in which they have to work. In theory, shifting from fossil fuels to biomass as a source of energy on site may appear to be low-hanging fruit, he argues, but some companies operate in areas where biomass is in short supply and expensive. “What is good for manufacturers in one region may not be so good for others,” he says.

Mr Sohail also points to “bottlenecks in the financing” because the view is that the responsibility for taking these steps lies at the feet of the manufacturers. Therefore, it is the manufacturers who are being left to find the capital expenditure required. “There is no sharing of the risk along the supply chain,” he says. “We feel that all the pressure to achieve decarbonisation and find the funding for it lies with the suppliers.”

Debt doubts

An executive vice-president of garment manufacturing group Epic, Dr Vidhura Ralapanawe, agrees with this. He thinks there is an assumption among many brands and retailers that their upstream supply chain partners can use debt to finance any actions they need to take to meet the targets.

“This is not possible,” Dr Ralapanawe points out. “A lot of small and medium enterprises will not have the ability to take on more debt. A lot of organisations in the apparel sector are highly geared [have a lot of debt] already and cannot take more on. And there are certain business models, for example, those of many family businesses, that are much more debt-averse than others.”

Inevitably, he explains, the conversations that have informed the white paper have included questions about the impact this expense might have on consumers. The cost of putting in place measures that will help companies meet decarbonisation targets will make garment production more expensive. Does this mean finished product prices will have to go up? Dr Ralapanawe says the business models that would allow this to happen smoothly are not in place anywhere at the moment. “We don’t have a model that would allow the cost of these increased operating expenses to be shared, either across the value chain or with the consumer,” he explains. “That’s not the way the industry is organised. But without that, there are projects that will not move forward.”

He lists a number of important garment manufacturing countries that are in what he calls “economic crisis”, mentioning Bangladesh, Sri Lanka, Pakistan and Egypt as examples. Interest rates there are high, making borrowing expensive. He finds two main faults with the funding that has been available so far on the road to 2030. The first is that it has been mostly for short-term payback rather than for long-term improvements. The second is that, even so, only the top 5% of operators in the garment manufacturing industry have managed to get their hands on any of this funding. The money has not been accessible for smaller companies or those that are highly leveraged.

He adds that the wider garment industry has been suffering a downturn in business for the last 18 months. The industry has six years in which to make the necessary investments for meeting the 2030 targets. But he fears any preparations could take at least another two or three years. This would leave only three more years for putting the investment in place and taking the necessary action to meet the targets.

Hopes for 2030 fade

Asked about this by Inside Denim, Dr Ralapanawe concludes that, in reality, there is no hope that the global garment industry can meet the decarbonisation targets it has set itself for 2030. “I’m sorry to say there is absolutely no chance,” he says. “The kind of mobilisation that would be required for the industry to make that shift is not happening on the ground. We are not even having the conversations that need to happen first.”

He insists that, already, not enough time remains between now and 2030 for garment brands and their supply chain partners to put in place and then execute decarbonisation plans for a 50% reduction in emissions. “I am going to say openly that we will be lucky to get to a reduction of 15% by 2030,” the Epic vice-president says.

However, he goes on to say that it is important for companies across the apparel supply chain to remember that 2030 is only an interim target. The real target is that the industry is aiming to reach net-zero emissions by 2050. He explains that this is why the new white paper has come out now. “We don’t want to wait until 2027 and start scratching our heads,” Dr Ralapanawe says. “Even if we don’t get to where we want to by 2030, we need to think about what happens in 2035, what happens in 2040 and what happens in 2045. We need to work on this until we completely decarbonise the value chain.”

He argues that work that can begin now to mobilise the funding and the will to bring emissions down can still make the 2050 target achievable. “But unless we re-couple the investment cycle and the business cycle, we will not hit those targets,” he warns.

Eight possible funding solutions

Suggestions that the white paper makes for taking this forward include eight concrete proposals for putting together the funding for the necessary decarbonisation to happen.

First on the list is the idea of establishing a ‘Fair Climate Fund’, which would build on the Fairtrade model. Fairtrade International is an organisation that works to make available to consumers products that offer farmers and agricultural workers a fair return for their work. The white paper suggests that it should be possible to apply this to the apparel industry’s decarbonisation funding challenge. This would consist of each player along the supply chain donating a proportion of its revenues to a central fund, which would then disburse the money in the form of grants to help finance emissions-reducing projects on the ground.

The second proposal opens up the question of debt once more. In this case, though, it would be “brand-supplied debt”. Big brands, according to this suggestion, could convert some of their earnings from selling clothes into loans for the supply chain partners who make those clothes to cut carbon emissions. Paying the loans back would still be a challenge, but the white paper says that transforming this debt into product discounts for the brands would make it easier to overcome.

Cost-sharing with consumers comes up as well. This would involve launching clothing lines with slightly higher prices than brands and retailers might usually charge, but with clear information to show consumers that the extra cost will exclusively fund decarbonisation of the product’s supply chain.

A fourth proposal is that the apparel sector could increase its efforts to capitalise on what the white paper calls “growing interest in green bonds”. This is a reference to the appetite among investors to put money into projects that specifically aim to bring about climate and environmental improvements.

It goes on to suggest that, particularly (although not exclusively) in garment manufacturing countries with large Muslim populations, Islamic finance could be a good option. This is an investment idea that has its roots in Islamic teaching that investment should generate goods and services or asset ownership rather than interest.

Suggestion number six is that companies in the supply chain should be able to borrow money to carry out these important projects, but that they should also take out business-cycle insurance to mitigate against disruptions that might affect their ability to repay the loans.

Governments, development banks, other finance institutions and export credit agencies could also become involved. These bodies could provide credit guarantees for apparel manufacturers, which would be another way of helping them access funding.

The white paper’s final proposal is for what it calls “a just transition fund”. It foresees this being created through “regulatory levies”. The money this fund accrues would be accessible to manufacturers in developing countries to support decarbonisation in those crucial parts of the value chain.

What is $1 trillion among friends?

Author of the report, Revan Philip Wickramasuriya, has a background in analysing risk management in financial markets. He has analysed the comments on decarbonisation of the  clothing sector that a non-profit collective called the Apparel Impact Institute (AII) has made. He quotes AII as estimating that industry decarbonisation will require total investment of $1 trillion between now and 2050.

Groups including Levi Strauss & Co, Abercrombie & Fitch, VF Corporation and PVH are Apparel Impact Institute partners, along with New Balance, Puma, adidas, Columbia Sportswear, Under Armour and others. What AII does is identify solutions that can make “a meaningful carbon reduction in textile production” and then secure financing to create “customised decarbonisation plans”. The money it raises comes from grants from the partner brands and from philanthropic organisations. Its $1 trillion figure comes from a joint report that AII released in February 2024 with textile innovation incubator platform Fashion For Good. This report presents    $1 trillion not as a challenge or a target, but as an opportunity.

Reflecting on this, Revan Philip Wickramasuriya repeats that there are significant pools of funding out there that are open to investment opportunities that will help fulfil environmental, social and governance (ESG) ambitions. “The apparel sector needs to start tapping into these pools of money,” the author of the new white paper says. “This figure, $1 trillion, may sound like a big number but if you come from a financial background it is just a drop in the ocean.”

He explains that total banking assets, globally, stand at $183 trillion at the moment. He adds that the top 500 asset management companies alone control $113 trillion in assets and are already putting some of this money into projects that could work in the garment sector. “The funding is out there,” Mr Wickramasuriya says. “If you want $1 trillion you can get it in the blink of an eye. If it is not coming into the apparel sector for decarbonisation it is partly because the policies and regulatory frameworks are lacking. But, more importantly, I think that if you come from the financial sector, it’s because you don’t see the necessary synergies and connectivity in the apparel sector. This is a problem right across the value chain and all the stakeholders need to work together on it. Instead, everybody seems to be trying to do their own thing.”

The big burden in decarbonisation efforts in the apparel supply chain is on the shoulders of manufacturers.
Photo: Fashion For Good/Lalit Kumar/Unsplash

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