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Financing fashion sustainably

When it comes to sustainability, fast fashion has an uphill task given its volume based production style. According to the Fixing Fashion report, the fashion industry’s pollution levels are second only to those of the oil industry and are responsible for 8% of global carbon emissions. The current growing trend of fast fashion operates under the norms of unsustainable speed of rotating fashion garments with dangerously narrow profit margin. As a result, there has been extensive usage of cheap, unsustainable materials, exploitation of garment workers, unsafe working conditions, and degradation of land and water resources.

Scope 3 emissions are the major contributor to the fashion industry’s carbon footprints and mounting pressures from conscious consumers globally, along with regulators call for change. There is a need to shift focus to innovation in the form of new materials, processes, technologies, business models, and emission reduction across the supply chain. This requires major overhaul with significant capital costs, such as portfolio transition to renewable energy, investments in technologies to advance and scale production of next-generation fibres, and so on. Furthermore, global initiatives such as the UNFCCC Fashion Industry Charter for Climate Action also pave the way to mitigate the climate impacts of fashion industry. A new set of commitments by the charter includes net-zero emissions by 2050, 100% electricity from renewable sources across owned and operated facilities, and the sourcing of environmentally friendly raw materials by 2030. Such initiatives along with the $2 trillion market size of the fashion industry offer major untapped low-carbon opportunities for investors and companies. This would help cater to the annual financing opportunity of US $20 billion to US $30 billion that lies within the fashion industry.

For example, in 2021, Prada signed a five year sustainability linked loan with UniCredit banking group for an amount of 90 million euros (~US $90 million). The disbursement of these loans is attached to Prada’s sustainable development targets. These targets, also known as KPIs, include the regeneration and reconversion of production waste and increase the share of self-produced energy. An independent third party audit will be conducted, based on which a reduction in the interest rate upon the achievement of quantitative targets will be availed by the company. This kind of financing mechanism is one of a kind to be used by a luxury brand for financing its sustainable targets and was soon followed by the VF group of the United States later in the year. Apart from these available and accessible sources of green financing, other sources include state-backed loans.

Another more recent development is the blended capital model for financing being used by The Good Fashion Fund. With the overall holistic goal of bringing in systematic changes within the clothing industry, the fund envisaged to raise a target size of US $60 million. It is a collaborative partnership between investors, financiers, FOUNT, and several parties from the industry, such as brands, manufacturers, and social and environmental experts. The fund’s blended structure combines risk-tolerant capital with private sector investment, that allows for flexibility as well as catering to the best fit individual solutions.

These are just a few financing mechanisms available and being accessed by the fashion industry. The growing focus on ESG in the fashion industry tantamounts to unparalleled opportunities for investors and companies, that have only begun to be explored.