The Future of Fashion & Sustainability | 18 The Sustainable Fashion Financing Gap

Price, Performance, and Planet. Sustainable fashion innovators looking for investments must show they can meet each mark. Sustainability credentials alone are not enough to take solutions mainstream. According to Elyse Winer – Partner at investment firm Material Impact –, startups must show performance and price parity.[1] Compared to the late 2010s, sustainable fashion startups are beginning to realize the challenge of scaling their sustainable fashion solutions and securing long-term partners. Despite the growing demand for cleaner solutions like alternative materials and recycling technology, few brands and outside investors have committed the funds required for facilitating scale. We are left with an industry sorely in need of closing the financing gap to meet the estimated “$1 trillion to make the shift away from polluting practices to greener ones” that will be required to “curb planet-warming greenhouse gas emissions by 2050.”[2]

In recent memory, textile-to-textile recycling manufacturer Renewcell and material science company Bolt Threads realized the stark reality of sustainable fashion financing. Earlier this year, Renewcell announced bankruptcy, while Bolt Threads ceased production of their Mylo™ leather alternative last summer. Approximately 90% of startups fail over the long run, but considering the hype and promise surrounding both innovators, the outcomes were a disappointment. Both businesses failed to acquire the necessary financing and industry buy-in to continue scaling their solutions and increasing their supplies. In today’s business climate innovators face several challenges in obtaining funding from banks and industry partners.

Existing models of finance are ill-equipped to support the necessary time horizons sustainable technology needs to develop and scale. Historically, “asset-intensive” startups that require investment in raw materials and factories have attracted less early-stage venture-backed capital than “soft-tech solutions such as digital platforms.”[3] When compared to the industries early-stage funding funnels into, the fashion industry “lacks clear [product development] stage gates [or checkpoints], standardized processes, and commercialization paths for investors.”[4]

Many apparel and footwear brands have not shown a willingness to tackle their environmental footprint by committing to the long-term use of sustainable material options on the market. Competing against established solutions on price is challenging, and innovations that do not result in higher margins have been “a tough sell to CEOs.”[5] Despite the financial challenges, over 85% of the biggest global brands have set carbon reduction targets, with raw material sourcing accounting for up to 67% of their climate impact.[6] There is a premium on sustainable technology, but “the cost of not investing in new technology will likely be greater than the pain points that brands investing in material innovation are currently experiencing.”[7] With at least 35 new sustainability-focused legislations globally poised to go into effect in the next few years, doing nothing will expose brands to pending regulation and financial costs.[8] According to an analysis by Boston Consulting Group, upcoming regulations could put “8% of EBIT [Earnings before interest and taxes] at risk for [European] brands that do not comply by adjusting their materials portfolio mix.”[9] The onus is also on brands, supply chain partners, and traditional lenders to craft financing models and budgets that will help accelerate climate-related initiatives, including the transition from synthetic and 100% virgin materials.

Investing in asset-intensive startups is a risk for both brands and traditional lenders. Large brands reap immediate profits, while manufacturers – many small and medium-sized businesses – incur the upfront costs associated with adopting new technologies. Without individual brand commitments, sustainable fashion solutions may benefit from a consortium of “brands, supply chain partners, innovators, and investors.”[10] Pooling investment across different channels would de-risk investments for any one participant. For example, the non-profit organization Global Fashion Agenda announced a partnership between renewable energy investment manager Copenhagen Infrastructure Partners (CIP) and fashion companies BESTSELLER and H&M Group at COP28 for an offshore wind project in Bangladesh.[11] The project is expected to culminate in 2028 and consequently “reduce emissions by ~725,000 tonnes annually.”[12] According to the Global Fashion Agenda’s Thomas Tochtermann, the renewable energy project “will supply 10-15% of the energy needs of the fashion sector” in Bangladesh.[13]

Additionally, the Apparel Impact Institute, a collaboration of brands, manufacturers, and industry associations, is pooling $250m for its Fashion Climate Fund. This collaboration aims at modernizing “apparel and footwear supply chains to meet the industry’s ambition to halve carbon emissions by 2030.”[14] According to the Aii, the seven lead funders are expected to invest $10m each by 2030.[15] If the Aii can secure the full $250m, it is still a drop in the bucket needed to meet the estimated $1 trillion.

Beyond consortium-funded investing, sustainable fashion startups may also require debt financing to scale their solutions. A report by Amsterdam-based Fashion for Good and Private-Equity firm Spring Lane Capital advocates for Project Financing. Project Finance funding enables companies to scale faster, partly due to the strict focus on development and planning. Unlike Venture Capital, which is better equipped to fund software and service startups, “Project finance can be a better option for emerging technologies making physical things.”[16] Startups innovating textile recycling technologies or sustainably sourced dyes may benefit from this method. Project Finance, however, has certain drawbacks that may deter some companies. Upfront transaction costs may be higher than Venture Capital-backed financing due to the involvement of “specialised financial experts, legal counsel, and sometimes technical consultants” needed for stricter due diligence.[17] The due diligence process requires “validating the technical viability of the project, ensuring all regulatory compliances are met, and formulating intricate repayment schedules based on projected cash flows.”[18]

Alternative funding measures may ensure that innovators continue to scale their technologies, but brands and supply chain partners must set purchasing commitments to establish a market for alternative material suppliers and recycling capabilities. Following the Renewcell bankruptcy announcement, innovators keyed in on securing purchasing agreements with suppliers to ensure their products reach the market.[19] LA-based polyester recycling startup Ambercycle secured a $74m purchasing commitment from Zara’s parent company Inditex for recycled polyester made from textile waste.[20] This investment from Inditex will contribute towards Ambercycle’s first commercial-scale textile recycling factory. In 2022 Inditex also invested in Circ – another U.S.-based textile-to-textile recycling firm. These purchasing commitments are a show of good faith and a growing necessity as “incoming regulations led by the European Union are set to establish new requirements for more climate-friendly product design.”[21]

The complex landscape of fashion supply chains ensures that no one solution will help the fashion industry close the estimated $1 trillion financing gap. Brands rely on supply from startups, but these startups need the necessary funding to scale and commercialize their products to meet demand. Newer technologies will reach price parity over time, but that requires scale. Innovators realize the challenge of reaching certain price points, and they are agreeing to “standardized blends” to reduce costs where possible.[22] However, In the short term, brands and supply chain partners will continue to incur higher premiums for sustainable solutions. In the long term, they will save on the costs of climate risks and regulations. Political will and choices will define whether the industry can close the financing gap by 2050. Historically, major industry players have prioritized price and performance. Now is the time to prioritize the planet.

[1] https://www.glossy.co/fashion/a-tough-sell-to-ceos-fashion-sustainability-is-taking-a-hit-in-the-current-economy/

[2] https://www.businessoffashion.com/articles/sustainability/fashion-climate-finance-decarbonisation-funds-manufacturers-supply-chain/

[3] https://www.bcg.com/publications/2020/financing-transformation-fashion-investment-scale-innovation

[4] https://www.bcg.com/publications/2020/financing-transformation-fashion-investment-scale-innovation

[5] https://www.glossy.co/fashion/a-tough-sell-to-ceos-fashion-sustainability-is-taking-a-hit-in-the-current-economy/

[6] https://www.bcg.com/press/25october2023-sustainable-raw-materials-133-million-tons-2030

[7] https://www.glossy.co/fashion/a-tough-sell-to-ceos-fashion-sustainability-is-taking-a-hit-in-the-current-economy/

[8] https://www.bcg.com/press/25october2023-sustainable-raw-materials-133-million-tons-2030

[9] https://www.bcg.com/publications/2023/driving-profitability-with-raw-materials-in-fashion

[10] https://www.bcg.com/publications/2020/financing-transformation-fashion-investment-scale-innovation

[11] https://globalfashionagenda.org/renewable-energy-initiative/

[12] https://globalfashionagenda.org/renewable-energy-initiative/

[13] https://www.just-style.com/features/explainer-why-fashion-brands-must-embrace-collective-financing/?cf-view

[14] https://www.just-style.com/news/hsbc-pledges-4m-for-aiis-fashion-climate-fund/?cf-view

[15] https://apparelimpact.org/fashion-climate-fund/

[16] https://www.barrons.com/articles/a-funding-model-thats-helped-solar-could-be-the-perfect-fit-for-sustainable-fashion-fc87646c

[17] https://reports.fashionforgood.com/wp-content/uploads/2023/10/REPORT_THE-GREAT-UNLOCK_FASHION-FOR-GOOD-SPRING-LANE-CAPITAL.pdf

[18] https://reports.fashionforgood.com/wp-content/uploads/2023/10/REPORT_THE-GREAT-UNLOCK_FASHION-FOR-GOOD-SPRING-LANE-CAPITAL.pdf

[19] https://www.businessoffashion.com/articles/sustainability/fashion-recycling-renewcell-investment/

[20] https://www.businessoffashion.com/news/sustainability/inditex-to-buy-recycled-polyester-from-us-start-up/

[21] https://www.businessoffashion.com/articles/sustainability/fashion-recycling-renewcell-investment/

[22] https://www.businessoffashion.com/articles/sustainability/fashion-recycling-renewcell-investment/