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Fashion Industry Faces $1 Trillion Financing Gap to Hit Climate Goals

Getting the fashion industry to net-zero emissions by 2050 is going to require some very deep pockets.

According to a new analysis published Wednesday by the Apparel Impact Institute (Aii) and Fashion for Good, the current investment shortfall exceeds $1 trillion, a number that not only throws into relief the formidable challenge of transitioning to a low-carbon economy but also raises the more immediate question of who will be footing the bill.

What’s clear, however, is that the sector already knows what it must do. In another report released last week, Aii and the World Resources Institute outlined important “interventions” that can deliver more than 60 percent of the necessary reductions required to help limit global temperature rise to 1.5 degrees Celsius above preindustrial times, including maximizing material efficiency, scaling sustainable materials and practices, improving energy efficiency, accelerating the development of “next generation” materials, transitioning to renewable electricity and eliminating coal in manufacturing.

In fact, of the $1 trillion pie, more than 60 percent should be earmarked for the implementation of existing solutions, Aii and Fashion for Good said, while the remainder can go to developing and scaling up innovations. “It’s about innovation but it’s also about action,” Lewis Perkins, president of Aii, told Sourcing Journal.

It’s true that not even low-hanging fruit, such as reusing wastewater or improving insulation, comes cheap—at least at the outset. Until the sector is willing to pony up, however, its ambitious climate targets will remain tantalizingly out of reach. As it stands, two-thirds of the companies that have announced Scope 3 targets are not on track to achieve the necessary reductions, according to a recent report by the Climate Board and Textile Exchange. With some 90 percent of a brand’s footprint stemming from its supply chain—and more than half of those emissions emanating from material production alone—the current emphasis on direct operations and the occasional regenerative-agriculture project will only take it so far.

“The reality is we are not set to meet targets currently if we don’t triple down, quadruple down and rapidly accelerate the work,” Perkins said. “Scaling to clean energy is not a new innovation; it just needs to systemically happen. The hard part is not so much that we don’t know what to do, it’s that we need to increase the rate at which we’re doing it.”

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Perkins said it helps to frame decarbonization as an investment opportunity rather than a cost. In a study it conducted with financial think tank Planet Tracker, Aii found that a one-time investment to improve the environmental footprint of a wet-processing facility can nip water use by 11.5 percent and greenhouse-gas generation by 10.8 percent, not to mention save an average of $369,500 with a payback period of under 14 months. And though the $1 trillion figure may produce sticker shock, Bloomberg Intelligence pegs the amount of financial capital currently available for good return environmental, social and governance investments at $35 trillion. By 2025, the number is expected to surpass $50 trillion. “There’s lots of philanthropic funding out there that we can tap into if we just had the commitment to get started,” Perkins said.

Unlocking this capital from a raft of sources is therefore critical. The public sector, for instance, can offer government-backed loan guarantee funds, link regulations to preferential trade agreements with major importing countries, or dole out additional economic incentives for low-carbon production and energy use, such as tax credits, eco-modulated fees and feed-in tariffs. Philanthropists can fund early-stage catalytic work, de-risking solutions before industry and traditional financial capital takes them to scale. Manufacturers can adopt strategic plans for funding sustainability initiatives and onboarding new innovations, align environmental priorities with core brand partners and sign up for programs that aggregate multiple manufacturers for better financing options.

As the biggest wellspring of cash, banks and lending institutions can give the sector a leg up by prioritizing key production regions that are attractive for investors yet underserved or overlooked. They can buttress transitional financing opportunities such as coal phase-out programs that are low risk yet high impact. To reach small and medium-sized enterprises, they can fund local banks through local currency loans.

Brands, which “sit at the nexus of all stakeholders” also have a crucial role to play in promoting investments in the space, even if they have been historically slow to take up the charge beyond what Perkins calls the “darlings” of their supply chains. Companies, the report said, need to offer more support to their suppliers through volume guarantees, pilot projects and direct investments. They should create cross-functional working groups with finance, sourcing and sustainability teams to identify financing opportunities. Brands can also serve as an important middleman to move capital from investors to manufacturers. Maintaining long-term relationships with all suppliers instead of a favored few could reap additional dividends for everyone involved.

“We’ve got to move past the darlings, past the favorite manufacturers that we all know and tout as being sustainable and write case studies about,” Perkins said. “We love those leaders, and we’re glad they’re showing us that it can be done, but how do we make it relevant to suppliers who have more fear around their ability to meet price points, remain competitive and keep contracts season over season? We’re going to have to come up with a longer commitment toward a lot of these facilities. Otherwise, it’s harder to leverage toward making improvements.”