Who Should Pay for Fashion’s Decarbonization Efforts?
A survey by Bain & Co. last year found that U.S. consumers are willing to pay an average premium of 11 percent for products with a minimized environmental impact. However, 28 percent is the average premium for products marketed as sustainable in the U.S.
A glaring gap in the willingness to pay for sustainability also exists between brands and their suppliers.
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A new report urges the apparel sector to adopt a more equitable and effective approach to funding climate action to achieve the goals of the Paris Agreement.
The supplier-led report “From Catwalk to Carbon Neutral: Mobilizing Funding for a Net Zero Fashion Industry” was co-commissioned by Epic Group, TAL Apparel, NITEX, Pactics Group, Artistic Milliners, MAS Holdings, Simple Approach, GIZ FABRIC, and Transformers Foundation. It was endorsed by the International Apparel Federation and Fashion Producer Collective.
Based on interviews with 21 apparel manufacturers and key stakeholders from a diverse range of countries and business types, the report investigated what types of funding needs manufacturers have for decarbonization, the challenges they face and what type of funding models the sector should consider to address these gaps.
Transformers raised concerns about the fashion industry’s roadmap for achieving decarbonization and related climate goals in a report last year. One of the biggest takeaways from that was how “who pays” for decarbonization rarely ever gets discussed between brands and suppliers and that it is implied that manufacturers will absorb costs while brands operate business as usual. Though brands and retailers have the largest share of revenues and margins, several suppliers expressed frustration that brands and retailers are neither willing to share costs to decarbonize nor pay a higher price for products with lower GHG.
Additionally, the report found that the amount of capital available to the denim supply chain is insufficient and projects can be a hard sell because they often don’t generate immediate returns or sometimes provide no financial gain.
The new report echoes these sentiments by finding that existing finance streams gravitate toward “fast and medium-payback projects” and don’t favor investments on long- or no-payback projects or ones that increase operational costs. Small or medium-scale manufacturers, companies that are already heavily leveraged, and businesses with low visibility into future order cycles especially struggle to access debt-funded solutions or otherwise.
“Among multiple other risks we identified that make debt financing difficult to leverage are poor country risk ratings; weak relationships with brand partners leading to higher borrower risk and cash flow; the industry’s boom-bust cyclical nature; and fashion brands’ eagle-eyed focus on cost reductions versus sustainability gains,” the report stated.
While the report explores innovative funding models that could potentially address these challenges, it found that there is no one-size-fits-all solution. For example, brand-supplied debt repaid via product discount relies on funding by larger and more profitable brands and retailers with repayment structured through discounts on future product orders. However, this would require products to be strategically priced to ensure profitability.
Another proposed solution is cost-sharing with the consumer, which would call for brands to offer higher-priced clothing and for the premium to go to a fund that supports decarbonization. This strategy requires brands to have a strong insight into market dynamics and robust communication with their target consumers. It would also be limited to small projects as the supply chain of the specific product would be eligible.
The report’s calls for action take a broader approach to solutions like policy advocacy that supports financing for decarbonization, strict transparency and sustainability reporting standards that cover value chain decarbonization efforts and for more brands, retailers and governments to increase their funding for decarbonization in manufacturing companies. Commercial banks have a unique opportunity to show climate leadership by significantly increasing their funding for decarbonization projects in the apparel manufacturing industry’s supply chain, the report noted.
“The conversation around value chain decarbonization today places a disproportionate burden on the manufacturer. Unless this shifts to one that focuses on supply chain decarbonization, the targets set for the apparel sector will not be achieved. All stakeholders must echo this message,” the report states.
