Fashion & Finance: Funding The Change

With the fashion industry's pollution levels second only to those of the oil industry it is clear change is necessary[1]. The current industry model of fast fashion is inherently unsustainable with the norms of constantly rotating styles that quickly make clothes 'out of fashion'[2]. This fast fashion model is the cause of unimaginable damage to people and planet.

The industry is now a race to the bottom where optimising costs and efficiency in order to operate on narrow margins is a priority[3]. In order to undercut competition’s prices the race leads to the use of cheap, unsustainable materials, exploited garment workers, unsafe working conditions; and a devastating environmental impact caused by factors such as the use of pesticides and textile waste.

The fashion industry is late to the sustainability scene and has brought its fair share of unethical baggage, from greenwashing to a lack of transparency in never-ending supply chains. But the industry cannot make significant (or disruptive) change alone. It needs help from the public and private sector.

Crucially, the Financial Services industry needs to recognise the opportunities they stand to gain in through fashion. According to Fashion for Good and BCG, the Fashion industry requires $20-30bn of financing per year to develop and commercialise disruptive solutions and business models that will move the industry towards sustainability3. It is clear there is a huge financing gap, but the good news is that many viable solutions already exist, with Fashion for Good identifying 1,500 viable innovators within their first two years of operating3. The issue is there is a lack of capital to grow these innovations on a disruptive scale.

So, what can the financial sector do to help?

  • Venture Capitalists are being called upon to support, and fund, up and coming innovations within the fashion industry. Due to the technicalities of some innovative projects, particularly those aiming for hard-tech innovations (physical innovations such as the development of a new sustainable material) this is sadly not enough. Brands such as H&M and Patagonia are also investing in early stage hard-tech innovations through Corporate Venture Capital (CVC) investments3. But other fashion companies need to follow suit, and fast, as funding directly from the fashion companies contributes a limited source of capital to sustainable innovators in fashion.
  • Specialised funds have also emerged over the past few years to overcome limited experience and expertise preventing investors in pursuing sustainable fashion innovation. Funds such as the Textile Innovation Fund and the Good Fashion Fund provide the means to support 3D printing, chemical recycling and plant-based fibres.
  • Blended capital can act as an avenue to reduce the financing gap in fashion. However, public and private collaboration is required to create disruptive change. The Good Fashion Fund already follows this model using private and philanthropic capital from the C&A Foundation.
  • Growth capital and private equity investors can invest in growing start-up fashion brands that have big consumer draw and e-commerce distribution. For example in July 2019, Permira announced that it had acquired a majority stake in the ethical fashion brand Reformation.
  • Sustainably Linked Loans (SLLs) can provide general corporate financing tied to sustainability KPIs and are another option for the financial sector to help change fashion for the better. The market for SLLs rose from $5 billion in 2017 to $40 billion in 20183. In November 2019, Prada became the first fashion company to sign a five year €50 million SLL, with Crédit Agricole Group, under the condition that Prada could pay a reduced interest rate if it achieves various targets related to its sustainability.

These are just a few of the options the financial sector has when it comes to funding the change for fashion.  But should the financial sector simply stop investing in fast fashion companies? And is there really a lack of finance within this $3 trillion market that accounts for 2% of global GDP?

The answers to these questions will demand urgent attention in the lead up to COP26 in Glasgow, as the fashion industry covers nearly every UN Sustainable Development Goal in some shape or form. There is no denying that the fashion industry is massive and damaging, but it also presents an opportunity for change. However, in order to make the change the fashion industry is going to need help, and the financial sector has an opportunity and responsibility to do so.

References

[1] Suraci, O. (2021) ‘The Best-Dressed Polluter - Regulation and Sustainability in the Fashion Industry’, Hastings Environmental Law Journal, 27(2), pp. 225–242. Available at: https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=edshol&AN=edshol.hein.journals.haswnw27.21&site=eds-live

[2] Sara Greco, Barbara De Cock, Argumentative misalignments in the controversy surrounding fashion sustainability, Journal of Pragmatics, Volume 174, 2021, Pages 55-67, ISSN 0378-2166, https://doi.org/10.1016/j.pragma.2020.12.019.

[3] Financing the Transformation in the Fashion Industry (Jan, 2020) & Investing in Textile Innovation Report (Oct 2019): https://fashionforgood.com/news/resource-library/