Bridging the billion dollar gap: how to fund sustainable fashion

Fashion needs funding and sustainable fashion even more so - between 20 and 30 billion US dollars annually as estimated - given that sustainability is the need of the hour to drive fashion innovation towards ecological solutions. Yet, the 2 trillion US dollar industry (in terms of market size) runs into roadblocks when it comes to financing sustainable fashion innovations, often due to limited awareness of the opportunity, the absence of a structured innovation process and its orchestration, and other reasons.

Together with the Boston Consulting Group (BCG), the global sustainability initiative Fashion for Good has released its report “Financing the Transformation in the Fashion Industry: Unlocking Investment to Scale Innovation” on Wednesday that sheds light on the funding gap in fashion and how to close it.

“Disruptive solutions that can offer major leaps forward toward circularity exist today, and the opportunities to invest and scale them within the industry are vast. This seminal study provides powerful insights and a clear call to action for all players to collaboratively drive innovation,” commented Katrin Ley, managing director of Fashion for Good, in a press release.

In September 2019, Fashion for Good had launched the Good Fashion Fund, a collaboration between the C&A Foundation, Hong Kong-based The Mills Fabrica and Dutch impact investment and advisory firm Fount, to address the gap between sustainable apparel supply chain solutions and the capital needed to scale them. However, with a target size of 60 million US dollars, the first investment fund focused solely on driving the implementation of innovative solutions in the fashion industry is not sufficient to fill the gap, whose size has now been identified in the new report.

Fashion industry needs to transform and invest in sustainable innovations

The question is now how the fashion industry will transform to achieve a sustainable operating model, given that it “has historically engaged in a cost-driven race to the bottom, giving little attention to radical new technologies,” according to the report. However, it also points to the fact that “a perfect storm of innovation and opportunity is now forming”, which investors and companies can now capitalize on in the form of impact-driven innovations that will transform the industry. “A step change requires disruptive innovation in the form of new materials, processes, technologies, and business models,” finds the report.

The study calculates that transitioning toward sustainability yields a 20 billion to 30 billion US dollar financing opportunity per year to develop and scale disruptive innovations. The latter case requires innovation to emerge at a faster pace before 2030, which in turn calls for investments to increase by a factor of three or more over their current levels.

“While the first steps have been taken, fashion needs to embrace and accelerate innovation to futureproof the industry. Doing so opens up major untapped returns for those who can capitalize on the upcoming technological disruption,” said Sebastian Boger, a BCG managing director and partner.

One of the key findings of the report is that only a fraction of all available capital has been invested in fashion and textile technology, leaving many innovators stuck in a financing gap that hinders their ability to develop and scale their innovations. In addition, nearly half of the 20 billion to 30 billion US dollar annual financing opportunity lies at the beginning and the end of the value chain, where raw materials and end-of-use solutions have the highest impact potential. However, innovators struggle to bridge this “missing middle” of finance.

“Our focus so far has been around improving our existing operations and implementing commercially available solutions. Only a small share of innovation budget and activity is currently directed to developing truly radical solutions. To drive this further, risk capital and an aligned approach between brands and manufactures are required,” agrees Arvind’s executive director Punit Lalbhai.

The study also finds that orchestration and consortiums are essential to help innovators find the right support and financing, give brands faster access to scalable technologies and offer investors better opportunities. In return for helping innovators develop and increase their chances of commercialization, brands benefit through offtake agreements, pilot projects and direct investment. Last but not least, financing will flow into the fashion space if all actors involved build toward conditions that promote attractive returns and measurable impact with manageable risk.

“So far, only a few foundations take the opportunity to play a more important role in unlocking funding to scale innovation. By adopting a more strategic investment approach, they can de-risk and catalyze private-sector investment,” advises Leslie Johnston, executive director of the C&A Foundation.

The study also identified six barriers to financing innovation: misaligned incentives where manufacturers do not account adequately for costs and implementation risks, limited awareness of the huge opportunity that sustainability is fashion means, the absence of a structured innovation process and its orchestration, lack of experience and technical expertise, incorrect perceptions regarding pricing and externalities such as carbon emissions and inadequately structured exclusivity which can block innovators from broader scaling and rapid commercialization.

Thus, the Boston Consulting Group and Fashion for Good see their report as a call to action for all stakeholders like orchestrators, brands, supply chain partners, innovators and investors and funders as well as the public sector.

“Indisputably, the fashion industry must accelerate its transformation to sustainable, circular practices. The clock is ticking, and success depends heavily on the development of new, disruptive solutions that will future-proof the industry. The growing innovation pipeline proves that such solutions can be found, but the pace of development is too slow, and the most significant innovations needed are not yet available at scale. Too many innovators still face the challenges of a financing gap, in which brands, investors, supply chain partners, philanthropy, and regulators fail to provide them with the support they need,” concludes the report.

Images: Boston Consulting Group and Fashion for Good