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Fashion has committed to decarbonisation, but overhauling the supply chain is costly work — an estimated $1 trillion worth, according to the Apparel Impact Institute (AII). Because most of fashion’s emissions are generated in the supply chain, brands depend on suppliers to take on the burden of reducing them. Yet, suppliers already operate on thin margins, are often based in less socioeconomically advantaged countries and are largely not funded by brands to make the necessary investments, which involve transitioning to renewable energy and updating equipment.
The maths doesn’t add up. Experts worry it’s suppliers who will suffer.
“The prevailing approach within fashion is that because most of the emissions are in the supply chain, it’s implicitly assumed that the suppliers will also be the ones to foot the bill,” says Kim Van der Weerd, intelligence director at Transformers Foundation, a body representing the denim supply chain.
The Science Based Targets initiative removes commitments from suppliers who can’t meet them within two years. Suppliers say it’s not a fair timeline.
It’s unclear how suppliers, who have historically been at the mercy of brands, can meet the need to decarbonise. A key proposed answer that has emerged is to fund the necessary investments through sustainable loan-based financing, which a slew of initiatives — from the AII to the Global Fashion Fund — are working to facilitate. The idea is that neither brands nor suppliers are in a position to fund the work themselves, because of a lack of incentives, or tools, or both. Getting the finance and banking sectors involved is a way to open up access to funding without requiring upfront investments from either suppliers or brands. Critics point out, however, that asking suppliers to take on loans when there’s no guarantee of a return on investment, combined with the cultural complexity that surrounds loans in many manufacturing countries, leaves suppliers disproportionately vulnerable — and the supply chain unlikely to ever become decarbonised.
The funding problem
Suppliers are not often in a position to take on debt, and campaign groups who work with suppliers, like Remake and Fashion Revolution, argue that loan-based financing allows fashion brands to shirk the responsibility of decarbonising, pushing it onto suppliers. They say that other stakeholders need to be involved, so that the responsibility and risk don’t fall to suppliers alone. They also argue that loans should come with a shift to improved business practices, such as longer contracted lead times that allow suppliers to feel more secure in making investments for the future and to improve their climate impact.
“Partnerships are important. Risks should be shared,” says Edwin Keh, supply chain expert and CEO of the Hong Kong Research Institute of Textiles and Apparel. “I can’t see this working any other way.”
Transitioning to renewable energy in supplier factories requires substantial upfront investment, which comes with lengthy payback periods for those businesses, explains Eva Von Alvensleben, executive director and secretary general of The Fashion Pact, a non-profit focused on forging a net-zero fashion industry.
Brands are resistant to providing the funding themselves because they don’t own their factories, and view it as unfair to invest in renewable energy at a factory that will then benefit other brands. Transitioning to renewables can also be more complicated than just shelling out some cash.
This is the thinking behind the creation of financing initiatives such as the AII’s Fashion Climate Fund, a $250 million initiative that provides technical support to supply chains, while aiming to facilitate access to financing on favourable terms for suppliers. “Many suppliers, especially small and medium-sized enterprises, struggle with cash flow and lack access to credit,” says AII president Lewis Perkins. The fund is in its early stages and has not yet facilitated any loans to suppliers, but says it’s working on relationships with banks and financial institutions in order to be able to do so.
But not everyone believes that working on credit is the best way forward. Most funding available for factory-level decarbonisation projects is debt based, says Van der Weerd. “[This] assumes that the work generates returns and that suppliers can take on debt.”
For suppliers, though, that’s a big leap. It is often difficult for them to secure loans, because they don’t have the established credit that banks require before they advance the funding and struggle to source guarantors who will back them in requesting the loan. There’s also a reluctance to be burdened by loans that can affect credit ratings, especially since they don’t have incentives or assurances from brands — even in the form of price premiums in their buying contracts — that the risk will pay off. “Those operating on thin profit margins are often reluctant to make expensive investments that do not offer short-term returns,” says advocacy group Fashion Revolution policy and campaigns manager Ciara Barry. “Especially when brand commitments remain uncertain.”
Another key issue is that among suppliers, access to loans is not equal. Many loan instruments prioritise suppliers that are already more advanced in their decarbonisation process, according to Van der Weerd, and have the scale to operate and absorb debt. The ones who have the most work to do, tend to be the ones with the least access to funding to help them do it.
“It’s only hitting the 1 per cent [of suppliers],” says Ayesha Barenblat, founder of the campaign group Remake, although she questions the value of the loans even for those who do have access to them. “Even for them, they don’t want favourable terms for debt financing. They want a true partnership.”
Cultural issues and debt
For many suppliers, there’s an added layer of complexity because of a cultural reluctance to take on debt and a vested pride in having built a business from cash. Debt is a complicated cultural issue in many parts of the world, and particularly for the countries overrepresented in the supplier landscape. Suppliers hold natural fears of overleveraging themselves, says Dr Vidhura Ralapanawe, executive VP of sustainability and innovation at supplier Epic Group. But there are also companies who have generally very conservative ideas of how much debt they should take on.
“Suppliers in many garment-producing countries, including Southeast Asia, prefer to avoid debt due to cultural barriers and pride in building their businesses with cash,” says Barry. “Climate fashion funds can be a net-positive force. [But] for these funds to be effective, they must prioritise brand-funded investments rather than debt-based approaches, ensuring they align with principles of equity and proportionality.”
Barenblat has heard similar concerns. “Suppliers will say, ‘Look, we’re not in any kind of position to take on debt. The industry has, since Covid, become increasingly unstable. We have a lot of urgent capital expenditures and decarbonisation projects don’t offer returns.’”
Rather, suppliers are looking for other solutions. Some propose options like brand-supplied debt, where larger, more profitable brands and retailers offer funding for climate initiatives, which is then repaid through discounts on future product orders. Alternatively, suppliers want ways in which the load for decarbonisation is shared.
The Future Supplier Initiative (FSI) project, formed in May and facilitated by The Fashion Pact in partnership with AII, Guidehouse and DBS Bank, aims to help finance decarbonisation by roping in brands to underwrite the debt their suppliers take on. Currently, four brands have signed on — H&M Group, Bestseller, Gap Inc and Mango — with the first loans set to be issued in 2025.
“The cost of inaction on the climate is unaffordable. But for many, the cost of action, at the speed and scale required, has felt unattainable,” says The Fashion Pact’s Von Alvensleben. While Barenblat believes the access to financing that brands have a stake in, like the FSI, is “welcomed as a piece of the puzzle” for mitigating the climate crisis. She also emphasises the need to ensure those approaches are inclusive and accessible for all. “Again, is it that 1 per cent that already has access to debt financing? Or is it more of the small to medium enterprises where we know a lot of the emission risk lies?”
More than debt: Sustainable commitment
Many suppliers insist that with further clarity and consistency from brands, they could make the kinds of lasting, expensive investments that decarbonisation requires. “What we have is a value chain decarbonisation problem. However, most brands look at it as a supply chain decarbonisation problem,” says Ralapanawe. “And the difference between the two perspectives is that the moment you call it a value chain decarbonisation problem, it becomes everybody’s responsibility.”
“It would be even more useful and powerful if, along with these funds, [there] are long-term commitments and partnership agreements from the customers,” says Keh. “So that there are greater assurances to suppliers that there will be users for these investments, and they are not taking on these risks alone.”
Supply partners often note a need for better commercial contract terms and longer term relationships to justify the cost of engaging with decarbonisation. If brands commit to paying more for products made in greener ways and adjust lead times to account for these changes, suppliers can have more comfort that their climate efforts are for a purpose.
The elephant in the room is that all of this requires rethinking how supply chains are structured and how risk and reward is distributed, says Van der Weerd. “But I want to emphasise that this rethink isn’t just about brand benevolence or doing something out of the goodness of their hearts; given the nature of the climate crisis, we must broaden our understanding of self-interest. The collective interest is our self interest.”
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