Fashion

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.

Bridging the billion dollar gap: how to fund sustainable fashion

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.

Bridging the billion dollar gap: how to fund sustainable fashion

“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.

Bridging the billion dollar gap: how to fund sustainable fashion

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



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