Lewis Perkins has spent the last 19 months trying to raise a $250 million fund to help cut the planet-warming greenhouse gases emitted by the fashion industry.

The president of the Apparel Impact Institute, a trade-backed organisation focused on funding and scaling climate solutions, launched the effort in June of 2022 at the splashy sustainability-focused summit hosted by trade group the Global Fashion Agenda in Copenhagen each year.

The AII’s fund is one of the industry’s flagship climate financing initiatives, intended to unlock billions of dollars beyond its base of capital by proving out and de-risking scalable sustainability solutions within fashion’s supply chain. But so far it’s raised only $70 million from a handful of brands, philanthropic donors and the bank HSBC.

Things are going “slower than anticipated,” Perkins acknowledged. “We had hoped the brands would jump on this faster.”

Unlocking the vast sums of money that will be required to meet fashion’s sustainability commitments (around $1 trillion by 2050, according to analysis by AII and innovation platform Fashion for Good) is an increasingly urgent and charged challenge for the industry.

Rising temperatures and extreme weather have made climate change a real and present business risk. Last year’s record heat unsettled seasonal shopping trends and threatened supply chains. Regulators globally are stepping in to police the issue. And the industry stands to lose tens of billions of dollars in missed earnings by the end of the decade if it doesn’t shore up its resilience to extreme temperatures and flooding.

But efforts to narrow the gap between fashion’s climate ambitions and climate spending have been hampered by structural challenges and conflicting interests.

Despite high-profile sustainability commitments, few brands have laid out clear budgets or spending plans to achieve their costly ambitions. And a gloomy economic backdrop has made finding the money more challenging. Adding to the complexity, most of fashion’s environmental impact takes place during manufacturing processes that have largely been outsourced to contractors in off-shore, low-cost production hubs.

Fragmented supply chains populated by small and medium-sized businesses already struggle with access to affordable capital, made worse by short and unstable spending cycles from brands. Manufacturers, for their part, argue they should not be left to bear the costs of a problem big brands have effectively pushed onto them, while continuing to extract most of the profits in the industry.

And while how the industry’s decarbonisation efforts should be financed and who should pay remain unanswered questions, time is running short to meet climate goals.

“A lot of CEOs and C-suite guys don’t understand that their targets are shot,” said Vidhura Ralapanawe, head of sustainability and innovation at Hong Kong-based sourcing and supply chain management business Epic Group. “We’re trying to let business as usual solve a problem that was created by business as usual.”

A New Kind of Financing for Fashion

These hurdles are not unique to fashion. Finding the funds to stop climate change is among the biggest political and economic challenges of our time, requiring huge investments in projects with uncertain returns, long pay-back times and high-risk counterparties.

Global efforts to develop financial tools and structures to address these issues are still nascent, but fashion is particularly ill-equipped to navigate this emerging world of climate finance. The sector isn’t geared towards long-term projects and investors and bankers for their part often overlook the industry.

“There are not many impact investors that have invested in fashion,” said Bob Assenberg, a partner at impact investment firm Fount. “It’s really an early stage thing.”

Assenberg is director of the Good Fashion Fund, a $19 million pot launched in 2019 by Fashion for Good with backing from philanthropic organisation Laudes Foundation and impact-focused innovation incubator Mills Fabrica to provide small and medium-sized apparel manufacturers in India and Bangladesh with longer-term credit to finance sustainability projects.

These suppliers, who make up a large portion of the industry, often struggle to secure multi-year loans because of the inherently unstable nature of the trend-driven fashion business. Manufacturers will generally work with multiple brands whose orders can totally change season to season depending on what’s in demand.

“There’s not that many long-term offtake agreements; there can be rollovers, but in difficult times orders might get cancelled so it’s difficult for manufacturers to make a long-term plan,” said Assenberg.

Though the overall amount of money needed is huge, individual projects aimed at improving a factory’s environmental performance are often small, and that’s a problem too. When AII first approached banking partners like the World Bank’s International Finance Corporation and HSBC, it was difficult to even get a foot in the door. The funds required were simply not big enough for the banks to consider, Perkins said.

Now it’s looking at ways to bundle projects to create larger parcels of investment for banks to finance and reduce the risk of individual defaults.

“Part of what we’re building is a sustainable finance or climate finance playbook for brands, suppliers or financial institutions and philanthropists,” said Perkins. “If we can prove the markets are receptive to decarbonisation investments, then the right capital can come in.”

Pilots and Partnerships

Brands and manufacturers are running their own experiments, too.

H&M Group partnered with Singaporean bank DBS to launch a green loan programme last year, offering suppliers preferential lending rates for projects that will reduce their emissions. In December, the Swedish fast-fashion giant and Danish retailer Bestseller said they would anchor a $100 million investment in a prospective wind project off the coast of Bangladesh, taking a swing at the kind of big ticket, long-term investing rarely seen in fashion.

Elsewhere, Pakistani denim manufacturer, Artistic Milliners, has partnered with Levi’s and Bestseller to develop an organic cotton project — an example of an emerging co-financing model whereby brands guarantee they will purchase pre-agreed volumes and pay a price premium to help cover the costs to farmers of transitioning to more sustainable agricultural practices. The four-year project is set to cost $700,000 and produce enough cotton to make 3.5 million metres of fabric a year.

But the amount of money available remains limited, the economic backdrop challenging and pilots still just pilots.

When developing its cotton project, Artistic Milliners found most brands were unwilling to commit to offtake volumes amid unease about the volatility of the fashion market. Many were too price sensitive to agree to any premium. The denim manufacturer ultimately shouldered about 60 percent of the project costs.

Artistic Milliners is one of the world’s top denim suppliers, and unlike many smaller manufacturers has ready access to credit. It’s already invested substantially in minimising its environmental footprint, knocking out low-hanging fruit and easy wins that can both reduce environmental impact and improve efficiency, according to responsible business practice lead Saqib Sohail. But bringing the company’s polluting emissions as close to zero as possible over the next 20 years is likely to take at least another $80 million to $100 million in major infrastructure investments and increase costs.

“The push towards net zero will require a lot of money without payback,” said Sohail. “Where are the returns? That’s where we really get stuck.”

Long-Term Investing

Toughening environmental regulation led by Europe is upping the pressure on big fashion brands to tackle their planet-warming emissions, despite the economic headwinds that are still holding back investment.

“Policy is really moving the action,” said Assenberg. “The sector is not moving without it.”

But suppliers fear they will ultimately be left to bear the costs, while brands continue to squeeze them on price. Most fashion companies’ sustainability teams don’t have budgets for major investments and are typically disengaged from how sourcing and finance teams operate.

And unlocking action isn’t just about increasing access to debt financing and grants, but changing the structure of how the industry operates to enable long-term investments and cover higher operating costs. Without such shifts, fashion is unlikely to meet its climate commitments. And the cost of inaction will be far higher than any investments required today.

“It’s not a luxury any more; it’s a necessity now for survival in this industry,” said Sohail