The ball is in the court of manufacturers. If the supply chain is to be decarbonised, then the bulk of the work needs to be done at the end of suppliers. But there's a slight problem there: the process needs to be funded, and not much of that is available, certainly not freely available. If wishes were horses, suppliers would have been galloping into a net zero world.
Technically speaking, emphasis on textile and apparel manufacturers having to decarbonise is correctly placed, since that's where most of the emissions come from. But, by and large, these are physically located in the Global South, and funding is needed for a "just transition" to a net zero.
The widespread belief among manufacturers is that the fashion sector’s approach to climate action is lopsided: it focuses more on decarbonisation and places less emphasis on adaptation and resilience. Then again, decarbonisation cannot be seen in isolation. Buyers/brands have many other requirements that manufacturers need to factor in which range from improved wastewater management systems, worker wellbeing programmes, and more general growth and infrastructural improvement investments.
It was with this context in mind that a bunch of manufacturers came together to commission a study on the subject. The report, From Catwalk to Carbon Neutral: Mobilising Funding for a Net Zero Fashion Industry, has just been released, and it explores the challenges and solutions for funding climate action in apparel manufacturing.
Structural issues with industry
The total share of debt among Tier 1-4 manufacturers is higher than that among retailers (Tier-0). The report points out: "Upstream actors usually have smaller turnovers and steeper debt-to-revenue ratios. Most manufacturers also hold low order visibility into the future, which further restricts their ability to raise debt whilst creating higher risk for lenders."
This skewed ground situation results in problem areas:
- A manufacturer’s profitability, debt level and visibility of future orders impact its ability to fund decarbonisation.
- Steep indebtedness will shrink a manufacturer’s ability to raise further loans, be they bilateral or via capital markets.
- Lenders also use visibility of future orders as a measure of investment risk, preferring manufacturers with strong brand partnerships and longer visibility.
- The misalignment of emissions with revenues and margins, as well as emissions with debt-to-revenue ratios and financial health, creates a dilemma of how sector decarbonisation can work if manufacturers are constrained to raise more and more debt for it.
The report then looks at different project categories (short-term payback projects, medium-term payback projects, long-term and no-payback projects, and projects that increase operational costs) and comes up with a glaring finding: "Manufacturers are overwhelmingly likely to implement short-payback, smaller-scale projects. Medium, long-term and no-payback initiatives require larger investment and entail production disruptions that necessitate the creation of funding mechanisms that share the risk-reward of climate action throughout the value chain. Manufacturers say prevailing solutions focus on short-payback projects and that they would like obstacles such as increased operational costs to be recognised and addressed."
