Why Fashion’s Decarbonization Efforts Are Just the Tip of the Iceberg

The Apparel Impact Institute’s 2023 annual impact report opens not with a list of plaudits or accomplishments but with a stark warning—the same one that the Intergovernmental Panel on Climate Change has tried to hammer home for years with increasing urgency: “The window to address the climate crisis is rapidly closing. There is not one second to waste.”

Without critical action, the consequences of spiraling greenhouse gas emissions will be devastating, “destroying homes, jeopardizing livelihoods and fragmenting communities, among other impacts,” said the nonprofit, which is better known by its acronym, Aii. The fashion industry, which in 2021 generated an estimated 897 million metric tons of carbon dioxide equivalent, or roughly 1.8 percent of the global carbon budget, stands to undercut the necessary decarbonization targets that will align with the 1.5 degrees Celsius pathway in a business-as-usual scenario.

Aii didn’t want to downplay the magnitude of the challenge, said Leonie Schmid, its director of sustainability reporting. In its roadmap to 2030, the Cascale partner set out a goal to stamp out 100 million metric tons of CO₂e from the clothing and footwear supply chain by the close of the decade. Yet with only six years to go, Aii program graduates have only eradicated an estimated 5.6 million metric tons to date, achieving 5.6 percent of the target. The report chose to illustrate this with a silhouette of an iceberg, plunged more deeply beneath the waterline than bobbing above it. The graphic makes it obvious, Schmid said, that the industry is “at the very beginning,” or tip. To delve further, brands, suppliers, philanthropic organizations and financial institutions need to put more money where their mouths are.

“Our achievement of the goal is going to be very tied to public funding,” said Ryan Gaines, Aii’s chief financial officer. The organization’s $250 million Fashion Climate Fund, which seeks to identify, fund and propagate verifiable solutions for decarbonizing apparel and textile production, has so far rallied $70 million from the likes of HSBC, H&M Group and Lululemon, leaving a 70 percent financing gap to help scale the most encouraging innovations. That will leave Aii “on track” to tackle 30 percent of its 100 million-metric ton aspiration, he said. “It will require us raising the amount of funding that we targeted in order to reach the full target.”

The geopolitical and economic upheaval of the past few years has been less than helpful, with the past year seeing some “very promising conversations” over fundraising sputter out, Gaines said. This development came in parallel with Aii’s realization that thermal energy solutions have been missing from discussions almost wholly focused on energy efficiency and renewable energy. While still core to Aii’s work, the two alone don’t address the hefty emissions stemming from coal-fired combustion boilers that heat water and create steam. “We developed a roadmap for bringing new technology to market,” he said.

Industry-wide penny-pinching has also carried over to suppliers that shoulder both the bulk of the industry’s emissions and the cost required to abate them. In a recent white paper about funding a net-zero fashion industry, manufacturers such as Artistic Milliners, Epic Group, MAS Holdings and TAL Apparel said that the sector’s approach to climate action “places the burden for action on factories in predominantly global South nations.” A “just transition,” they said, requires shared risk and responsibility, particularly since funding for decarbonization must currently compete with other supplier investment needs such as shoring up infrastructure, improving wastewater management and promoting worker well-being.

“Brands and retailers hold the largest share of revenues and margins,” the report said. “Upstream actors also usually have smaller turnovers and steeper debt-to-revenue ratios. The misalignment of margins, contrasted against the concentration of emissions, poses a real challenge to funding sector decarbonization.”

The issue of who foots the bill has had a knock-on effect. Since 2018, Aii has put 1,070 producers in 31 geographies—Bangladesh, China, Honduras and Vietnam, included—through the paces of platforms like Clean by Design, Carbon Technology Assessment, Supplier Climate Action Program and Carbon Target Monitoring. But although the average payback period for investments hovers at 12 months, recruiting suppliers and providing the right incentives for implementation to take place has “always been a challenge and continues to be a challenge,” Gaines said.

“What’s uniquely difficult in apparel is the very short-term nature of the relationships between the suppliers and the brands,” he said. “And one thing we’ve overwhelmingly heard from all the suppliers is that if there were business incentives—not just affordable loans, but they knew they were going to go sell their products for a higher price, or that they were going to have a longer-term commitment from a brand partner—that would very quickly change their mind and they’d be very willing to adopt rooftop solar or new thermal technologies. That’s the best incentive but it’s the hardest to execute on.”

Blame the finicky and cost-sensitive nature of an industry whose sourcing teams value the flexibility of being able to pivot from one supplier to the next, often at short notice. Spurred on by looming legislation, this could be evolving. A 2023 McKinsey survey of chief purchasing officers found that “deeper relationships,” including long-term volume commitments and joint three- to five-year plans, represent 43 percent of apparel’s total supplier base, up from 26 percent in 2019.

“This continued shift is recognized as a must-do strategy to keep pace with increased sustainability regulations and speed requirements as well as to achieve the expected level of digitalization,” the consultancy said, noting that more than 80 percent of big businesses have inked some kind of strategic partnership with their suppliers versus the “more transactional” approach of small and medium-sized enterprises.

At the same time, a scant 1 percent of respondents reported entering into shared investments, a strategy that the consultancy expects to “remain limited for the foreseeable future,” McKinsey said. All of which is to say, most manufacturers will still have to scramble to raise the financing they need unless this is baked into buyers’ commitments.

“Although there is the goal of sustainability and the direction to move toward long-term stable relationships, you can still see the goals that buyers have…are contradictory to the sustainability goals,” Schmid said. “It’s more interchangeable to use another factory and just pressure on the prices…that pattern is still very much present.”

In 2023, 300 Tier 1 and Tier 2 factories making products for 28 brands poured nearly $27 million into completing one of Aii’s programs. The nonprofit funneled more than $11 million, as well. This, the report noted, saved nearly 195,000 tons of greenhouse gas emissions (the equivalent of 42,000 cars being taken off the road), over 3.6 million cubic meters of water (1,456 Olympic-sized swimming pools’ worth) and more than 2 million gigajoules of energy (think 12 million washing machines going idle.)

“We have actually seen quite a good progress compared to last year’s report,” Schmid said. “So we’ve quadrupled our Co₂ emission savings compared to 2022. We had suffered obviously from the Covid crisis, when just everything stopped and we couldn’t effect change in facilities. So we’re happy to kind of ramp up again and see those kind of emission reductions happen.”

Legislation could move things along at a faster clip. When Gaines speaks to corporate finance executives, he finds that many struggle to wrap their heads around why they spend money underwriting Scope 3 improvements when they yield “very intangible financial benefits.” That will change when “double materiality” regulations such as the European Union’s corporate sustainability reporting directive require companies to disclose how their sustainability impacts affect their bottom lines.

“As costs are incurred If you have a higher carbon footprint, it really starts to quantify what the financial requirements might be to make this transition and becomes less of an option for brands to take action,” Gaines said.

New rules could make cost-sharing more equitable, too, taking a load off suppliers whose margins are already razor-thin, lack the tools to de-risk investment and cannot afford the steep interest rates that accompany debt, especially if they’re based in developing countries facing macroeconomic headwinds.

“That’s why I think that legislation in the demand countries is so powerful because it forces the brands to confront the issue head-on, rather than let it be in a production region and let all the legislation and action take place there without brand support,” he said.

One thing that Gaines is keen to point out, however, is that while there is a lot of work to do, plenty of progress can still be made with “what we have.”

“Yes, there are all these barriers,” he said. “[But] there are also low-hanging fruit that [are not being taken advantage of] right now. There are solutions that [can generate] financial returns [and] carbon reductions, are commercially viable and are funded and ready to be deployed. And we just need people to step up and implement them.”