5 minute read

The report offers:

• An overview of the key business and financing bottlenecks faced by manufacturers.
• Solutions to overcome these obstacles and finance decarbonisation. 

It will help you:

• To understand the current state of play in the fashion industry when it comes to decarbonisation.
• Appreciate the specific financial and business obstacles faced by manufacturers in their quest to reach net-zero.
• Discover alternative solutions and a pathway forward.  

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7 business and financing bottlenecks faced by manufacturers

Capital expenditure

• On the one hand, the full burden and risk of capital investments tends to fall on manufacturers whilst, on the other, suppliers struggled to raise the requisite funding.

Lack of solutions beyond debt

• For many manufacturers, especially SMEs their high leverage and limited company size placed debt out of reach.

• Without other (non-traditional) funding options, and the sharing of climate action risk-reward, industry-wide decarbonisation will lag and falter.

Increased operating expenses not shared

• When decarbonisation projects add to their operating costs (short-term or otherwise) without the option of sharing these among value chain participants, including consumers, manufacturers worry they cannot invest without making unworkable margin cuts.

Business cycle risk

• Manufacturers typically do not have much visibility into the order pipelines beyond a season. The fashion industry’s cyclical nature thus reduces the span during which investment practically occurs.

Debt affordability

• Lack of access to lower-cost US dollar or Euro funds keep domestic financial markets in manufacturer countries from supporting decarbonisation. 
•  Other obstacles were high double-digit interest rates applicable in local currencies and, to a degree, the absence of financial system transparency and depth resulting in poor local capacity and resources.

Lack of tools to de-risk investment and debt

• An estimated 45% of Tier 1 businesses and nearly 30% of Tier 2 are in developing countries where adverse macroeconomic conditions have led to increased country and equity risk premiums. This makes them riskier to potential lenders.
• Some manufacturers cannot raise funds because of the risk profile of their organisation or of a given project.

Lack of local policies for renewable energy and energy transition

• Some manufacturers in certain jurisdictions lamented the lack of reliable legal frameworks, the adverse impact of certain domestic energy policies and the absence of physical infrastructure to support specific de-carbonisation strategies.

8 innovative funding solutions that could meet these challenges

Establishing a fair climate fund

• Built on the principle of equity, adopting the Fairtrade model, each value chain partner diverts a portion of revenue to the fund, which is then disbursed as grants to finance supply chain decarbonisation projects.

Brand-supplied debt repaid via product discounts

• The larger, more profitable brands and retailers provide funding for which repayments are through discounts on future product orders.

Cost-sharing with consumers

• A clothing line priced slightly over the conventional range, with clear information to consumers that the premium—displayed as a “green tag” at the point of sale—will exclusively fund decarbonisation of the product’s supply chain.

Green bonds and equity

• Capitalises on growing interest for green bonds and equity in an environment where investors are increasingly focused on economic, social and governance (ESG) factors.

Islamic finance

• A project funding tool—particularly for countries with a majority of followers in the Islamic faith—that differs from regular bonds in that it is not speculative and derives revenue through direct asset ownership rather than interest-bearing debt.

Mitigating business cycle risk

• Business cycle insurance for investment policies to cover disruptions or downturns that impact loan repayment ability.

Credit guarantees

• Credit guarantees from governments, multilateral development banks (MDBs), development financial institutions (DFIs) or export credit agencies (ECAs).

A Just Transition fund

• Created through regulatory levies, it would be accessible to manufacturers in developing countries to support value chain de-carbonisation.

About the authors

This paper was commissioned by: Artistic Milliners, Epic Group, MAS Holdings, NITEX, TAL Apparel, Pactics Group, Simple Approach. The paper was supported by: Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, FABRIC Asia Project and Transformers Foundation.

Why this paper was commissioned:

 The need for this paper originated in private discussions between producers hosted by the Asia Garment Hub , which led to the realisation that many of our decarbonisation funding challenges are shared. However, we also want to emphasise that our perspectives are not monolithic and we do not align on everything. Indeed, some of us are direct commercial competitors. Nonetheless, we came together to commission this paper because of our shared belief that manufacturer perspectives on this topic—in all their breadth and complexity—must be better understood if we are serious about driving meaningful impact.

Asia Garment Hub

The Asia Garment Hub is a digital one-stop shop tailored to the garment and textiles sector in Asia, viewed through a lens of Decent Work and Sustainability. On the Hub you’ll find high-quality resources from leading industry organisations and respected voices, bringing together manufacturers, brands, worker and employer organisations, civil society, and multi-stakeholder initiatives.