Sustainability goals need to be reframed financially and translated into feasible investment pathways to decarbonize the fashion industry at the pace and scale needed to mitigate climate change, according to new research from H&M and Ernst & Young.
Recent data shows that the climate crisis is worsening, with climate-related risks set to triple by 2050. The fashion industry’s contribution to global greenhouse gas emissions could be anywhere from 3% to 10%, according to a 2020 McKinsey report, while a separate 2021 report from the World Economic Forum found that the fashion industry and its supply chain were the world’s third-largest polluter. But the fashion industry’s emissions have increased in 2023 compared to 2022 — the most recent period for which data exists — and despite some efforts to reduce carbon usage, it’s not decarbonizing fast enough to meet climate targets.
H&M and EY’s white paper, published last month, states that though the fashion industry’s supply chain produces most of its emissions, it’s unlikely that traditional financing could lead to sustainable transitions for tens of thousands of small suppliers scattered across the globe. Additionally, sustainability and its risks and payoffs are difficult to quantify for CFOs, according to the paper, which also includes contributions from HSBC and global nonprofit the Apparel Impact Institute.
“Only by rethinking traditional models and promoting industry wide collaboration can we truly unlock the investment to drive scalable impact across these complex fragmented supply chains,” HSBC Head of Sustainable Trade Solutions Clair Smith said in the paper.
As a first step to creating incentives for decarbonization, the paper suggests that CFOs find a way to capture the reality of sustainability-related risks and benefits in financial terms. Companies currently view transitioning to sustainability as an uncertain investment, and thus shy away, but this is “not a novel financial issue,” according to EY and H&M. The companies write in the paper that this can be solved by treating sustainability like research and development — another uncertain investment — thus making it “a normal lever for value creation.” In fact, companies with deeper sustainability integration are 40% more confident in their business outlooks for the year, according to a separate EY report based on insights from 200 European executives and board members.
CFOs also need to face the fact that decarbonization is necessary to mitigate risk from current and future regulation, reputation damage and climate-related supply-chain disruption, and to secure future business value, the white paper said. The WEF estimated in 2024 that businesses that fail to adapt to physical climate risk could lose up to 7% of earnings already by 2035. Meanwhile, the WEF estimated that companies investing in adaptation and resilience could generate returns between $2 to $19 for each dollar invested.
But the structure of fashion supply chains poses a conundrum for funding the transition to sustainable fashion, according to H&M and EY’s research. Suppliers are usually far too small to directly access financing to decarbonize their operations, and manufacturing countries generally have less ambitious mandates to decarbonize their utilities than countries in the Global North, where most brands are based. But even if a brand decides to finance supplier improvements, carbon accounting rules mean that the benefits are proportionally shared among all brands that work with that supplier, creating a “free rider” dilemma, the report noted.
The solution, the white paper suggests, is collaboration on both the investor and supplier end, in order to allow capital to flow and for change in the supply chain to occur on larger scales. Currently, green bonds and loans are used to finance ambitious infrastructure projects, not small suppliers. But sector specific, blended finance vehicles can unite partners such as multi-development banks, financial institutions, insurers, brands and manufacturers to invest in bundles of small, dispersed supplier projects that would be too risky and too granular for conventional finance, according to the paper. Nongovernmental organizations, as outside entities, would be crucial for coordinating investors and shaping the right blended finance bundle, thus avoiding anti-trust issues due to the data-sharing that would be required.
“Decarbonizing and future proofing these value chains demand more than isolated initiatives,” EY Partner and Nordic Chief Impact Officer Anna Ryott said in the paper. “It requires scalable financing models, aligned incentives and deeper collaboration between brands, suppliers and financial actors.”
