6 ways to drive funding to transform the fashion industry

In 2020, sustainability is at the top of the fashion industry’s agenda. The industry’s environmental and social impacts are well documented. Under growing consumer and regulatory pressures, industry leaders are recognising the urgent need to move towards responsible practices. The question now is how the industry will transform to achieve a sustainable operating model.

Progress to date has been encouraging but still largely incremental. Transformation requires disruptive innovation, at scale, in the form of new materials, processes and business models. To bring the necessary solutions to market and mainstream implementation, the ecosystem of fashion brands, supply chain partners, investors and so on, need to step up to accelerate innovation.

This includes addressing a financing opportunity of $20 billion to $30 billion per year until 2030. Stakeholders need to actively engineer the conditions for strong ventures to emerge and succeed in order to future-proof a sustainable business model for the fashion industry.

Strong innovation, emerging support

An extensive pipeline of innovations has emerged from new, alternative raw materials right through to digital platforms. Bringing these innovations to scale requires industry support and financing to advance solutions from R&D to fully commercialized products.

“Soft tech” solutions such as digital platforms have attracted more financing than the more asset-intensive forms of “hard tech” such as new raw materials or recycling technologies. However, hard tech innovations will spark the larger transformation towards sustainability and therefore have a greater need for financing per year.

Across all technology types, two points in the innovation development process are most challenging to finance. First, innovators struggle to secure financing to develop a minimum viable product. Second, in the scaling phase they struggle to raise the (often substantial) financing needed to reach commercial volumes. This type of capital is difficult to raise from the still-nascent financing landscape, which needs to expand to include growth equity, project financing, lending vehicles and R&D investments from large corporations.

The barriers to financing innovation

So, what is causing the shortfall in financing for the fashion industry’s move into technological innovation?

The demand for innovation in the fashion industry is a recent development. As such, private, public and philanthropic investors have had limited exposure to the size and scale of the opportunity that lies in the industry’s impending technological transformation. The limited awareness of the opportunities, but also the lack of expertise in this new space, contributes significantly to the lack of capital flowing into fashion innovations.

In addition, misaligned incentives in the supply chain can hamper the advance of disruptive solutions. While brands have the most incentive and pressure to drive towards sustainability, manufacturers have to account for the costs and implementation risks.

New innovations also have to compete with the commoditized prices of today’s environmentally harmful production methods. Many brands and retailers benchmark against current costs of production and fail to account for things such as carbon emissions, when assessing business cases.

An industry-wide call to action

Considering the enormity of the challenge the industry faces and the barriers that must be overcome to drive this transformation, industry-wide collaboration with six specific actions is required. Financing will flow into the fashion space if all stakeholders build towards conditions that provide for manageable risk, attractive returns and impact that can be measured.

1. An orchestrated and structured innovation process

At the macro-level, multi-stakeholder organisations must drive collaboration and create a cohesive, streamlined ecosystem that accelerates innovation. At a more targeted level, bespoke consortiums of brands, supply chain partners, innovators and investors with a common technology focus are needed to concentrate resources and de-risk investments.

2. Brand advocacy and hands-on support for promising technologies

Brands must signal to investors which innovations they are supporting and thereby de-risk investments. This can be through: co-developing a project or launching a pilot with an innovator, giving a volume commitment in advance, or directly investing into a venture.

3. Increased engagement and ownership from supply chain partners

Manufacturers and upstream operators, such as chemical companies or fibre producers, have a natural stake in innovation. They are best positioned to partner with innovators and offer expertise and access to equipment, as well as provide capital, or ultimately acquire successful innovators.

4. Innovators' propositions; focused use cases and practical implementation plans

Innovators have to approach customers and investors with executable use cases, clear value propositions and more realistic implementation plans for commercializing their solutions.

5. Mobilizing more investment and new types of capital through investors and funders

Investors must advance their industry expertise and join forces with brands, manufacturers, and innovators to develop investment propositions that match their risk-return profiles. Also, new sources and vehicles of investment are needed, such as blended finance, combining public, private, and philanthropic capital.

6. Stronger policy framework and mechanisms to catalyse private investment

Regulatory action has begun to help influence the industry’s move to sustainability, but more is needed, to provide a framework of policies and incentives to help inspire systemic change. The public sector must increase direct investments and their support to catalyze investment from the financial and philanthropic sector.

This blog post is a summary of findings from the report, “Financing the Transformation in The Fashion Industry: Unlocking Investment to Scale Innovation”, authored by Boston Consulting Group and Fashion for Good.