Financing sustainability, Who will pay for decarbonization?


Azul Stengel, Co-founder of Lienzo

Photo by Mufid Majnun

"Financing of sustainability is not limited to the financing of disruptive innovation, but also includes other initiatives and further adoption of already existing solutions”
- Rogier Van Mazijk, investment director at Fashion for Good.

Stakeholders across the fashion industry are pushing brands to provide alternative sustainable solutions. This transversal transformation will indeed have an impact on how businesses are run, and this transition will require financing and a redirection of the company’s business model.

By identifying the main pain points in the company’s value chain, several objectives can be set regarding the issues of environmental impact such as carbon emissions, water consumption and waste disposal, as well as social responsibility and accountability. These objectives will lay out the roadmap for businesses to direct financing and implement real change within their structures. This may seem a daunting task for many companies as it is a very high cost to shoulder in the short term. However, this should not deter companies from leaping into action as this will allow them to grow and evolve in the long term.

Across the value chain, vendors and suppliers can distribute the cost of the transformation respective to their pain points and objectives. Brands are currently feeling the pressure of consumers demanding decarbonisation and commitment to the environment, as well as social accountability. Big companies will be able to reduce their margins, in the beginning, to invest in technology that allows them to provide greener products to their customers. On the other hand, smaller brands will struggle to bear the cost of green materials which are currently more expensive. There are several ways in which small and medium-sized companies can transform in a way that has a positive impact and helps them grow financially and as a brand.

Suppliers are currently bearing the costs of sustainable textile production as regulation and market demand material and social certifications, at low costs. “The least brands can do to help suppliers switch to more sustainable practices is to pay the real cost of the goods” (1). Due to higher inflation on raw materials, petrol, shipping and the increase in wages, suppliers have very little wiggle room to invest in improvements. Suppliers are usually paid two months after they have delivered the goods, and the brunt of delays is borne by them. These, usually nameless, suppliers are not the faces of the brands but are still demanded to comply with the transformation. It is here that transparency and accountability are key elements that need to be incorporated to create an even distribution of the cost across the value chain. While suppliers are, in practice, the ones implementing the transformation, they do not have the capital or resources that big companies do. In order to properly finance sustainable sourcing, ethical work and innovative solutions, companies and brands need to pay the real value of the products, even if this means reducing their margins in the short term. At the same time, customers and regulation should demand transparency from said brands as they should financially account for the goals they committed themselves to.

While big companies have the financial resources to develop research and create new products and absorb the cost of this process, smaller companies have the advantage of being more dynamic. By implementing change at a faster pace, small brands can differentiate their product faster, and position their brand differently through this premium product offering. Furthermore, transversal transformation can be achieved at a lower cost, and the implementation of sustainable practices will be easier as a result of having a smaller structure.

External investors are also poised to play a role in the transition toward a low-carbon industry. Funds are looking to integrate an ESG strategy within their portfolios. ESG-focused funds currently have more than 1 trillion in assets under management, and this trend is only growing. The fashion industry, including smaller companies, can benefit from the financial transformation as more money is going into greener investments while low-sustainability assets decline. According to a study conducted by McKinsey, “Some investors may accept a lower return on equity in the short to medium term, effectively financing decarbonization” (2).

The final stakeholder that comes into play for the funding of this decarbonization is the consumer itself. Currently, consumers are willing to pay a higher price for a sustainable product. Companies and brands who are transparent and communicate effectively with their customers incorporate the client’s wants and needs within their product development. As a result, these products have more value for the consumers and there is a consumer’s willingness to pay for said products and garments. Research suggests that consumers, especially Gen Z and higher-income shoppers are willing to pay a higher premium of up to 60 per cent (3).

While there is a lot to gain from a transition toward sustainable practices (Lienzo has several articles looking at the business drivers of sustainability) it is also important to take into account the cost of this transition. Decarbonization comes at a price, and the question is no longer if companies want to pay it, as the regulation requires them to do so. It is then that companies need to make the decision to implement change transversally by evolving their business model to incorporate sustainability and transforming their brand DNA.

(1) Traceability Playbook, TrusTrace, 2022.

(2)&(3) Climate sustainability in retail: Who will pay? by Anamika Bhargava, Steve Hoffman, and Nikola Jakic, McKinsey & Company, April 2022.