Catalytic Capital for Apparel Decarbonization

Summary

In 2024, Apparel Impact Institute (Aii) , in partnership with apparel brands and financial institutions, committed to create a portfolio of financial tools to unlock investment in apparel decarbonization. One of the first tools will be a global debt fund focused on investments that reduce greenhouse gas emissions and water use for the suppliers of international apparel brands. The initiative provides essential capital and technical assistance, access to networks, and capacity-building through smaller loans. With loans from the fund, ~125 apparel suppliers (80% of those being small businesses) can implement decarbonization projects in their facilities. These improvements save water and reduce carbon, helping address the industry’s science-based target commitments. They also provide cleaner water and air for 10,000 locals living around these facilities and technical training to 200 textile workers. Aii will assist in recruiting brands, philanthropies, and financial institutions to create a pipeline of suppliers and projects requiring investment.

Approach

Apparel Impact Institute (Aii) – in partnership with apparel brands such as H&M, Lululemon, and PVH, and financial institutions – commits to making catalytic capital investments that derisk loans for decarbonization, lowering interest rates, unlocking additional capital and resulting in carbon reduction for the apparel industry.

One example of a financial vehicle that the funds will go towards is a dedicated global debt fund of $250 million focused on investments that reduce greenhouse gas emissions and water use for suppliers of international apparel brands.

The initiative provides essential capital and technical assistance, access to networks, and capacity building through smaller loans (< $5 million) . Historically, these loans are too small for international banks and development agencies to finance directly. Without derisking mechanisms like junior debt, interest rates have been too high for most suppliers to take advantage of. This tool aims to offer affordable debt to incentivize suppliers to decarbonize. The fund will include three tranches, or levels. Aii is entering at the junior level, leveraging $2 million from its Fashion Climate Fund to bring in mezzanine and senior investments. With loans from the fund, 125 apparel and footwear suppliers (80% of those small businesses) can undertake decarbonization projects, such as renewable energy implementation or boiler or heat pump upgrades or replacements. These improvements save significant water and carbon and will provide cleaner water and air for 10,000 locals living in these communities, in addition to technical training to 200 textile workers. The $250 million is intended to be spent down over a period of 10-12 years. As a leading convener and trusted source for impact programs, Aii will assist in recruitment of apparel brands, philanthropy, and financial institutions to these instruments. Additionally, Aii will act as a matchmaker, creating a pipeline of suppliers and decarbonization projects requiring investment.[commitment-title title='Action Plan'] Timeline & Next Steps: Q2-Q4 2024 - Get commitments from partners, with a focus on Junior and the Mezzanine tranches for the debt vehicle. Q4 2024 - Choose fund managers, achieve a first close of $100 million for debt fund; the full size of $250 million is expected by 2025. Q1 2025 - Q4 2026 - Engage facilities on the ground to participate in energy audits and identify investment opportunities. This will be done in conjunction with the corporate brand partners. Q1 2025 - Q4 2027 - Support facilities in accessing funding and implementing projects on the ground. Q1 2026 - Q4 2027 - Measure and verify impact created by projects and provide public reporting.[commitment-title title='Background'] The textile, apparel, and footwear industry is a resource-intensive and environmentally impactful manufacturing sector. Aii's Taking Stock of Progress Against the Roadmap to Net Zero report estimates that the industry's share comprises 1.6% (1.025 gigatonnes CO2 eq) of annual global greenhouse gas (GHG) emissions, with most impact taking place in the raw material and material production steps of the supply chain. These estimates are conservatively based on the industry's best collective datasets from the Higg Index and Textile Exchange; other estimates made by Quantis have reported up to 8% global emissions. Regardless, it is known that apparel brands' scope 3 emissions alone are a major contributor to climate change, and therefore must be addressed. Suppliers in the apparel and footwear industry will largely bear the burden of the transition to net zero, but many of them have little to no access to critical funds that will catalyze their sustainability journeys and practices. Suppliers within the industry urgently need monetary support from financial institutions to kickstart their efforts. However, there is often a great deal of perceived risk that financial partners assume when funding innovative solutions aimed at addressing the apparel & footwear industry's collective impact on climate change. In turn, manufacturers and suppliers that are interested in transitioning their practices are stuck in a never-ending cycle of wanting to be more sustainable but unable to implement the solutions that help them meet this target. The existing financial tools available to suppliers, with market interest rates, do not incentivize suppliers to take on these investments.[commitment-title title='Progress Update'] [commitment-title title='Partnership Opportunities'] Apparel Impact Institute is seeking additional financial partners for the fund and other financial vehicles, particularly at the first-loss (junior debt) levels. In order for financial institutions to feel comfortable offering affordable interest rates to suppliers, they require their investments to be de-risked in this way. Banks have expressed a particular interest in having apparel brands and retailers invest at the junior level to show their long-term commitment to a supplier, which offers financial institutions more confidence in their own investment. Aii hopes that a partnership with CGI will unlock conversations with potential investors that Aii does not currently have access to. Aii is also building a pipeline of supply chain projects and actively recruiting suppliers. Aii is hopeful that the media support offered by CGI will directly help these recruitment efforts and globally build the Aii brand., Apparel Impact Institute is committing financial resources - $2M from the Fashion Climate Fund. One use of these funds will be towards the first loss tranche of the debt fund, in order to unlock other asset classes and provide affordable financing to suppliers. In this way, Aii's financial resources serve as a multiplier, unlocking many times more funding than Aii alone could provide. Aii is also well-positioned to recruit additional financial resources from apparel brands and financial institutions, given its network of 70+ brand partners and banks, plus partnerships with NGOs and trade associations. Aii recently introduced the Fund to 15+ brands present at their annual Strategy Summit in March and is holding regular remote fundraising meetings. Lastly, Aii will play a matchmaking role, recruiting both suppliers and decarbonization projects to ensure a healthy pipeline for the investments.