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The fashion supply chain is ripe for investment, with many solutions across traceability, renewable energy, next-gen materials and textile recycling ready to scale after years of pilot projects and accelerator schemes, and incoming legislation forcing companies to become more efficient. Yet, manufacturers and logistics companies say the funding available for innovation is still falling short of what’s needed.
Two events last week underlined the importance of this investment. The first was a celebration of the UK textile industry’s contribution to global luxury fashion, by the UK government's Department for Business and Trade and held against the backdrop of the new ‘Gabrielle Chanel. Fashion Manifesto’ exhibition at the V&A Museum in London. In a panel discussion, tweed, silk and cashmere manufacturers spoke of the urgent need to innovate in order to keep up with rising demand, as more European luxury brands look to re- or near-shore production. The second was a sustainability conference hosted by the UK Fashion and Textile Association, during which materials innovation was a focus; but speakers said cost continues to be a barrier to progress.
Globally, macroeconomic challenges and incoming legislation are making supply chain innovation a necessity, rather than a nice-to-have — meaning the funding gap is becoming more pressing. “At every stage of the fashion supply chain, there are opportunities for reimagining how we make, sell and consume products,” says Danielle Joseph, managing director at Closed Loop Partners, the US-based asset manager that facilitates investment in circular economy solutions. “Legacy processes within the fashion supply chain have led to significant overstock, resulting in markdowns and lost revenue. These dynamic pressures are a driving force for change within supply chains.”
Regulators are establishing transparency and due diligence requirements, and brands need data-driven traceability platforms to ensure compliance. “The industry needed regulations to provide incentives for upgrading supply chains, and those regulations are on the horizon,” says Henrik Jones, founder and general partner of Buckhill Capital, one of the first investors in the Sustainable Apparel Coalition’s analytics platform Worldly (formerly Higg Co, the company behind the Higg Index). “If regulations require disclosure of Tier 2 and 3 suppliers, there will be an even larger demand for the data behind every consumer product. The apparel industry will go from measuring approximately 25,000 factories to over 100,000. It is a massive transition that will require investments to solve.”
However, the world of emerging supply chain innovations is a complex one, with many offerings costly or unproven at scale. Even when financing is available, there’s little way to ensure it goes to the right solutions.
“There’s a lot of interest, but people are sitting back and observing who moves first in the market,” says Katrin Ley, managing director of Fashion For Good (FFG), whose platform connects those working on sustainable innovation with brands, retailers and funders to bring new ideas and technologies into the mainstream.
Which innovations are drawing investment?
In the wake of the pandemic, brands are keen to avoid future supply chain disruptions by adopting AI, robotics and automation. More than 50 per cent of fashion industry respondents to a 2022 Euromonitor survey said they planned to invest in AI, cloud-based data collection tools and robotics in the next five years.
Efficiency is an attractive buy-in for private investors. On-demand forecasting and supply chain digitisation can reduce overproduction, while in the end-of-use phase, AI-based sorting technology is automating processes within textile recycling. In early September, warehouse robotics startup Mujin announced that it had raised $85 million in its latest funding round, led by SBI Investments, with participation from Accenture, Pegasus Tech Ventures, 7 Industries and angel investor James Kuffner. In June, London-based company Dexory raised $19 million to expand its “digital twin” warehouse replica globally, in a Series A funding round led by European venture capital firm Atomico.
Meanwhile, investment in sustainability-focused supply chain innovations — from VCs, non-profits, brands and suppliers — is ramping up as the industry scrabbles to meet more stringent requirements enshrined in new legislation.
The Apparel Impact Institute (AII) has announced the first recipients of its $250 million Fashion Climate Fund, which include traceability tech company Made2Flow and BluWin, a solutions provider focused on clean chemistry and sustainable materials in all major manufacturing regions. This year, FFG’s Good Fashion Fund made its first investment in Bangladesh, funding a new water and chemical saving washing plant at Progress Apparel in Dhaka.
Much of the recent financing is being diverted to circularity initiatives like recycling infrastructure and recycled materials. Last year, textile recycler Worn Again raised £27 million from partners that included H&M, while Goldman Sachs Asset Management led a $100 million in recycled cotton producer Recover. Textile waste company Circ raised $30 million from investment firm Lansdowne Partners, among others, and in the US, Ambercycle raised $21 million from Zalando, H&M and Bestseller.
Closed Loop Partners says it is focused on companies that are exploring smart planning systems, reuse and resell technologies, low-impact material science, better business models to match supply and demand in manufacturing, and circular mechanisms for recapture to ensure that clothing gets a second, third or infinite life.
“We’re interested in companies that are addressing the critical challenges and answering questions like, how can we more appropriately ensure supply meets demand or work with manufacturers to collaboratively reduce oversupply?” says Closed Loop’s Joseph. “What customisations exist so that we can reduce return rates or get returned items back on shelves more quickly? How do we enable more re-commerce and resale of items to extend their useful life? How do we incentivise higher quality production methods using more sustainable and less toxic materials?”
Solutions to fashion’s supply chain challenges can be divided into ‘soft’ and ‘hard’ tech solutions. Soft tech solutions are software-based and tend to be easier and cheaper to implement than hard tech solutions like machinery and recycling infrastructure. Both will be crucial to meeting the industry targets for impact reduction. “By 2030, many existing solutions will be the ones that need to be implemented at scale,” says FFG’s Ley. “But, to close the 2050 gap, it needs to be the innovative solutions that we are working on now.”
Currently, FFG is looking into innovations in dry processing through the D(R)YE Factory of the Future project. “This includes the use of plasma technology for textile pre-treatment, digital printing technology (which applies dyestuff and designs directly onto the textile, significantly reducing water and energy usage compared to conventional dyeing methods) and spray technology,” explains Ley. She points to companies like Imogo, Alchemie, and NTX Cooltrans as promising innovators in the space. “We are not just looking at increasing investments in the innovations, we are also catalysing creative financing solutions to enable the supply chain to adopt or implement these innovations.”
While many hard-tech solutions can lead to significant carbon reduction, they are less attractive to investors because they require more capital to scale and the return on investment is often unclear. “Scaling what is proven is not as exciting as the shiny penny start-ups, but if we want to decarbonise the sector, we need to do it all,” says Lewis Perkins, president of AII. “We need to focus grant-making dollars on those solutions that have proven CO2 reduction benefits and have the highest likelihood to reach scale.”
Thermal energy, for instance, is consistently a neglected but urgent need, he says. “Fifty-three per cent of the CO2 emissions happen in the dyeing and finishing of our fabrics and we know that is due to the practice of using thermal heat — typically powered by on-site coal boilers. We should be focusing on scaling solutions to address thermal heat such as efficiencies, renewable energy alternatives, dry-processing and waterless dying technologies. At the same time, we are lacking quality [grant] applicants for renewable thermal heat alternatives.”
Should brands do more?
In 2021, FFG and the AII identified that an estimated $1.04 trillion is needed to finance fashion’s net-zero targets, funnelled into renewable energy, sustainable and next-gen materials and the coal phase-out. FFG says its 173 innovators have collectively catalysed €1.9 billion. The vast majority of that funding — 73 per cent — has come from early and late-stage venture capitalists and has largely financed raw material innovators.
Luxury brands and conglomerates have been investing in or acquiring their Italian suppliers in order to boost their innovation capacity, but much more could be done to support solutions that these brands will likely rely on in future.
“There are the pioneers that are marching forward, but there are still too many folks who could do way more and not just wait on the sidelines until it’s all de-risked and proven,” says FFG’s Ley. “There’s an opportunity for brands that want to play a more pioneering role to create a competitive advantage, whether it’s through exclusivity or from a reputational perspective. There is such an upside if you’re willing to also take some risk.”
“The best way to encourage more private capital to invest in innovations is to have more consistent demand signals from brands in the space and their largest manufacturers, where commitments to sustainability are backed by dollars and transparently adhered to within their supply chains,” says Joseph from Closed Loop Partners. “Brands that signal their interest in working with a given start-up should sign at least a year-long commitment or have a clear pathway to scale up.” For example, earlier this year, Sri Lankan manufacturing conglomerate MAS Holdings invested in Swiss next-gen material company HeiQ in a five-year offtake agreement that will see MAS securing 3,000 tonnes of HeiQ’s AeoniQ next-gen cellulose yarn — a replacement for polyester and nylon — in 2025 and 5,000 tonnes each year from 2026 to 2029.
Sharing the risk
If emerging, complex or asset-intensive innovations are seen as too risky to ROI-focused financiers, the question is: how can they be repositioned as more lucrative investment opportunities? “You reduce risk by having an entrepreneur who brings enough technology and commercial expertise to the table when going through the different demonstrations, pilots and lab trial stages,” says Ley. “There is a lot of money out there, but the challenge is to funnel that money into orchestrated investment opportunities where these risk portions are managed in a relevant way so that financing can actually flow.”
Priyanka Khanna, FFG’s head of Asia expansion, says larger suppliers have begun financing innovation, challenging the notion that investment should be approached top-down. “The trend that we’ve seen is the suppliers who weren’t really thinking about innovations five years back, are now starting to reach out and asking: ‘Could you guide us in where to invest?’” she says.
While brands still hold much of the power when it comes to negotiating orders and prices, they are slowly coming around to seeing the value of forging long-term partnerships with suppliers — something that experts have long argued is vital for achieving any meaningful progress. “We all need to do a better job of engaging the suppliers in designing the scaling of solutions,” AII’s Perkins says. “We need the voice of the supplier to inform us of what they need and what will work. They work with the solutions, so we better understand from them if it actually is workable.”
Generally, collaboration is key. FFG encourages investors to work together and share the risk of financing newer innovations. “If we look at this like one big financial risk pie, we can divide it and say each of the stakeholders gets a portion of that so that the risk falls very little or as little as possible on the supplier and the innovators who are actually making this new process happen,” says FFG’s Khanna.
The missing piece of the puzzle is the ambitious pioneers who will lead the pack. “We think upgrading supply chains is an investment focus like fintech [the use of technology to deliver financial services and products to consumers] or AI. It’s a very clear market opportunity,” says Buckhill Capital’s Jones. “So, we use the same focus as in other investments. Look for a big market and a big opportunity. Now where is the big solution?”
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