In Short : The funding model that has proven successful for solar initiatives could be ideal for sustainable fashion. By leveraging similar financial mechanisms, the fashion industry can attract investment for eco-friendly practices, ethical sourcing, and circular economy initiatives. This model aligns economic growth with environmental and social responsibility, fostering a more sustainable and responsible fashion sector.
In Detail : The emissions and waste produced by the US$2 trillion fashion industry is a big problem for the environment, but several innovative companies are creating new materials and processes aimed at reducing the impact of making clothes.
Consumers—and the brands that want their business—are clamoring for these innovations, but bringing responsibly made clothing to market is challenging. That’s because getting products from the early stages of research and development and piloting into full-scale commercial production requires building expensive, physical facilities.
How much will it take to get there? US$400 billion, according to a recent report from the Amsterdam-based Fashion for Good and Spring Lane Capital, a private-equity firm based in Boston and Montreal. That’s the amount of total financing needed to scale the innovations that can transform the industry. The innovations range from so-called “next-generation materials”—such as polyester that isn’t made from virgin fossil fuel—to recycling and processing techniques.
“There are an enormous amount of well-funded technology companies that are innovating in various areas of sustainable fashion—from dyes to sustainable materials and textiles—and a lot of the pain points are as they attempt to emerge from that technology research-and-development mindset into an execution-oriented, large-scale deployment mindset,” says Jordan Kasarjian, associate at Spring Lane.
Traditionally, innovative entrepreneurs have relied on venture capital to get their businesses off the ground. But venture financing is better equipped to fund software or service companies, not those that require millions of dollars of capital to commercialize their ideas, says Christian Zabbal, managing partner at Spring Lane.
“Most of our financing systems for the last decades haven’t really been geared toward building companies that build things,” Zabbal says. “We don’t really have protocols for funding companies that are relatively capital-intensive, but are doing really interesting things.”
Capital-intensive projects that are needed to make commercial-scale products often run into a financing gap that’s sometimes called “the missing middle.” If not addressed, the gap “becomes a significant hurdle to industry-wide adoption of new products and technologies,” the report said.
Using Project Finance to Scale
After the early stages of coming up with a product idea and testing it, what innovative sustainable fashion companies need is debt financing to build facilities that can make their products at commercial scale. In fact, about half of the US$400 billion required to scale the industry through to commercialization and adoption will need to be financed with debt, such as loans or bonds. The report argues that the best form of debt for this fledgling industry is project finance, which has historically been used to fund roads, bridges, power plants, and other types of infrastructure.
Project finance can be a better option for emerging technologies making physical things than traditional corporate or bank financing because it allows for raising a significant amount of capital at a lower cost, according to the report.
It’s particularly good, too, for industries with high upfront costs and “relatively predictable long-term cash flows,” which are used to pay back investors, the report said. This is advantageous to the entrepreneur and his or her company because project financing is backed by the project itself and so is non-recourse to the company. As a result, it’s also considered an off-balance sheet transaction.
“All the financial instruments we use, whether it’s project equity or project debt, effectively allows them to leverage larger quantities of capital that don’t involve them selling their company off and run the risk of running out of steam,” Zabbal says.
The key with project finance is it’s focused on the facility that’s being built, and the clients it’s being built for. “The actual company remains relatively safe and able to develop these projects and grow,” he says.
For investors, however, this form of debt financing can require higher upfront expenses than a typical loan to assess the viability and risks of a given project, according to the report.
Today, many entrepreneurs developing sustainable fashion products or processes are unaware of project finance as an option, and they turn instead to bank financing—which has recourse to their businesses—or to venture capital, which requires founders to give up high percentages of ownership and future profits.
Spring Lane had had plenty of experience with project finance as an alternative in funding other capital-intensive industries in the business of addressing climate, such as solar energy and electric vehicles. Now that the firm sees the sustainable textile sector on the verge of scaling, it’s on an evangelical mission to spread the word about project finance, Zabbal says.
“If you can do it, raising capital in these more creative structures that are tied to the plants, actually allows you to scale your company in a much less risky way,” he says.
Investing Opportunities
As a project finance investor, Spring Lane is paying attention to developments throughout the sustainable fashion sector. Typically, the firm will enter a new market by setting up a structure “for one particular company, one particular technology, or one particular business model, because that allows us to keep an eye on it and to help the company scale,” Zabbal says. “Once that happens, it’s relatively straightforward to expand that facility or the financial structure to other players who are in a similar space or doing similar things.”
Then, Zabbal says, other investors are likely to follow. “The first one is really hard to do, the second one is hard, the third one isn’t, and by the fourth and fifth, it becomes much more accepted in the industry, and there’s a sort of domino effect,” he says. “What we’re trying to find now is the first couple to say, O.K., which one of these is ready for prime time, which one of these can we scale?”
Spring Lane isn’t naming specific investment opportunities yet, although Kasarjian says companies developing recycled polyesters and sustainably sourced dyes look most interesting to the firm right now.
“Once these facilities are up and running, they get improved faster and faster because that’s where the innovation happens,” Zabbal says. “Very quickly they grow and the financing structures grow with them and that’s what we’re trying to do.”