Investing in sustainable fashion: trends, challenges, opportunities
Investment Trends
Given the growing global demand for fashion products in a historically polluting industry, there has been a large influx of investment in green innovation from fashion conglomerates, investors, and a new wave of startup entrepreneurs.
Fashion Conglomerates
In 2015, H&M launched Group Venture (Prev. CO:LAB), an internal venture fund for rising sustainability startups, making 39 investments to-date with an average round size of $17M (Seed to Series B). Earlier this year, Inditex announced it may follow suit with an internal investment vehicle for sustainability and PVH committed $10M to the Fashion Climate Fund. Nona Source, founded in 2019, began at LVMH within the conglomerate’s DARE incubator program to bring the previously unheard-of-concept of luxury deadstock materials for sale on the mainstream market.
Retail and Institutional Investors
On a macro level, these decisions are starting to gain consideration amongst retail and institutional investors. Broadly, 8 in 10 retail investors globally have stated their desire to invest in ESG related businesses, and 39% have already done so. As of June 2023 according to Bloomberg, more than 1,200 ESG funds hold shares of LVMH with 500 additional funds indirectly exposed. This puts a luxury retailer liker LVMH ahead of traditional sustain-techs such as, say, Vestas Wind Systems or Tesla in terms of ESG fund exposure. HSBC established a Sustainable Supply Chain Finance Program with PVH in 2022, aiming to fund the estimated $1T needed to decarbonize the fashion supply chain. These are only a few examples.
Venture Capital/Private Equity
The rise of capital available for climate innovation has given rise to notable climate-tech venture funds such as Closed Loop Partners and Arctern Ventures or even more niche, fashion sustainability venture funds such as Style With Substance and Alante Capital. VC/PE funds, similar to H&M CO:LAB and other corporate investment arms, are searching for new startups disrupting the fashion supply chain via production and distribution technology.
Opportunity: Expected Growth, Inflow of Investment, Dry Powder
While 74% of retail investors are interested in making ESG and sustainability related investments, 1/3 investors say they lack information to make informed decisions about the topic.
On the VC/PE side, there is an increasing amount of dry powder in the climate sector. In 2023, while climate dollars($) invested were down due to macroeconomic conditions, the number of investments and the number of first time investors and funds established solely for climate increased.
It is no doubt that the sector remains attractive as a whole despite challenging market fundamentals. Data on extrapolating this theme to fit the fashion/retail industry is not readily available, but I assume there is a correlation in both areas. The ~$7.6B sustainable fashion industry is growing at a 9.46% CAGR (2022–2028) and the $60B sustainable fabrics market is growing at a 12.50% CAGR (2022–2030). These metrics can be coupled with growth in renewable energy, agri-food systems, and waste recycling technology that will also mobilize the fashion industry in its pursuit of a circular economy.
Key Challenges
- The novelty of climate tech solutions means that we don’t know the long-term implications they will have on our planet, society, etc. This lack of data can delay due diligence process and increase uncertainty for investors.
- The lack of data means that measuring sustainability is still vague. Improving overall government policy and funding to supports R&D and academic research into creating frameworks for ESG that can be measured will be key. Canada particularly lags in funding research, widening the innovation gap and commercialization of novel technology. Further, analytics platforms that help companies create ESG ratings and reporting are not unified by one set of standards. This makes it difficult for investors to make investment decisions based on sustainability.
- It’s not only metrics, but the PR and marketing challenges associated with gaining social trust with investors, companies, and the general public. Sustainability and circularity are becoming buzz words and industries like fashion’s have a notorious habit of greenwashing. The greenwashing fatigue, rise of media distrust and misinformation, and “climate doom” has a role in either incentivizing and disincentivizing firms from investing in sustainability.
- Few climate-tech startups in the fashion space have reached commercial scale, as most are stuck in pilot or industrial phases. The large upfront capital investments and R&D expenditure for many innovative companies creates high barriers to entry and slower exit timelines for VC investors. Many climate-tech solutions are not operationally seamless or profitable yet, creating risk for investors. It creates a paradoxical problem, where capital is needed to scale, but capital is held back because of higher risk.
- Ultimately, the complexity of fashion’s lengthy value chain, and the entire circular economy at-large, lengthens the time for implementation of a new system. Collaboration, time, and capital is needed to support companies in securing long-term off take agreements with suppliers, solving complex operational and logistical challenges associated with changing entrenched processes, and educating the general workforce/population.
Overall, while there is a push towards investing in clean-tech, sustainability, ESG, and innovation, there is a gap between intent and action, resulting in confused investors with misinformation and a lot of dry power. New startups and researchers in the field will have to present evidence-backed claims and clear ROI/payback timelines to bridge the gap with investors and ultimately, bring more climate-centric innovation to market, at-scale.
Thank you, for taking the time to read!
— Rubaina
