Financing sustainability in the textile and apparel sector – challenges and solutions

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Access to finance continues being a pain point for countries and businesses embarking on a greening journey. While more and more options are cropping up in the financial markets, information remains scant. This blog discusses some of the avenues developing countries can take to enhance the scope of financing options available.

Mohan Seneviratne, former Global Lead Textiles, International Finance Corporation

The textile and apparel industry is one of the largest industries in the world, with annual revenue (pre-pandemic) of $2.5 trillion and one of the largest contributors to environmental degradation. Global apparel consumption is intricately linked with rising incomes and population increase. The fashion industry’s upward growth was dealt a devastating blow by the COVID-19 pandemic. McKinsey estimates that the global fashion industry’s profit is expected to fall by 93% in the pandemic years. In this environment, improving the competitiveness of suppliers through the lens of sustainable use of resources is an even bigger challenge. International brands’ primary interest is being able to purchase apparel at an affordable price without undue risk to reputation due to poor labour practices, high water and energy use, and poor chemical management.

From a supplier’s perspective, one of the key challenges to sustainable improvements is financing and access to finance, especially for micro, small and medium sized industries (MSMEs). Many MSMEs have trouble getting funding at advantageous terms to improve their competitiveness, let alone financing sustainability. Some even have trouble getting access to foreign exchange.

Financing water and energy efficiency

The textile and leather sectors’ usage of water and energy resources is high. Elevated costs of electricity, diesel and energy inefficient equipment are the prime reason for this high energy use and costs in many developing countries. For an example, in Kenya, the grid electricity tariff is $0.22 per kWh, which is four times that of Ethiopia. Moreover, grid unreliability creates the need to maintain spare generators and their operation also contributes to the production costs and greenhouse gas emissions. Within the textile apparel sector, the highest resource consumption occurs in the wet dyeing and finishing sector.

Therefore, financing schemes to promote the uptake of capital-intensive, resource-efficient equipment would go a long way to increase the industry’s competitiveness, reduce energy emissions and improve the bottom lines of the suppliers. An export development fund (EDF) could be created by the respective central banks to fund sustainable development opportunities in the textile and leather sectors. This will offer loans to the textile sector through the financial institutions for purchasing water and energy efficient equipment at a discount to the prevailing interest rates as long as the loans are only earmarked for purchasing of such equipment such as boilers and funding water-efficient process equipment, etc.

Given the importance of the $32 billion textile and apparel sector to the economy of Bangladesh, where close to 80% of exports are from this sector, Bangladesh Bank created a Green Export Development Fund (EDF) in 2015. The GEDF is a $500 million revolving fund intended to facilitate financing in foreign exchange for resource efficiency in the textiles and leather sector of Bangladesh. In the context of Bangladesh, high cost of diesel, unreliability of grid-connected electricity, low gas pressure, limited new gas connections, fast-declining water table and high cost of cleaning up chemicals are some of the reasons the textile and leather sector is considering resource-efficiency measures. Some of the top buyers/ brands are also encouraging their suppliers to adopt resource efficiency in their production process. In this backdrop, Bangladesh Bank has committed the EDF to ensure that soft funds are available to the factories adopting resource-efficiency initiatives that will result in a reduction of energy/ water/ chemical costs, improvement of environment and working conditions and reduction of greenhouse gases in Bangladesh. The tenor was 5–7 years; all manufacturers were eligible, and interest rates were set at 2.5% + LIBOR (London Interbank Offered Rate).

A second option is to access the $10 billion Green Climate Fund (GCF), the world’s largest fund set up to address climate change in developing countries that aims to catalyse climate finance for low-emission equipment. In Bangladesh, the 6,000-strong ready-made garment industry is the most energy intensive industry. The energy saving potential is estimated at 1,159 tons of oil equivalent (TOE)/ year. The Infrastructure Development Company Limited (IDCOL) in Bangladesh received a loan of $150 million with a co-financing of another $100 million to promote large-scale adoption of energy saving technologies. The GCF loan has a disbursement of 20 years and a grace period of five years.

However, to make the best use of these funds, domestic financial institutions need to be ready to avail themselves of these opportunities. This requires a sustained effort in creating awareness within the local financial sector on the attractiveness of going beyond vanilla envelope financing of trade opportunities. A central organization needs to be created, like the IFC’s PaCT, which would be able to undertake the required training to the sector.

Green mortgages for green buildings

Globally, buildings and their operations use large amounts of resources and emit a variety of pollutants. More than half the world’s resources are consumed in the construction of buildings. To mitigate the emissions from the construction and operation of buildings, green buildings are being promoted. Green buildings reduce the overall environmental impact of the built environment by conserving material resources, water, and energy use, reducing air, water and land pollution and mitigating disturbance to the local ecology and biodiversity.

The IFC estimates that the green building industry is forecast to be $24.7 trillion by 2030. The United States green building certification system, Leadership in Energy and Environmental Design (LEED), is the market leader. The IFC has also developed its green building certification system known as EDGE. EDGE requires that a building achieve a minimum projected reduction of 20% in energy and water use, and embodied energy in materials as benchmarked against a standard building. In the apparel sector, garment factories can be built as green buildings.

In Sri Lanka, leading companies like MAS, Brandix and Hirdaramani have built green buildings, with innovative features such as solar photovoltaic (PV) on rooftops, net zero emissions, hydroelectricity, compressed earth bricks, heat block paving to minimize air-conditioning usage, rainwater harvesting, wastewater recycling, LED lighting controls and extensive gardening. Brandix claims to have reduced its carbon footprint by 77%.

It is well accepted by the property industry that green buildings attract higher sale prices, stronger rents, lower vacancy rates, reduced outgoings and better returns for more sustainable buildings. Given the reduced climate risk, financial lending institutions could offer lower interest rates to promote green building uptake, which can be backed by central bank programmes to address climate change. The green building claims and proposed reduction in emissions can easily be checked using pre-set standards such as the EDGE calculator. The banks also benefit by developing a stronger real estate portfolio that is resilient to financial, regulatory and reputational risks. Many multilateral and bilateral development finance institutions such as the IFC could be interested in providing such loans to partner banks.

Image by Nattanan Kanchanaprat from Pixabay 

Voices of SITA
Voices of SITA
This blog provides a window into the SITA project. Through stories from India, Ethiopia, Kenya, Rwanda, Uganda and the United Republic of Tanzania, this blog showcases the project’s progress and impact.