For apparel suppliers, sustainability is rapidly moving from an environmental commitment to a requirement for staying competitive in global sourcing.
That shift has major implications for capital investment. Textile manufacturers are being asked to cut emissions, improve water and energy efficiency, introduce more circular production models, collect more supply chain data and prepare for increasingly demanding regulatory requirements. Each of those changes carries a price tag.
Yet the financing systems available to fund them have not necessarily kept pace.
That gap was at the center of a recent discussion among textile manufacturers, commercial banks, development finance institutions and sustainability experts in India. The takeaway was not that capital is unavailable. Rather, much of the money already in the financial system is poorly matched to the realities of textile manufacturing, particularly for the thousands of small and midsize businesses that underpin the country’s supply chain.
For large exporters such as Welspun, the commercial rationale for investment is already becoming clear. International customers are increasingly incorporating environmental performance into sourcing decisions alongside traditional considerations such as price and quality.
“Sustainability is no more a parallel activity or a peripheral activity for the business,” Alok Mishra, Group Head – Sustainability for Welspun Group, said. “Sustainability is a core activity.”
That development changes the equation for suppliers. Energy systems, material inputs and resource efficiency are no longer purely operational considerations. They can affect whether a manufacturer qualifies for future business.
Welspun is already investing accordingly, particularly in energy transition and emissions reductions. But companies that begin that process before financing markets have developed products specifically for these investments may have little choice but to fund projects themselves.
That is easier for a large corporate than for a smaller mill, dye house or processing facility.
The MSME Problem
India’s apparel and textile supply chain is highly fragmented, with millions of micro, small and midsize enterprises participating in production. Many have limited financial reporting capabilities, relatively weak balance sheets and little internal capacity devoted to evaluating new technologies or navigating government programs.
That creates problems well before a sustainability project reaches a bank’s credit committee.
Satyaki Rastogi, chief general manager of the Small Industries Development Bank of India, or SIDBI, pointed to several barriers facing MSMEs, including informality, limited financial records, insufficient technical knowledge and a lack of consistency in how sustainable investments are defined.
Without a common framework, two lenders could evaluate similar projects differently. Manufacturers, meanwhile, may struggle to determine which technologies qualify for financing or which investment will deliver the best operational return.
There is also a more fundamental mismatch between conventional lending and sustainability projects.
Banks traditionally provide products such as term loans and working capital. But investments in cleaner technology, water infrastructure or new energy systems can have longer payback periods or produce returns partly through avoided costs rather than immediate revenue.
As Mishra put it, “Sustainability-linked projects, they can’t be seen from the same lens as typical projects are seen.”
That means sustainability finance may need longer repayment schedules, different risk calculations or financing tied more closely to projected operating savings.
The need extends beyond machinery.
Smaller suppliers will increasingly need capital to build the digital infrastructure required to manage compliance. New regulatory regimes are creating requirements around product information, traceability and environmental data that will require manufacturers to improve both technology and internal processes.
Those expenses may not look like traditional capital expenditures, but they still require money, people and systems.
Banks Need a Business Case Too
The answer, however, is not simply asking lenders to accept more risk.
Banks are responsible for getting their money back, and borrowers ultimately must generate enough cash to repay loans. Sustainability projects therefore need credible economics regardless of their environmental benefits.
Shailesh Unnithan, Chief General Manager, ESG & Climate Finance Unit of State Bank of India said lenders need reliable structures that allow them to evaluate both repayment capacity and project risk.
“If you have to have the banks involved, then there has to be a business case,” he said.
That case becomes difficult to establish when suppliers are small, data is inconsistent and unfamiliar technologies require extensive due diligence.
The cost of underwriting itself can become a barrier. A bank may spend nearly as much time evaluating a small sustainability loan as a significantly larger commercial transaction, making individual projects unattractive even if they are technically viable.
This is where the discussion around sustainable finance is beginning to move beyond simply creating more green lending products.
The question is increasingly how projects can be packaged differently.
Venkat Kotamaraju, Partner & Director, Global Head – Circular Economy & Climate Solutions of Intellecap, argued that the core issue is not necessarily the amount of money available.
“The problem is not capital,” he said. “The problem is on how do we structure it? It’s an architecture problem and the problem is on being very clear across the ecosystem on what are we financing, how are we financing and who are we financing.”
That opens several possibilities for the apparel supply chain.
From One Factory to 50
One of the most promising ideas is aggregation.
Financing a cleaner boiler for one small manufacturer may produce a transaction too small or risky to attract a commercial lender. Financing infrastructure serving 40 or 50 manufacturers creates a very different proposition.
Projects can spread capital expenditure across multiple users, lower operating costs and create a larger pool of assets and cash flows for lenders to evaluate.
Intellecap has been working with groups of manufacturers on shared infrastructure models, including biomass systems and common facilities serving multiple companies within the same production cluster.
“One boiler will always remain an unfinanceable, risky, very small-size proposition for any financier,” Kotamaraju said. “Forty boilers put together, their collective collateral, their collective creditworthiness, their collective risk which you can actually surface and the fact that there are a bunch of brands and tier one operators who can stand up for a cluster of 40-50…it becomes an asset class.”
That concept could apply across textile manufacturing.
Water treatment, renewable energy, recycling infrastructure, cleaner thermal systems and other technologies can sometimes be developed at the cluster level rather than factory by factory.
For lenders, aggregation creates scale. For manufacturers, it reduces upfront spending. And for technology providers, a larger guaranteed customer base can improve the economics of deploying new systems.
It also helps address one of the apparel industry’s persistent sustainability problems: much of the environmental impact occurs beyond tier-one suppliers, where brands have less visibility and smaller companies have fewer resources.
Brands Could Help Unlock Capital
Brands themselves may have an important role to play in lowering financing risk farther down the supply chain.
Purchase commitments, long-term sourcing agreements or sustainability-linked incentives can provide lenders with additional confidence that a supplier will have the revenue needed to repay an investment.
Instead of providing capital directly, brands could help create what Kotamaraju characterized as a form of “soft collateral” by demonstrating future demand.
For example, a brand or tier-one supplier might offer incentives to mills that reduce energy or water consumption by an agreed amount. Combined with existing supply-chain finance programs, those commitments could make investments farther upstream more attractive to lenders.
That would also create a closer connection between brands’ sustainability goals and the capital required to achieve them.
The concept is particularly relevant as companies face pressure to reduce Scope 3 emissions. Brands can set supplier targets, but achieving them often requires factories to purchase equipment or infrastructure. Without a mechanism to finance those upgrades, the targets risk running ahead of suppliers’ ability to deliver them.
Blended Finance Without Permanent Subsidies
Development finance institutions and government programs can help bridge that gap by absorbing portions of risk that commercial lenders cannot.
That might include concessional funding, guarantees, first-loss structures or risk-sharing programs combined with commercial loans.
The goal is not necessarily to subsidize sustainability indefinitely.
Instead, public or development capital can help prove that unfamiliar investments work, develop lending models and build enough transaction history for private financial institutions to enter later.
Rastogl described DFIs [development finance institution] as potential “market makers” that can demonstrate viable models before commercial finance scales them.
Standardization could accelerate the process further.
Several panelists called for a common sustainability taxonomy, which could give manufacturers and financial institutions a shared definition of qualifying investments. Standard project templates could also reduce the amount of due diligence required each time a bank evaluates familiar technologies.
Once lenders understand the cost, expected savings, performance and risk of a particular technology, financing the next installation becomes easier.
And that may ultimately be what determines whether sustainability investment moves from isolated projects to industrial scale.
The apparel industry’s sustainability transition requires enormous capital, but the panel made clear that simply putting more money into the system will not solve the problem. The financing has to reflect how textile supply chains actually operate: fragmented, margin-sensitive and dominated by companies of dramatically different sizes.
For suppliers, the opportunity is becoming increasingly commercial. Environmental performance can protect access to customers, reduce operating costs and prepare factories for future regulations.
The next challenge is making sure the financial architecture catches up.
