Globally, the efforts to combat climate change are on the rise mandated by the respective government, with an increasing focus on banks and private investment entities in advancing global sustainability goals. Green finance involves directing capital towards environmentally friendly initiatives, including areas such as Circular Economy and Eco-Efficient Projects, Clean Transportation, Climate Change Adaptation, Energy Efficiency, Green Buildings, Renewable Energy, Sustainable Water, Wastewater Projects amongst others.
Banks are incorporating Environmental, Social and Governance (ESG) criteria into their lending and investment strategies, ensuring that funds are directed towards projects aligned with sustainable principles.
In a survey conducted by the RBI in 2022, it was found that 32 per cent of banks have mobilised new capital to scale up green lending/investment or set a target for incremental lending/investment for sustainable finance. Additionally, 56 per cent of banks have decided to gradually reduce their exposure to high-carbon emitting/polluting businesses in the coming year.
In line with international commitments and moral obligations, apparel and textile manufacturers, brands and retailers in the sector are increasingly defining and redefining their environmental commitments and forging supply chain partnerships to enhance and amplify the effectiveness of their initiatives. The majority of fashion’s emissions—estimated to be as high as 80 per cent —come from the supply chain. Therefore, achieving the sector’s net-zero goals will require significant efforts in the production process.
An integral part of this endeavour is green financing, which many in the garment industry are now exploring for its potential benefits.
Funding options from banks
State Bank of India (SBI), the largest Indian Bank with one-fourth market share, provides a range of financial products and services to individuals, corporations, institutions and micro, small and medium enterprises.
Under the ‘ESG Financing Framework’, the bank intends to issue green, social, sustainability bonds and loans and use the proceeds to finance or refinance, in whole or in part, existing or future projects that are expected to create positive environmental and social impact in India.
SBI has identified 16 eligible green and social project categories for financing, including biodiversity, circular economy and/or eco-efficient projects, clean transportation, climate change adaptation, energy efficiency, green buildings, living natural resources and land use projects, renewable energy, sustainable water and wastewater.
Similarly, Axis Bank has committed to ESG-aligned initiatives and has earmarked a financing budget of Rs. 30,000 crore for sectors with social and environmental impacts by FY ’26. As of March 2023, it already achieved an incremental exposure of Rs. 20,400 crore. The bank is actively reducing its exposure to carbon-intensive sectors, as per information provided on its website.
Other banks too are giving thrust to green financing. During 2023, ICICI Bank developed an internal framework for Sustainable Financing. This framework aims to provide guidance on Green/Social Sustainability-linked lending, outlining a standardised methodology and associated procedures for classifying financial products and services offered by the bank as sustainable finance.
“Green loans may offer slightly lower interest rates compared to regular commercial loans. Rates can range from 7 per cent to 10 per cent, depending on the bank and the borrower’s credit profile,” said Mayank Singhavie, CEO, Cosmos Financial Group, a private fund house, comprising various regulated equity and debt funds.
To specifically support the micro, small and medium enterprises (MSMEs), Small Industries Development Bank of India (SIDBI), a national entity focusing on promoting and financing the MSMEs, offers various schemes for loans ranging from Rs. 10 lakh to Rs. 50 crore.
“For instance, The Green Finance Scheme provides up to Rs. 20 crore for MSMEs and Rs. 50 crore for service providers or aggregators, with a minimum promoter contribution of 20 per cent of the project cost. The maximum repayment period is 10 years, with interest rates linked to MCLR (Marginal Cost of Funds based Lending Rate), currently ranging from 8.5 per cent to 10 per cent,” stated Pranava Sinha, Dy. General Manager, Green Climate and Energy Efficiency, International Co-operation, SIDBI.
He mentioned that another scheme, The End-to-End Energy Efficiency (4E), provides assistance of up to Rs. 50 crore with a maximum repayment period of five years, extendable to seven years on a case-by-case basis. Interest rates are floating repo-linked, currently ranging from 7.60 per cent to 9.10 per cent based on credit rating. The scheme supports projects related to energy efficiency and solar rooftop/ground-mounted PV systems. Promoter contributions vary: for units with a three-year profitable track record, 100 per cent financing is available with cash collateral, while units with at least one full year of operations require a minimum promoter contribution of 10 per cent of the project cost.
Pranav emphasised that since 2004-05, SIDBI has been funding energy efficiency projects with support from various multilateral and bilateral agencies such as the World Bank, ADB, JICA, AFD and KfW. Over US $ 1.7 billion has been deployed, resulting in a reduction of 2 million tonnes of CO2 emissions annually. Although gathering specific data for each sector is challenging, the garment and textile sectors have significantly benefited from these initiatives.
Anurag Gupta, Managing Director at Usha Yarns, shared that they secured funding from SIDBI to install energy-efficient machines at Surya Textech, a sister company located in Kala Amb, Himachal Pradesh. Surya Textech, a technical textile manufacturing unit, has a capacity of 20 tonnes per day. Anurag emphasised the favourable terms they received from SIDBI, including interest rates that were 1 per cent to 2 per cent lower than those offered by commercial banks.
Funding from private bodies
Manufacturers are also exploring various funding options from private bodies to support their sustainability initiatives. Indore-based Pratibha Syntex Ltd., a major producer of over 60 million pieces of apparel annually including garments, innerwear, thermals and sleepwear, is a standout example. They also secure funding from The Good Fashion Fund (GFF), an initiative of the Laudes Foundation, Fashion for Good and FOUNT. Established in 2019, GFF is a US $ 19 million fund that offers long-term, dollar-based financing to manufacturers in India and Bangladesh, aimed at financing production technologies and providing targeted technical, environmental and social improvement support.
Pratibha Syntex took US $ 4.5 million from GFF to replace machinery in the spinning, processing and garmenting divisions as well as provide new equipment for the expansion of their activities and facilities. “With the funding, we have been able to reduce greenhouse gas (GHG) emissions and enhance our energy efficiency. This has not only improved our environmental footprint but also boosted our overall profitability, building our capacity to reinvest in sustainable practices,” said Mukesh Matta, VP, Pratibha Syntex Ltd.
The interest rates of private bodies such as GFF more or less match with the market rates, but their USP lies in offering technical, environmental and social expertise to the manufacturers to adopt sustainable production.
“Interest rates for sustainability-focused financing from banks can vary widely depending on the institution and loan terms. We found that working with dedicated funds like GFF, offers more aligned and supportive terms for our green initiatives from a strategic perspective, rather than just focusing on financial impact,” added Mukesh.
Recently, GFF has made four investments in Tier-1 (apparel), Tier-2 (fabric) and Tier-3 (yarn) factories in India and Bangladesh. Alongside Pratibha Syntex, GFF is also supporting Sri Kannapiran Mills, a sustainability-oriented cotton yarn and denim fabric producer based in Coimbatore and has partnered with Progress Apparel and EPIC Group in Bangladesh.
“We used GFF funding to finance an Effluent Treatment Plant (ETP) upgrade for one of our denim laundries in Bangladesh. This state-of-the-art ETP meets ZDHC aspirational level discharge standards and allows us to reuse treated water in our processes, reducing our freshwater use,” claimed Vidhura Ralapanawe, EVP, Innovation and Sustainability and Himanshu Gupta, EVP, Finance of Hong Kong-based EPIC Group, with state-of-the-art manufacturing facilities in Bangladesh, Vietnam, and Ethiopia. EPIC has an annual turnover of
US $ 500 million in the region and has the capacity to produce 36 million pieces annually.
The Group has also partnered with the International Finance Corporation (IFC) to spearhead sustainable textile manufacturing initiatives in Bangladesh and India, backed by a US $ 100 million debt financing package. This package includes a US $ 70 million sustainability-linked loan and US $ 30 million green loan. The partnership aims to expand EPIC Group’s operations in Bangladesh and construct a new manufacturing facility in India, creating over 27,500 jobs in both countries. Additionally, the initiative sets significant environmental targets, aiming for a 65 percent reduction in GHG emission intensity per garment produced by 2030.
EPIC group has previously obtained funding from HSBC and Capital Bank of Jordan.
| Challenges to Funding & Solutions
When analysing funding, the focus often falls on three key aspects: availability, affordability and accessibility. Even when funding is available, it may not be accessible to many manufacturers due to their credit ratings and gearing levels. Affordability poses another challenge, particularly during periods of high interest rates. Many available funds are not accessible to the majority of companies, highlighting the need for innovative financial mechanisms to support sector decarbonisation, including lower-risk, lower-cost funds that are more accessible. Additionally, most financing options are debt-based, which limits accessibility. Various forms of funds can be created to address this issue. A whitepaper supported by Epic Group and other leading manufacturers analysed these challenges and proposed innovative tools. Some of the suggested solutions include establishing a Fair Climate Fund, built on the principle of equity and adopting the Fairtrade model, where each value chain partner diverts a portion of revenue to it, which is then disbursed as grants to finance supply chain decarbonisation projects; brand-supplied debt repaid via product discounts, where larger, more profitable brands and retailers provide funding and repayments are made through discounts on future product orders; cost-sharing with consumers through a green tag for decarbonisation, where a clothing line is priced slightly above the conventional range with clear information to consumers that the premium, displayed as a ‘green tag’ at the point of sale, will exclusively fund the decarbonisation of the product’s supply chain; green bonds and equity, which capitalise on growing interest in green bonds and equity in an environment where investors are increasingly focused on economic, social, and governance (ESG) factors; mitigating business cycle risk through business cycle insurance for investment policies to cover disruptions or downturns that impact loan repayment ability; credit guarantees from governments, multilateral development banks (MDBs), development financial institutions (DFIs) or export credit agencies (ECAs); and a Just Transition Fund, created through regulatory levies and accessible to manufacturers in developing countries to support value chain decarbonisation. |
In an exclusive interview with Apparel Resources, Jayanth Kashyap B, Investment Lead at GFF, revealed the intricacies of their funding process. He explained that GFF’s assessment is guided by a strategy developed by FOUNT in collaboration with investors and stakeholders. Their evaluation is meticulous, involving comprehensive third-party assessments to address reputational, financial and legal risks. They seek companies with a strong financial track record, favouring those with professional management and solid governance. GFF focuses on funding technological innovations that reduce environmental impact, as evidenced by their recent support for Sri Kannapiran Mills in upgrading their spinning equipment. They also place significant emphasis on environmental and social sustainability, requiring adherence to their Code of Conduct and a tailored Environmental and Social Action Plan (ESAP). Jayanth provided further insights into the intricacies of GFF’s funding process, stating that their rates are ‘competitive with local banks’. Here are the edited excerpts:
AR: What are the typical funding structures offered by green funds to support sustainable initiatives and how do these structures vary based on the scale and nature of the project?
Jayanth: The spectrum of green financing ranges from concessional capital such as grants, subsidies and guarantees to risk-based capital such as debt, equity and blended finance structures. Green financing combines concessional and risk-based capital structures to reduce the cost of capital and unlock more private sector funding.
Blended finance is a structuring approach. Concessional investors have minimal or limited financial return expectations on their capital deployed to funds like GFF. Risk-based investors are more sensitive to financial returns, but are willing to support the achievement of positive impact. Blending allows investors with different objectives to co-invest while achieving their own goals – be it financial, social, environmental or a combination of these. Overall, there is still a positive yield expectation. For GFF, such blending allows to take more risks and work towards creating a ‘demonstration’ effect through our technological investments and value-add to the textile and apparel industry. The concessional investors lower the overall cost of the capital and provide an additional lay of protection for private investors. This makes it more appealing or feasible for private investors to deploy more capital in such segments.
These funding structures also depend on the types of projects being supported based on payback periods – short, medium and long term between 1–10 years. Funding structures are also attached with some form of technical assistance and capacity building support. The Good Fashion Fund, for instance, provides USD-based loans for a 5 year period and thus typically seeks to finance projects that can demonstrate payback in the same period in terms of either cost reduction and/or increase in revenues.
A recent whitepaper commissioned by a group of manufacturers and supported by GiZ and Transformers Foundation reviewed the status of the existing financial solutions in the market and identified that most options are debt and grants based. For manufacturers, green funding is available through a handful of international investors and partners such as the Good Fashion Fund and Apparel Impact Institute’s Fashion Climate Fund that focuses on a wide spectrum of end-use of funds targeted at impact goals such as reduction in hazardous chemicals usage or reduction in overall emissions in the supply chain.
Apparel brands such as H&M have set up their own financing facilities such as the Green Fashion Initiative and co-financing solutions with international banks such as DBS Bank to provide green loans for decarbonisation purposes. Such initiatives are necessary, but are nascent in terms of deployment and typically restricted to the manufacturers in their supply chain.
Besides the private sector, manufacturers in India have access to several initiatives of the Ministry of Textiles that seek to promote India as the hub for sustainable fashion and circularity.
AR: Do you offer funding for manufacturers focusing specifically on upcycling, recycling or social aspects like labour safety, sanitation and productivity?
Jayanth: Yes, we help manufacturers in building a restorative and regenerative apparel supply chain. This means the use of recyclable and safe materials, clean and less energy, closed-loop manufacturing and the creation of fair jobs and growth. The GFF can finance technologies across the entire production chain (spinning till finished products) and also support manufacturers looking to build capacity in end-of-life solutions such as recycling and upcycling.
Over the past years, we have seen several brand-led initiatives to transform the raw material procurement process from virgin materials to recycled materials or use of sustainable fibres such as organic hemp and Tencel. The presence of polyester in the supply chain (especially from bottle industry) cannot be overlooked and is by far, the most commonly used synthetic in the textile industry which is blended with virgin or recycled cotton. There are many innovators with recycling technologies (e.g. Circ, Ambercycle) that are trying to close the loop within textile-textile recycling as majority of textile waste is post-consumer and blended. However, many of these technologies have reached the scale and established operations in countries like India and Bangladesh, where high-quality textile waste feedstock is available in abundance. GFF has an important role to play as a financial actor and can bridge the gap by funding manufacturers willing to adopt these disruptive technologies as first movers in the market.
GFF’s view on sustainability is holistic and not isolated to environmental benefits alone. In collaboration with Fairwear Foundation, GFF conducts social assessments focusing on gender equality, occupational health and safety, conditions of employment, freedom from forced labour and child labour and overall social development. Each GFF investee commits to an Environmental and Social Action Plan (ESAP), outlining specific improvement areas and establishing pathways and milestones in partnership with manufacturers. For systemic issues like reducing overtime and ensuring proper wage administration, GFF collaborates with independent local experts and consultants on tailored improvement programs. These initiatives have demonstrated success, provided that manufacturers are willing to implement changes and recognise the economic benefits of embracing sustainable and ethical practices in their operations. With forthcoming regulations from the EU, US and other global markets, the social aspect of production is poised to become even more critical.
AR: Could you provide few examples specifically related to the social aspects?
Jayanth: GFF portfolio companies have benefited from the support of the fund’s extensive diligence process to implement further improvements alongside the technology investments. Such assessments are supported by independent third party organisations such as Fairwear Foundation. For example, in Bangladesh the investee Progress Apparels has established an E&S action plan (ESAP) as a result of the GFF’s diligence, which is a legally binding document as part of the loan agreement. The company is committed to addressing the agreed action items and has defined milestones over the first years of the loan term. Besides health and safety issues, other items already solved relate to improved human resources management and administration of salaries and benefits to workers.
Similarly, one of the GFF pipeline companies in India has introduced significant changes through local E&S (Environmental and social) advisors to meet GFF’s eligibility criteria. Verified key improvements include the introduction of normalised 8-hour shifts, improvement of the management system for time and wage records (change from a manual to a software-based system) as well as other improvements related to factory communication on policies and grievance mechanism or the implementation of trainings on workers’ rights, among others. This value-add from GFF is important, considering that regulations (EU CSDDD) are now in place to mitigate adverse human rights and environmental impacts on the supply chain. In this regard, we operate as an investor-partner for companies and indirectly support brands who produce with or source from these companies.
AR: How do you ensure that the funds are properly utilised?
Jayanth: We have a robust verification and monitoring system in place. GFF partners with companies only after an extensive diligence process, including verification of end use of funds via actual purchase orders (POs) for the proposed equipment to be financed. In certain cases, we directly communicate with the equipment provider to understand the delivery timelines and overall sustainability parameters of the machines. Post investment, we receive regular updates on the installation progress of the equipment supported by actual invoices, pictures and on-site visits, if needed.
AR: What advice would you give to Indian manufacturers seeking green funds?
Jayanth: Manufacturers need support to improve compliance, labour rights and health and safety procedures at their production facilities. This is especially the case for manufacturers that are more focused on domestic markets and therefore not undergoing due diligence processes of international brands.
Any investment or funding has strings attached. Every manufacturer should evaluate the investor and weigh the value-add provided alongside the capital – as access to finance is not the problem in the textile industry but access to smart, strategic capital to support sustainability goals is. Seek partnerships with investors offering a tailored framework to enhance your overall sustainability pathway or transition.
