H&M and EY Urge CFOs to Lead Financing of Fashion Supply Chain Decarbonization

H&M Group and EY have jointly called on chief financial officers (CFOs) to take a leading role in financing the decarbonization of the fashion industry’s supply chains. The message reflects a broader shift in how companies approach climate action, moving responsibility beyond sustainability teams and into core financial decision-making.

As pressure mounts from regulators, investors, and consumers, companies are being pushed to demonstrate credible progress toward net-zero targets. In the fashion sector, this challenge is particularly complex due to the global and fragmented nature of supply chains.

The report argues that CFOs are uniquely positioned to influence the pace and scale of decarbonization by embedding climate considerations into financial planning, investment decisions, and risk management frameworks.

Scope 3 Emissions Dominate the Sector’s Carbon Footprint

A key issue highlighted is the dominance of Scope 3 emissions in the fashion industry. For most apparel companies, these emissions account for more than 70% of their total carbon footprint.

These emissions largely originate from upstream activities such as raw material extraction, textile processing, dyeing, and garment manufacturing. Many of these processes take place in regions that rely heavily on fossil fuels, making emissions reductions more difficult and capital-intensive.

Because these activities fall outside direct corporate control, reducing them requires strong collaboration with suppliers and new approaches to financing and incentives.

Suppliers Face a Significant Financing Gap

One of the main barriers to decarbonization is the lack of access to affordable capital for suppliers. Many manufacturers, particularly in developing economies, operate on thin margins and face limited financing options.

Investments in renewable energy, energy-efficient machinery, and low-carbon materials often require upfront capital that suppliers cannot easily secure. As a result, even when technologies are available, adoption remains slow.

The report stresses that without targeted financial support, suppliers will struggle to meet the emissions reduction expectations set by global fashion brands.

Innovative Financing Models Gain Importance

To bridge this gap, H&M and EY highlight the need for innovative financing mechanisms that align financial incentives with sustainability outcomes.

Examples include sustainability-linked loans, where interest rates are tied to environmental performance, and blended finance structures that combine public and private capital to reduce investment risk.

Supplier financing programs are also identified as a key tool. These programs can provide preferential financing terms to suppliers that meet specific emissions reduction targets, helping to accelerate the adoption of low-carbon technologies.

Such approaches shift decarbonisation from a cost burden to a financially supported transition.

Rethinking Supplier Relationships and Procurement

The report also calls for a transformation in how brands engage with their suppliers. Traditional procurement practices often prioritize cost efficiency and short-term delivery timelines, limiting suppliers’ ability to invest in long-term sustainability improvements.

Moving toward longer-term contracts and strategic partnerships could provide suppliers with greater financial stability and predictability. This, in turn, enables them to plan and finance investments in cleaner production processes.

Closer collaboration across the value chain is seen as essential to achieving meaningful emissions reductions at scale.

Data, Transparency, and Digital Tools as Enablers

Another major challenge is the lack of reliable emissions data across supply chains. Many companies still struggle to obtain accurate and consistent information from suppliers, making it difficult to track progress and allocate capital effectively.

The report emphasizes the importance of investing in digital tools and standardized reporting frameworks that improve data transparency. Better data enables CFOs to make informed decisions, assess risks, and prioritize investments with the greatest impact.

Improved transparency is also increasingly necessary to meet regulatory requirements and stakeholder expectations.

Regulatory Pressure Is Increasing

Policy developments are adding urgency to the need for action. Regulations such as the EU Corporate Sustainability Reporting Directive and emerging supply chain due diligence laws are requiring companies to disclose and manage their environmental impacts more rigorously.

These frameworks place greater responsibility on companies to understand and reduce emissions across their entire value chain, not just within their own operations.

Failure to comply could lead to financial penalties, restricted market access, and reputational risks, further reinforcing the need for proactive financial leadership.

Embedding Climate into Financial Strategy

H&M and EY recommend that CFOs integrate climate considerations into core financial processes. This includes budgeting, capital allocation, investment appraisal, and performance measurement.

One tool highlighted is internal carbon pricing, which assigns a financial cost to emissions and helps guide investment decisions toward lower-carbon alternatives.

Aligning executive compensation with sustainability targets is another important step. By linking incentives to emissions reductions, companies can ensure that climate goals are embedded at the highest levels of decision-making.

Decarbonization as a Strategic Opportunity

While the transition presents challenges, it also offers significant opportunities. Investments in sustainable materials, circular business models, and energy-efficient production can reduce long-term costs and enhance resilience.

Companies that lead in supply chain decarbonisation may also benefit from stronger brand positioning, improved investor confidence, and better preparedness for future regulation.

The report stresses that decarbonization should be viewed not only as a compliance requirement but as a driver of innovation and long-term value creation.

A Call for CFO-Led Transformation

Ultimately, H&M and EY argue that CFOs must expand their role in the climate transition. By mobilizing capital, enabling supplier investments, and embedding sustainability into financial systems, they can play a decisive role in reshaping the fashion industry.

Achieving net-zero in fashion will depend not only on technological solutions but also on the ability to align financial systems with climate goals. In this context, the CFO is emerging as a critical actor in turning ambition into implementation.

Source: esgnews.com