Morgan Stanley
  • Institute for Sustainable Investing
  • Jun 28, 2022

How Capital Markets Are Helping Scale Circular Fashion

Investors are helping clothing and footwear designers scale innovations for circular fashion. How five companies are leveraging the capital markets to make the fashion industry more sustainable.

In the last 20 years, “fast fashion”—typically inexpensive clothing that wears out quickly—has fundamentally transformed the apparel industry with its frequent style drops, affordability and shipping convenience. Between 2000-2015, clothing production doubled, yet the time consumers spent wearing the garments actually fell by more than a third, according to the Ellen MacArthur Foundation.1

We’ve already seen strong consumer and investor interest in companies with circular fashion business models.
Jessica Alsford Morgan Stanley’s Chief Sustainability Officer and Chief Executive Officer of the Institute for Sustainable Investing

One result: the fashion industry is using more water, creating more waste and emitting more greenhouse gases. Not only are fashion companies the major contributors of plastic microfibers in our environment today—they are also responsible for more greenhouse gas emissions than the entire economies of France, Germany and the U.K. combined.2

There’s no doubt that the fashion industry is now a notable contributor to climate change and environmental pollution, which makes its sustainability efforts crucial for maintaining our planet’s health. Recently, we’ve seen innovative business strategies that put sustainability in greater focus for both emerging and big-name fashion brands. In line with the Ellen MacArthur Foundation’s vision of a circular economy, companies are rethinking the idea of fashion itself by redesigning products with recycled or renewable materials, facilitating clothing rentals and resales and making products that can be used more and recycled at the end of their use. Morgan Stanley is a partner in the Ellen MacArthur Foundation Network, because the firm publicly endorses the circular economy and plays a leading role in one or more of the Foundation’s key action areas.

Estimates from the Ellen MacArthur Foundation illustrate the potential for sustainable fashion’s future growth: the industry’s sustainable and circular business models have the potential to grow from 3.5% of the global fashion market to 23% by 2030, which could make them worth $700 billion.3 “We’ve already seen strong consumer and investor interest in companies with circular fashion business models,” says Jessica Alsford, Morgan Stanley’s Chief Sustainability Officer and Chief Executive Officer of the Institute for Sustainable Investing. “Mobilizing capital is vital to help the industry become more sustainable.”

In recent years, Morgan Stanley has helped mobilize investor capital and grow the sustainable and circular fashion market by facilitating initial public offerings and sustainable bond issuances that help scale innovation. The companies featured below are just a small sample of those working across the fashion value chain to advance solutions that are critical for greening the fashion industry.

Redesigning Products with Plastic Alternatives

Some companies, like footwear and apparel company Allbirds, are redesigning wardrobe staples to be sustainable from the onset, choosing to make their sneakers from wool, sugarcane and other natural materials rather than plastic. When you consider their product’s entire lifecycle—manufacturing, distribution, product use and end of life—the average pair of Allbirds shoes has a carbon footprint approximately 30% less than the estimated equivalent for a standard pair of sneakers, the company says.4

Beyond making sustainability a core part of its product lineup, Allbirds has also made it an explicit part of its value proposition to investors. When the company was preparing to go public in 2021, which Morgan Stanley helped lead, the company co-created the Sustainability Principles and Objectives Framework with Business for Social Responsibility to give late-stage private and early-stage public companies a credible and clear mechanism for demonstrating their ESG credentials. Many investors saw the framework as a step in the right direction and valuable tool for companies planning to go public.

Renting and Reselling to Increase Use and Reduce New Consumption

Other companies are finding ways to help consumers buy fewer new products to minimize unnecessary waste. Rent the Runway offers apparel and accessories from more than 750 brands that consumers can keep for a short time and return, extending the useful life of clothes. There’s also an option to buy through the company’s resale platform or even have clothes repaired. By choosing rental over retail, Rent the Runway’s customers have already helped save 1.3 million new garments from production since 2010.5

To further avoid waste and be economically viable, rental marketplaces need to ensure that the clothing and accessories available on their platforms are designed to withstand many wears and cleaning cycles. If rented or resale products “are not designed to be part of the system in which they sit, they will end up in the landfill after few uses,” says Marilyn Martinez, Fashion Initiative Project Manager at the Ellen MacArthur Foundation. This is one reason why Rent the Runway offers designer labels. For clothes that are decommissioned, the company says that close to 100% are diverted from landfill.6

In addition to rental business models, resale companies help prevent waste by facilitating the movement of products from user to user, yielding more wears per garment, according to the Ellen MacArthur Foundation.7 This is one solution helping chip away at the fashion industry’s waste challenges, with secondhand purchases displacing nearly one billion new purchases in 2021.8

Marketplaces that connect buyers and sellers of new or used clothes, shoes and accessories—such as Poshmark and thredUP, whose IPOs Morgan Stanley helped underwrite—are examples of circular fashion business models in action. Secondhand marketplaces are growing around the world with estimates predicting that the market will grow 127% by 2026 to an estimated $218 billion,9 due in part to more consumers recognizing that their individual consumption habits can have significant impacts on the planet.

Recycled Materials for Creating New Products

While it’s important to keep garments in use for as long as possible, there will come a time when some clothes are ready to be retired. When that time does come, it’s important to divert as many garments away from landfill as possible.

One option is to use recycled materials for new products, effectively keeping the materials in use for as long as possible. It’s a strategy that VF Corporation, whose brands include The North Face and Timberland, says is key to reducing its environmental footprint.

When the company issued its inaugural €500 million (~$530 million) green bond in 2020, the funds helped expand the company’s sustainability work across its business, including in its operations and supply chain, as well as in natural carbon sinks that help capture and store carbon dioxide from the atmosphere.

Particularly relevant to its sustainable fashion ambitions was the company’s decision to allocate a portion of the green bond’s proceeds to procure recycled materials for both its products and packaging, including fabric containing at least 50% recycled-content nylon and polyester and materials containing at least 80% recycled-content paper and corrugate. Materials that likely would have sat in landfills are now back on shelves.

“These examples of circular fashion business models are not exhaustive, and it will be important for companies to explore and share a wider range of innovations that deliver both economic and environmental opportunities over time,” says Courtney Thompson, Executive Director in the Global Sustainable Finance group at Morgan Stanley. “By reporting on their sustainability progress, companies can ensure alignment with both consumers and investors seeking to scale sustainable fashion solutions.”