Alternative funding models offer additional flexibility to ethical companies

Alternative funding models offer additional flexibility to ethical companies

To deliver on real sustainability goals, ethical brands must look for smart business and financing models that are as radically different from the mainstream industry as their ethical products.

The fashion industry's business model has long been that of low prices, low manufacturing wages, quick production, and just as quick obsolescence. In that respect, it seems as far removed as any industry from sustainability.

Yet, increasingly, ethical brands are emerging. But without a robust financial business model, an ethical company – other than not-for-profit – can achieve little, particularly in the cut-throat world of textiles.

Qiulae Wong, marketing officer at the UK-based Ethical Fashion Forum, has a clear message for ethical brand wannabees – the key to any business model is clarity.

This is especially important given that ethical fashion adds sustainability into the mix of cost and consumer appeal that applies to all clothing and textile brands. This segment must incorporate an approach to the design, sourcing and manufacture of clothing that maximises benefits to people and communities while minimising impact on the environment.

Such an approach, she argues, goes beyond doing no harm, including striving to take an active role in poverty reduction, sustainable livelihood creation, while minimising and counteracting environmental concerns.

With this many goals, an ethical company must apply a focused business approach. This involves setting timeframes, identifying the costs of designing a product as well as the materials required and communicating to customers.

"They need to establish what the main issues are for them from an ethical point of view – is it labour rights, reducing water usage, textile waste, or something else?" says Wong. "The business model then needs to focus on these important areas and what that means for their supply chain."

In the short term, this can mean companies have to make hard choices. "Companies have to really look at what they can afford to do with sustainable products," says Wong. "They may have to accept they can't afford to do everything perfectly. They may not get a certain certification because it is too expensive, but they can always get that later."

Alternative funding models

Moreover, additional flexibility is being offered to ethical companies through alternative funding models. While banks can remain wary of lending to start-ups, crowd-funding is proving a quick and successful way for ethical fashion companies to raise capital.

"There are ways to market that are easier and more successful than banks," says Wong. "Crowd-funding can have a large impact and is a great way to get potential consumers involved in your product."

So a business model can be quite modest in size and ambition to start. "There is potentially less investment required – a sustainable company can start off with just one or two really great products rather than trying to launch a 30-piece collection," she adds.

According to Scot Case, a US-based independent consultant for new technologies, and executive director of the EcoLogo Programme, a key business and financial requisite is a complete change in mindset.

"The fundamental difference is that traditional companies focus on maximising financial profits, [while] ethical companies look at profits completely differently; you do not prioritise yourself above the rest of the supply chain. There is a radical shift in conceptualising your business and everyone in it has to share that change.

"For example, you are giving up your economies of scale. If you just try and bolt on ethical and sustainability factors, you will hit road blocks such as the chief finance officer who will say they will hit your bottom line."

Small-scale investors

The key to financing an ethical business is to look for different kinds of investors, says Case. "You are looking for smaller financial investors who are happy with a 10% return rather than the institutional investor who will accept nothing less than 15%."

While there is no shortage of business schools and think-tanks ready to advise ethical companies – large accountancy firms such as US-based McKinsey & Co, along with the Haas School of Business at the University of California Berkeley, also provide such advice.

It can also be cheaper and still useful to take a recommended business guide off the shelf. One example is 'Slow Fashion' by Safia Minney, published by the UK-based environmentally sustainable fashion company People Tree Ltd, of which Minney is CEO.

The book looks closely at the costs of the ethical supply chain and includes several case studies that are relevant to the clothing and wider textile industry. "People expect companies to be run well with a high degree of competence," says Minney. Issuing bonds proved a successful move for People Tree, she adds, while viewing what conventional business consider profit as surplus was important.

However, Wong notes an ethical company must use its business model to invest wisely and, most importantly, in the quality of its product.

"One of the dangers is that you invest and market yourself on the ethical fashion element and forget about the great design and the consumer. At the end of the day, you are making a product. One of the biggest pitfalls for some start-up brands is that their business model focuses on their ethics rather than their products."

Click on the following links to read related articles:

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Sustainable sourcing – Is fast fashion at odds with sustainability?