According to McKinsey & Company’s published report ‘Sustainable Style: How fashion can reduce Tier 2 emissions,’ in which it mentions how the industry can take to reducing its carbon dioxide (Co2) emissions.
As the fashion industry strives to meet its decarbonization targets, translating these ambitious goals into actionable strategies has proven to be a formidable challenge. In our previous article from March 2024, we outlined six key actions that fashion brands can take to enhance their sustainability efforts. Among these, one action stands out as particularly impactful: collaborating with Tier 2 suppliers to reduce emissions.
Tier 2 production, defined as the stage where fabrics are produced and treated before assembly by Tier 1 suppliers, is responsible for a staggering 45 to 70 percent of a brand’s Scope 3 emissions. This makes Tier 2 production the largest emission source within the fashion supply chain, necessitating a significant shift in industry practices. Unfortunately, the supplier landscape is highly fragmented, and many brands lack direct relationships with their entire value chain past Tier 1 suppliers. This complexity often results in fashion brands concentrating their decarbonization efforts on the use of low-impact materials—a necessary but ultimately insufficient and costly strategy.
Despite the challenges associated with reducing Tier 2 emissions, the potential returns are enormous. This report indicates that up to 50 percent of Tier 2 emission reductions can be achieved in a near-cost-neutral manner. Also, how suppliers can achieve cost efficiencies alongside decarbonization, outline immediate actions for fashion brands, and present six longer-term strategies to capitalize on the Tier 2 decarbonization opportunity.
Two Routes to Decarbonization
McKinsey’s collaboration with Made2Flow, a leading supply chain data-gathering solution provider, enabled to analyze primary data from over 9,000 suppliers, focusing on their emission profiles across various textile processing and manufacturing technologies. From this analysis, we identified two primary routes to decarbonize Tier 2 production, which can be pursued simultaneously:
- Technical Decarbonization Levers: Suppliers can implement technical solutions, such as low-cost renewable energy production, resulting in potential cost savings of up to $250 per metric ton of CO2 equivalent (CO2e). However, this route requires long-term, multi-year efforts, and fashion brands can play a vital role by supporting their suppliers in these initiatives.
- Incentives for Lower-Emission Suppliers: By incorporating emission intensity into their supplier selection criteria, fashion brands can achieve emission reductions of 20 to 50 percent. This approach allows brands to work with suppliers to achieve best-in-class emissions without changing the manufacturing country of origin. Brands can implement this strategy immediately, resulting in relatively quick outcomes.
Pursuing Supplier Decarbonization
An average-sized Tier 2 cotton supplier operating in one of Asia’s largest manufacturing countries could achieve a remarkable 50 percent decarbonization while also reducing long-term manufacturing costs. This would involve a full decarbonization effort costing about $30 per metric ton of CO2e, translating to a mere 1 percent increase in production costs—equivalent to just 2 additional cents per cotton T-shirt.
However, the practical implementation of these measures remains a significant challenge, often requiring substantial investment that can be difficult to secure in key sourcing countries. Two main paths to achieving supplier decarbonization exist: collaborative programs that share best practices across the industry and large-scale investment initiatives, such as the Renewable Energy Initiative recently launched by the Global Fashion Agenda, which aims to fund offshore wind projects in Bangladesh.
Fashion companies can utilize tools like the Marginal Abatement Cost Curve (MACC) to prioritize actions that promote sustainable operations. The MACC illustrates the abatement potential of specific levers against their associated costs. For example, leveraging renewable energy production, energy-efficient machinery, and low-liquor dyeing technologies can help suppliers achieve a 50 percent reduction in emissions while realizing cost efficiencies.
Driving Decarbonization at the Supplier Level
To effectively decarbonize their Tier 2 supply chains, fashion brands need to undertake several critical actions:
- Build Long-Term Supplier Relationships: Establishing stronger connections with Tier 2 suppliers allows brands to influence sustainability improvements. Brands should take an active role in selecting Tier 2 suppliers and consolidating production volumes to enhance their impact.
- Secure Primary Data: Accessing primary emission data is vital for accurately evaluating and selecting Tier 2 suppliers. Brands should collaborate with traceability providers to obtain reliable data that reflects actual emissions rather than relying on industry averages.
- Educate and Provide Incentives: Brands should assist Tier 2 suppliers in developing comprehensive decarbonization plans. This might involve creating playbooks that outline best practices for emission reductions and providing on-site support from sustainability experts.
- Unlock Financing to Fund Decarbonization: Fashion brands can facilitate suppliers’ access to capital for green investments by partnering with financial institutions. Programs like the one initiated by H&M Group and DBS Bank, which offers favorable terms for suppliers’ decarbonization projects, illustrate this approach.
- Commit to Renewable Energy Projects: Brands must work to increase the availability of renewable energy sources for their suppliers. Initiatives like multistakeholder renewable energy projects can significantly drive emissions reductions by fostering collaboration among brands, suppliers, and industry groups.
- Collaborate with Peers: Collective action can amplify efforts to decarbonize Tier 2 production. Brands should share best practices and leverage joint initiatives to launch renewable energy projects, maximizing impact while reducing individual effort.
Conclusion
As the fashion industry approaches its 2030 sustainability targets, addressing Tier 2 emissions becomes increasingly urgent. By transforming traditional sourcing practices and building long-term relationships with Tier 2 suppliers, brands can not only reduce emissions but also enhance their operational efficiency. The path to decarbonization may be complex, but with commitment and collaboration, the fashion industry can pave the way toward a more sustainable future.
