Translating fashion’s decarbonization targets into action has proved difficult, as we wrote in our March 2024 article. At the time, we outlined six actions fashion brands could take to become more sustainable. Among those, one stands out as having the highest potential impact: working with Tier 2 suppliers to reduce emissions. Tier 2 production—the stage in which fabrics are produced and treated before being assembled by Tier 1 suppliers—typically accounts for 45 to 70 percent of a brand’s Scope 3 emissions.1
Tier 2 production is fashion’s biggest emission hot spot, and tackling Tier 2 emissions requires the most significant shift in how the industry works. The supplier landscape is highly fragmented, and a large portion of brands don’t have a direct relationship with their full value chain beyond their Tier 1 suppliers, both of which contribute to the complexity of this issue. As a result, fashion brands tend to focus their decarbonization efforts on using low-impact materials. While these efforts are important, they are insufficient, not to mention an expensive decarbonization strategy.
For all the work required of fashion brands to reduce Tier 2 emissions, the returns are undeniable: It is one of the most cost-efficient decarbonization strategies a fashion brand can pursue (second only to reducing overproduction and cutting waste in the production process). Our analysis shows that up to 50 percent of Tier 2 emission abatement can be achieved in a near-cost-neutral way.
In this article, we describe how suppliers can achieve cost efficiencies alongside decarbonization, the near-term actions fashion brands can take, and six longer-term actions brands can take to seize the Tier 2 decarbonization opportunity.
Two routes to decarbonization
In collaboration with Made2Flow, a leading supply chain data-gathering solution provider, we analyzed primary supplier data for more than 9,000 suppliers. The primary data we analyzed included supplier-level emission data for different textile processing and manufacturing technologies. Based on this data, we created a detailed assessment of how a set of decarbonization levers could have a positive impact on each supplier’s total emissions and cost profile.
Based on these granular analyses, we were able to compare different decarbonization levers and identify two primary routes to decarbonize Tier 2 production. These routes are complementary, so the industry could pursue them in parallel.
- Suppliers can pursue technical decarbonization levers. With these levers, such as implementing low-cost renewable-energy production, Tier 2 suppliers can achieve cost savings of up to $250 per metric ton of carbon dioxide equivalent (CO2e). Taking this route will require long-term, multiyear efforts. Brands can play a significant role here by supporting suppliers that pursue decarbonization.
- Brands can offer incentives to lower-carbon emission suppliers. By making emission intensity part of their supplier selection criteria, brands can cut emissions by 20 to 50 percent by working with suppliers to achieve best-in-class emissions without needing to change the manufacturing country of origin. Since brands significantly influence the industry’s decarbonization pace across the value chain, they can help suppliers achieve better emissions and drive volumes toward lower-emission suppliers. Brands can take this route immediately—and achieve results relatively quickly.
Pursuing supplier decarbonization
In theory, an average-size Tier 2 cotton supplier in one of Asia’s largest manufacturing countries could achieve 50 percent decarbonization while also cutting long-term manufacturing costs (Exhibit 1). Full decarbonization for this supplier could be achieved for about $30 per metric ton of CO2e, which translates to a 1 percent cost increase (practically, this translates to an additional 2 cents per cotton T-shirt, for example).
In real life, the implementation of several supplier levers is very challenging and demands significant investment that can be difficult to accomplish in the sourcing countries of many apparel brands. Typically, we see two main paths to achieving supplier decarbonization: supplier collaboration programs, which help share best practices across the industry, and large-scale supplier investment programs, such as the Renewable Energy Initiative, launched in December 2023 by the Global Fashion Agenda (GFA), Copenhagen Infrastructure Partners (CIP), Bestseller, and H&M Group, to invest in an offshore wind project in Bangladesh.2 Smaller players may not lead these investments, but they can participate by meeting various sustainability criteria and pledging a minimum investment.
In some instances, we observed that the price of some decarbonization levers was 30 to 40 percent higher than calculated. Some costs are inevitably tacked on based on unforeseen circumstances, but minimizing these costs is possible through rigorous planning and execution in decarbonization work.
Fashion companies can use a marginal abatement cost curve (MACC) to identify and prioritize actions that drive more sustainable operations. This tool shows how the abatement potential of specific levers can offset the expenditures required to implement them. Each bar in a MACC, as shown in Exhibit 1, represents an abatement lever. The height of these bars shows the abatement cost (operating expenditures and capital expenditures combined), and the width of these bars shows the abatement potential (emissions reduction per lever).
In this case, the MACC shows that low-cost renewable-energy production (such as rooftop solar panels), electricity energy-efficiency levers, low-liquor dyeing machines, and solar parabolic panels are a few of the levers that the supplier could consider to reach 50 percent decarbonization with cost efficiencies. (For more examples of decarbonization levers, see sidebar, “Decarbonization levers for fashion brands to consider.”)
Driving decarbonization at the supplier level is a long-term, complex process. Brands must work closely with each of their hundreds of suppliers. Further, brands and suppliers must align their efforts to enable fast change.
Providing supplier incentives
Brands should prioritize working with suppliers with better emission profiles without compromising on product quality or costs. To do so, they should gain access to suppliers’ primary emission data, rather than rely on industry-average data, to gain an understanding of the drivers of Tier 2 supplier emission intensity. Three factors are weighted heavily in suppliers’ emission intensity: electricity mix, energy mix, and electricity and energy efficiency.3 All three factors vary across and within countries and may depend on a range of attributes including access to fossil fuels, renewable-energy investments, and machinery investments.
Fossil fuels including coal, oil, and gas remain the primary sources of electricity and energy in the largest manufacturing countries, which can make choosing a supplier with lower emissions more difficult. What’s more, each fossil fuel produces varying emissions (coal produces higher emissions than gas, for instance).
The supplier’s facility can also affect emission intensity. Using data from Made2Flow, we identified two weaving facilities in the same region of a primary manufacturing country that showed a significant difference in emission intensity. One of the suppliers invested in solar panels, shut down air compressors during idle times, reused process water, and optimized its air consumption in machines, among other machine-related energy-saving measures. As a result of these initiatives, the supplier produced energy intensities that were 50 percent lower than those of other suppliers.
Assumptions that one manufacturing country is preferable to another are misguided. In fact, each manufacturing country is home to both low- and high-emission-intensity suppliers. In one manufacturing country in our analysis, the best-in-class suppliers decreased emissions by 39 percent versus the country average, while its worst-in-class suppliers increased emissions by 84 percent versus the country average (Exhibit 2).
As we approach 2030 sustainability target deadlines, the advantage of low emissions is likely to get “priced in,” meaning the demand for low-emission suppliers will increase along with the costs of working with them. Brands should move quickly to lock in strategic relationships with more energy-efficient Tier 2 suppliers and seize a potential cost advantage over their competitors. In addition, brands should invest across their supplier portfolio to support decarbonization efforts and enable long-term differentiation in their supplier base.
Six actions for success
Fashion brands could reduce a significant share of their Scope 3 emissions—bringing them closer to their 2030 sustainability targets—in a cost-effective way by focusing on Tier 2 production. A fashion brand’s supply chain leader should consider six longer-term actions, in addition to choosing lower-emission suppliers in the near term.
1. Build long-term supplier relationships
Brands should select more of their Tier 2 suppliers independently. This would mean becoming more involved in choosing the fabrics and materials that are used in their products or setting stricter sustainability criteria for their Tier 1 suppliers (or agents) in contracting with Tier 2 suppliers.
Fashion brands should also consolidate their production volumes at each Tier 2 supplier. This allows brands to more effectively influence suppliers’ sustainability- and operations-focused improvements.
For these actions to be meaningful, brands need to build longer-term, strategic relationships with their Tier 2 suppliers. We see early signs that these relationships are forming. The share of long-term strategic partnerships with volume commitments between brands and suppliers increased from 26 percent to 43 percent from 2019 to 2023, according to our 2024 McKinsey apparel CPO survey. Still, more strategic partnerships are required.
For many brands, this will be a fundamental shift in how sourcing is done. It will require new capabilities and processes (such as having experts who can assess fabric mills, create a supplier ecosystem across tiers, or negotiate with Tier 2 suppliers).
That said, brands don’t need to transform their full sourcing footprint, which would reduce their operational flexibility. Instead, they can focus on the 60 to 80 percent of volumes that are simpler to consolidate, such as those in core and high-volume categories.
2. Secure primary data
One of the chief reasons why tackling Tier 2 emissions is so difficult is that most fashion brands use secondary industry-average emission data for Tier 2 suppliers. As we noted in our previous research, this can be problematic, not only because of the discrepancies between secondary and primary data but also because relying on industry-average data makes it impossible to accurately measure the impact of decarbonization levers.
To access the primary data that will help them properly evaluate and select Tier 2 suppliers, brands will need to partner with leading traceability and impact measurement providers as well as collaborate closely with suppliers. The World Business Council for Sustainable Development’s Partnership for Carbon Transparency, or PACT, developed a methodology for measuring a business’s carbon footprint across value chains using primary data.
3. Educate and provide incentives for suppliers
Fashion brands should help their Tier 2 suppliers create a decarbonization plan, and the relationship between brand and supplier should be contingent upon the supplier adhering to this plan. A typical decarbonization plan should include MACCs, which will help leaders determine which decarbonization levers to implement as well as how much investment is required.
Most suppliers don’t have the capabilities or resources to decarbonize in cost-efficient ways. To help, fashion brands can create decarbonization playbooks for suppliers, which include elements such as best practices for emission reductions, suggestions on how to switch to more efficient energy sources, and an overview of potential collaboration partners. Brands could also send their talent with management, sustainability, or manufacturing expertise to manufacturing sites to offer support.
4. Unlock financing to fund decarbonization
Suppliers often have limited access to capital and much higher financing costs than fashion brands, making investments in lower-carbon technologies and energy efficiency both more costly and more challenging to implement. (Suppliers’ short-term volume contracts and sprawling customer base only aggravate this circumstance).
Fashion brands can improve their suppliers’ access to capital and better loan agreements through partnerships with financial institutions, other brands, and suppliers. For example, H&M Group and Singapore-based DBS Bank launched a program that offers H&M’s suppliers access to highly favorable terms for decarbonization initiatives as well as technical support.
5. Commit to renewable-energy projects
The transition to renewable-energy sources could drive significant emission reductions among Tier 2 suppliers by 2030. But that won’t happen unless fashion brands commit to improving the availability of renewable energy in countries where their production takes place.
One way to do this is to create multistakeholder renewable-energy projects that bring industry groups, suppliers, and fashion brands together. The Renewable Energy Initiative described earlier serves as an example.
Other tools that brands can use to improve suppliers’ access to renewable energy include power purchase agreements (PPAs) and renewable-energy certificates (RECs). PPAs are direct contracts between companies and electricity producers to increase the share of renewable energy, and RECs are proof that the energy produced is generated from renewable sources and can be sold as a carbon credit. Brands could consider working exclusively with suppliers that use PPAs and RECs.
6. Collaborate with peers
Collaboration among peers can help make each of the above actions easier. Fashion brand groups should aim to share best practices for supplier decarbonization playbooks and financing solutions and join forces to launch renewable-energy projects.
When it comes to decarbonizing Tier 2 production, we have found that groups of five to ten brands with a joint mission and overlapping supplier footprint tend to be the most effective; these groups are big enough to make real changes but not so big that organizational complexities slow their progress.
Each of these actions can help tackle fashion’s largest emission hot spot. Transforming brands’ typical sourcing approach—from relying on Tier 1 suppliers for information and relationships to developing long-term, direct supplier relationships—will require steadfast commitment and bold action. Fashion brands should work to optimize for cost, speed, flexibility, quality, resilience, and certainly, sustainability.
