Textile wet processing such as dyeing adds value to the apparel but has the potential to cause significant environmental and human health impacts. The objective of this study is to compare the environmental impacts of fabrics made of spun-dyed modal with conventionally dyed modal fabrics (for production in Austria, system "cradle-to-factory gate"). The chosen functional unit is one kilogram of black modal knitted fabric. We assessed energy use, GHG emissions, water use and the impact categories covered by CML 2001 method. We found that the cradle to gate production of spun-dyed modal fabric has 50% lower energy use, 60% lower carbon footprint, and requires only 50% of water and has significantly lower (40–60%) environmental impacts compared to conventionally dyed fabric. Sensitivity analysis with liquor ratios and number of washing cycles does not substantially change the above results. Conventional dyeing in China leads to four-fold higher GHG emissions per kg fabric compared to spin-dyeing in Austria. Finally, we described linkages of sustainable innovation with business value creation. We showed that spin-dyeing can significantly reduce costs for value chain actors, helps reducing the environmental footprint of end products, enhances reputation of brands and retailers, and can contribute to mitigating global problems while catering for the rising demand for clothing fuelled by ever growing world population.