The partnership, which is set to kick off in autumn this year, will see Swedfund injecting 60 million kronor ($8.6 million) in investments to H&M suppliers, reported the Dagens Industri newspaper.
The goal is to create a domestic textile industry that's both sustainable and responsible, Swedfund announced in a statement.
"Through this unique partnership with H&M, our goal is to contribute to developing the textile industry in Ethiopia, thus creating jobs with good working conditions that lift people out of poverty, especially women," said Anna Ryott, CEO at Swedfund.
H&M's CEO Karl-Johan Persson said the move was an opportunity to get involved early in Ethiopia's growing textile industry.
"We have for many years worked in existing manufacturing countries to improve working conditions and environment. This experience is included with the establishment of cooperation with Ethiopian suppliers," he added.
The Swedish clothing giant has been on the scene in Ethiopia all year, with long-term plans to attract Africa's middle class.
H&M has a good track record when it comes to sustainability and working conditions.
In May last year it signed up to a building safety agreement in the wake of the factory collapse that killed more than 1,000 garment workers in Bangladesh. In November it announced that it was scrapping angora products after a Chinese video surfaced showing workers plucking hair from rabbits while they were still alive.