The fashion and textile industry (FTI) is a significant contributor to greenhouse gas emissions, resource consumption, and waste generation, necessitating sustainable alternatives. Chitosan, a biodegradable and renewable biopolymer, has shown potential in reducing environmental impact throughout the textile lifecycle. However, existing studies often focus on isolated applications rather than its broader role in industrial sustainability. This review synthesises findings from 142 academic studies to assess chitosan’s applications in textile production, dyeing, finishing, and waste management, emphasising its impact on energy efficiency, carbon reduction, and resource circularity. Chitosan’s biodegradability, antimicrobial properties, and affinity for sustainable dyeing offer a viable alternative to synthetic materials while also enhancing wastewater treatment and eco-friendly finishing techniques. By evaluating its contributions to sustainable manufacturing, this review highlights its potential in supporting decarbonisation and circular economy transitions within the textile sector, while also identifying challenges for future research.