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While somewhat coarse, megasloth wool's long fibers make it very strong. It is very warm.
Megasloth wool is gathered by animal handlers from tamed megasloth. Megasloth wool is the second warmest textile in the game, after Guinea pig fur and tied with Thrumbofur, and is essential for colonies on cold biomes like sea ice and ice sheet. It can be hard to obtain lots of it as it takes quite a while for megasloth's to produce the wool (usually only enough to make one parka) and it is rarely sold by traders.
Megasloth wool is acquired by shearing tamed megasloths - each megasloth can be sheared every 50 days for 400 wool, for an average of 8 per day.
It can also be purchased from traders.