Sustainability linked finance is fashion's latest trend

Oversubscribed yet somewhat unambitious, sustainability-linked bonds (SLBs) are intended to drive improvement across environmental, social and governance (ESG) indicators. But, the misplaced incentives for KPIs on sustainable materials could be leading the industry down a dangerous path, distracting brands and retailers from true climate progress. 

From luxury conglomerates to high-street names, all segments of the fashion industry face increasing stakeholder pressure to clean up their act. The destruction of natural capital for raw material extraction, high water and chemical footprints, and the seismic scope 1, 2 and 3 emissions embedded across supply chains have made investors wary of the direct financial and environmental risks. 

Heightened adoption of an ESG lens from investors has led to the upsurge of sustainability pledges and targets, which has run alongside a new trend: the issuance of loans, green bonds, sustainability bonds and sustainability-linked bonds (SLBs). These are orchestrated to spur tangible action that tries to offset the industry’s negative impact. 

Since the first issuance of a green bond in 2007 by the European Investment Bank, the value of the green bonds market has grown to $517.4bn (£459.9bn) in 2021, according to the Climate Bonds Initiative’s Market Intelligence. As a corporate debt tool, green bonds have been leveraged to measure the progress of the environmental efforts of a given issuer and a brand may face penalties if targets are not met. Proceeds are allocated to fund new or existing projects deemed to have a positive environmental impact. Sustainable bonds are similar, casting their net to include social projects too. These bonds are growing in mass appeal, with Refinitive reporting that in 2021 sustainable bonds accounted for 10% ($1tn) of global debt markets. 

Sustainability-linked bonds (SLBs) differ and are increasingly woven into the fashion agenda. Companies use them to raise finance and tying repayments to their sustainability targets. 

From Chanel and Burberry, to H&M Group and VF Corp, the rising issuance of SLBs and green bonds has made headway in reaching environmental targets, including decreasing carbon emissions, supporting the transition to renewable energy, and spurring the adoption of ‘sustainable’ materials. In 2019, VF Corp, owner of brands including Timberland and Vans, was one of the pioneering companies to announce the closing of a €500m (£438m) green bond. Chanel followed suit in 2020 when it issued a $700m green bond tied to goals on energy and emissions, with the commitment that if these goals are not met by 2025, they would repay this investment at 100.5%. SLBs are proving popular among the financial community too. Burberry’s sustainability-linked loan of £300m issued in September 2020 was oversubscribed by 30%. 

Prada’s approach differed as it engaged in four sustainability-linked loans with financial institutions, as opposed to investors. Marta Monaco, financial and corporate communication senior manager for Prada Group, stated that these loans, linked to LEED certification of its store portfolio, employee training on sustainability, and the adoption of ReNylon, an alternative material to conventional nylon, were “an important enabler to achieve increasingly ambitious goals towards a sustainable business and growth”. Luxury Italian players like Salvatore Ferragamo and Moncler also received a €250m and €400m sustainability loan respectively, in 2020, tied to their ability to meet ESG targets. 

Hype around fashion’s sustainable financing practices resurfaced in February 2021, when H&M Group issued its first SLB of €500m which, like Burberry’s, was oversubscribed (more than seven times). Kim Hellström, green investment project manager for H&M Group, argued that: “Our SLB adds a further financial incentive to our commitment to achieve our goals, as well as a transparent communication with investors to our sustainability journey.” European retailer Mango signed its first finance deal in April this year, linked to criteria on emissions reduction and use of materials such as ‘sustainable cotton’. 

Financial accountability on environmental sustainability targets has its benefits. It can help to contribute to limiting warming to 1.5C, as set out in the 2015 Paris Agreement, although this target looks increasingly unattainable as time goes on. Many of the climate goals linked to these bonds are verified by the Science Based Targets initiative, which can help to build credibility and solidify trust in sustainability strategies among a retailer’s stakeholder network.