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Green bonds are in fashion. Literally. Fashion brands are jumping on the green bond issuance bandwagon, which seems to be heading for another record year after a slowdown at the peak of the pandemic. Luxury designer Chanel is among the latest fashion houses to issue a $700 million bond linked to its environmental goals. The privately-owned fashion brand seems keen to walk the talk: in a bold move, it pegged its bond issuance to the achievement of its sustainability goals, meaning, if they are not met, Chanel will have to pay a penalty. “The fact they are committing to step up of the final notional to be repaid to the investors if the targets are not met and the fact these goals have been verified by the Science Based Targets Initiative (SBTi) indicates they are serious about their green transition,” says Krista Tukiainen head of research and reporting of Market Intelligence at the Climate Bonds Initiative. Chanel’s sustainability goals include a 50% decrease in its own emissions (Scope 1 and 2) by 2030 and a shift to 100% renewable electricity by 2025.
Fashion: The 2nd Most Polluting Industry
The fashion industry has come under a lot of scrutiny in recent years and for a good reason. According to the UN Conference on Trade and Development (UNCTAD), the fashion industry is considered to be the second most polluting industry in the world. “Sustainability -linked bonds can support the transition to more sustainable business models in an industry that has a rather problematic environmental and social track record,” explains Ulrich Volz, founding director of the SOAS Centre for Sustainable Finance. The UNCTAD estimates that some 93 billion cubic meters of water – enough to meet the needs of five million people – is used by the fashion industry annually. As for carbon emissions, the industry is responsible for more emissions than all international flights and maritime shipping combined. “Fast fashion is especially an environmental concern within the industry, and no one would call Chanel “fast fashion”. However, the industry transition depends on all players setting and achieving ambitious climate targets. Chanel is setting an important example,” says Anastasiya Ostrovnaya, research fellow at the Centre for Climate Finance and Investment of Imperial College Business School.
Chanel, Burberry, Prada Pave the Way
Chanel is not alone. A few weeks ago, U.K. rival, Burberry announced the issuance of the first sustainability labelled bond issued by a luxury fashion company. After the backlash it received in 2019 for burning about $37 million worth of clothing and cosmetics to maintain ‘brand value,’ Burberry launched an ambitious sustainability plan aiming at a fair-produced coat collection and a goal to produce climate-neutrality by 2022. They too had their goals approved by the SBTi.
“There are 3 categories of green bond” explains Krista “the traditional green bond where businesses finance pre-defined assets and projects in green areas, then there is the sustainability bond which is what Burberry did, where companies still finance pre-defined assets and projects but they go beyond green,” covering areas from within the wider sustainability space such as fairness of their supply chain, gender equality and diversity” and then there are the sustainability-linked bonds, which is Chanel’s issuance,” Krista says, “which is matched against the UN’s Sustainable Development Goals (SDGs) and their company-level goals.”
Italian luxury fashion designer Prada, have also linked their sustainability ambitions to their debt issuance. In November last year, they signed a €50 million loan named Sustainability Term Loan. The 5-years term loan has an interest rate which can be reduced following the achievement of targets related to the company’s sustainability goals, which include training hours for their employees and the use of regenerated nylon for the production of goods.
VANS might not be considered luxury per se, but VF Corporation VFC +14.4%, the maker of Timberland TSBK +9.9%, VANS and other brands, was the first in the fashion industry to set the tone. In 2019 they announced the closing of a €500 million green bond offering which aimed to help drive progress toward achievement of the company’s targets, also verified by the SBTi.
The Road is Still Long
Demand for green assets is huge. “There seems to be an insatiable demand for anything with an ESG (environmental, social and governance) badge on it. But for the time being, the green bond universe is still fairly small. Many green or sustainability bonds are oversubscribed,” Ulrich says. This surge in appetite has created concerns of greenwashing “i.e. that an asset is sold as green while the proceeds, in reality, are going towards projects or activities that have negligible or even negative environmental benefits,” Ulrich points out. To help cut through the noise, and discern the green good deeds from greenwashing the industry needs to deploy green bond guidelines, robust frameworks such as the SDGs and a taxonomy that is widely accepted,” says Krista. “Companies should not base their targets on pledges, they need to show progress towards meeting their targets,” she points out.
It took years for the fashion industry to start getting its act together. The road is still long and uncertain, but those first glimpses of progress might set the tone for bigger, bolder moves, much needed for the industry as a whole to reduce its environmental footprint.