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Sustainability-linked finance is fashion’s latest trend, but will it work?

Green and sustainability-linked bonds and loans are all the rage in the industry


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. 

It has enabled investors to access sustainable investments, while companies can raise cheap capital

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. 

Need for measurements

Catherine Tubb is head of textiles at Planet Tracker, a non-profit financial think-tank that has conducted extensive research on the risks which textile supply chains pose to investors. She views the rise in green and SLBs as positive, especially when they look at reducing scope 3 emissions in the supply chain, as illustrated by H&M Group and Chanel. ”It has enabled investors to access sustainable investments, while companies can raise cheap capital, as it is an oversubscribed market,” she says.

Yet the trend in ethical debt won‘t provide an instant panacea to the negative externalities created by the industry. The extent to which SLBs can drive robust environmental management, reduce carbon footprints and prevent human rights abuses across the supply chain is yet to be seen. 

Barrages of press releases highlight that sustainability-linked finance is an external communications exercise, which can be open to greenwashing. Tubb notes that: “Greenwashing is always a risk, especially in an oversubscribed market where the KPIs may not be investigated thoroughly, as there is no real way to compare across companies.” 

Greenwashing in the realm of sustainable finance is nothing new. The limitations of ESG screening for the fashion industry were showcased in 2020, following the Boohoo Leicester factory scandal. Despite the retailer’s AA rating on MSCI’s ESG index, the company was exposed for the exploitation of its workers, some of whom were paid as little as £3.50 an hour. 

KPIs linked to the roster of sustainability bonds could be more aggressive to drive a quickened pace of transformation of the industry. Criteria for the protection of labour rights across the multiple-tiered supply chain appear thin. Tubb at Planet Tracker recommends that: “KPIs could be more ambitious. They could incorporate a broader range of environmental metrics and include higher cash premiums for missing targets.” Tubb points out that for the H&M Group bond, missing targets would double the annual coupon rate from 0.25% to 0.5%, which she sees as still relatively low. “They could also split bonds into tranches with differentiated targets on a variety of timelines for greater accountability,” she adds. 

H&M Group’s engagement in an SLB could be interpreted as a virtue signal and a misalignment of business strategy, given the retailer’s recent announcement that it plans to double sales by 2030 through increased volumes of production. In response, a company spokesperson comments: “We see significant opportunities to grow in a way that respects planetary boundaries, and only aim to produce what will sell.” 

Another element of the KPIs linked to these bonds that are arguably misplaced is the commitment to increased volumes of ‘sustainable materials’, like recycled polyester. H&M Group’s bond is connected to the increase of recycled materials and Mango’s April sustainable finance deal is linked to the reliance on recycled polyester, branded as a preferable option. The use of recycled synthetics has become an increasingly contentious issue, given that recycled polyester and polyamide are still plastic-based and derived from petroleum. 

Polyester continues to take the lion’s share of the global textile market, at around 63% according to Textile Exchange. Through its research on the intrinsic link between fossil fuels and fashion, the Changing Markets Foundation has sought to expose how recycled polyester, often derived from rPET plastic bottles, found in many ‘sustainable’ collections, is a false environmental solution. These items can’t be recycled and will still end up in landfills. We must ask the question: are these bonds driving commitments towards the wrong KPIs and giving brands a licence to greenwash? 

Arguably, these bonds don‘t go far enough to call for a limit on the volumes of production. This is problematic, given the mountain of garments piling up in regions of the Global South such as Kantamanto in Ghana, Kenya, Tanzania and the Atacama Desert in Chile. This level of production shows no signs of abating. Research by the Business of Fashion found that fast-fashion giant Shein has added more than 300,000 new lines to its website since the start of 2022. 

To truly operate in a system that is aligned to preserving planetary boundaries, something else in the industry must give. The maturation of these bonds and the ability of companies to hit their targets will “provide an indication to the market about how their environmental targets are proceeding,” says Tubb. 

What’s more: alongside bonds and loans, the financial community should look to invest capital that focuses directly on developing innovative and disruptive technologies such as waterless dyeing and next-generation materials which are devoid of plastic. 

One important fact remains. For fashion’s sustainable financing plans to carry real weight, the industry should focus on issues such as labour rights. Members in the C-suite should move the ‘S’ in ESG to the top of the agenda. This will prove critical to provide long-term socio-economic support to millions of people across the supply chains on whom the industry heavily relies.