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

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. 

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.