Chanel is popping up in unexpected places. The privately-owned luxury brand tapped public markets for the first time last week, issuing a $700 million sustainability-linked bond on the Luxembourg Stock Exchange. It’s not the only fashion company pursuing the strategy. VF Corp and Burberry have both taken on debt linked to environmental initiatives in the last year. And just this week, Adidas issued a €500 million (approximately $590 million) sustainability bond to fund environmental and social initiatives.
Fashion’s rising interest in green bonds reflects a broader market trend. Bonds designed to finance climate-friendly and social initiatives have exploded in recent years, as investors seek out ethical and environmentally responsible investments. The value of sustainable bonds issued globally hit a record of almost $100 billion in the second quarter of 2020, up 65 percent from the first three months of the year, according to credit rating and research centre Moody’s. Last month, Google-parent Alphabet launched a $5.75 billion sustainability bond, the largest such corporate issuance ever, according to the company.
While Chanel sits firmly at the top of the industry, fashion brands are entering the bond market as the coronavirus constrains more traditional financing routes, while simultaneously increasing pressure on companies to deliver on capital-intensive sustainability programmes. The industry is looking to other types of green financing too: Prada, Moncler and Ferragamo have all taken on sustainability-linked loans and credit agreements.
These types of bonds, in particular, are appealing for a number of reasons. For one, they’re hot right now, thanks in part to a boom in environmental, social and governance (or ESG) investing. Chanel’s bond issuance was “significantly oversubscribed,” according to the company. Interest in Adidas’ bond issuance reached more than five times the issue amount.
“We’ve seen during the corporate crisis that ESG funds have outperformed and companies that have strong sustainability performance have outperformed,” said Elisa Niemtzow, vice president at nonprofit consultancy BSR. “The fact that this would be considered a hot investment is really no surprise.”
The fact that this would be considered a hot investment is really no surprise.
They’re also good marketing, shining a spotlight on companies’ sustainability initiatives and lending them additional credibility by putting money behind them. Just like investors, consumers are demanding companies behave in a more environmentally and socially responsible manner, making it increasingly important for brands to tout their green credentials. With the personal luxury goods industry estimated to contract anywhere from 35 to 39 percent in 2020, according to BoF and McKinsey’s State of Fashion Coronavirus Update, companies are eager to increase their value proposition however possible.
“The question among the luxury retailers will be how do we differentiate ourselves to ensure that we are putting our best foot forward with consumers,” said Emily Kreps, head of capital markets for the global environmental reporting platform CPD. Maia Godemer, a sustainable finance researcher at BloombergNEF, put it more bluntly, calling the bonds “a great marketing tool.”
There are green bond sceptics who argue some companies’ eco-friendly issuances are only marketing. While the debt instruments are intended to fund environmental projects, how those are defined can be extremely broad. There are guidelines, but these are largely voluntary. A range of third-party certifiers exist, including major credit rating firms like Moody’s and S&P, but these all have their own methodology. Green credentials can be hard to quantify and progress difficult to measure. Usually, there’s no penalty if companies fail to show measurable progress.
“There are definitely ways to greenwash this,” said Kreps of green bonds.
Adidas’ bond will be used for investments in sustainable materials, renewable energy sources and mentorship and funding for under-represented communities. Burberry outlined plans to use the funds for projects including more energy efficient buildings and expenditures surrounding recycled packaging materials.
Chanel’s sustainability-linked bond is an outlier in that it’s particularly strict, said analysts. If the company doesn’t meet a five-year target to become wholly reliant on renewable energy, it will pay a premium. That will increase if it fails to meet greenhouse gas emissions targets by the end of the decade. That makes it a trendsetter.
“[Chanel’s bond] is definitely both leading the fashion side but also leading the corporate side at large,” said Kreps.