The French fashion group Chanel in September became the latest company in the business to make use of sustainable financing, an increasingly important accessory in the portfolio of companies that are looking to lower their environmental footprint.

Chanel offered €600 million in “sustainability-linked” bonds to finance the achievement of carbon reduction targets outlined in its Mission 1.5° climate plan. The company aims to halve its own emissions by 2030, cut the greenhouse gas emissions of its supply chain by 10 percent in the same timeframe and only use electricity produced from renewable sources for operations by 2025.

Mallory Rutigliano, a sustainable finance analyst at BloombergNEF, explains that sustainable debt includes green loans and bonds – proceeds of which are earmarked for specific environmentally-friendly projects – but also social bonds for social purposes, sustainability bonds that cover both the green and social space, and sustainability-linked bonds and loans.

“Sustainability-linked bonds are a bit more flexible and particularly innovative,” says Rutigliano. “You don’t have to earmark funds for specific projects, but they allow companies to link their debt financing to their sustainability goals.” Rutigliano adds the use of sustainable debt gives companies instruments for providing transparency on their environmental and social objectives. “It also acts as a signal to investors that they are interested in ESG (environmental, social and governance) issues,” she notes.

The Chanel bond has been divided into two €300 million tranches with maturities of five and ten years bearing annual coupons of 0.5 percentage points and 1.0 percent respectively. Investors will receive a 0.50 percentage cash premium on the five-year issue if the company does not meet its 2025 renewable energy goal and a 0.75 point premium on the 10-year issue if it fails to halve its emissions by 2030.

The French company is a front-runner and not only among fashion companies. The first sustainability-linked bond was issued only last year by Italian power producer Enel, which tapped the market in a €2.5 billion issue for which the size of interest rate payments were tied to achieving renewable energy capacity targets.

Chanel’s offer came on the heels of Burberry’s first “sustainability” bond in September. Proceeds from the five-year £300,000,000 bond issue will be used to finance and/or refinance eligible sustainable projects and will allow the British company to diversify its funding sources. Burberry indicated that funds could be used to help improve the energy efficiency of its stores, increase the percentage of sustainable-grown cotton in its products and to enable the use of recyclable packaging and labels.

Burberry’s sustainability framework also includes a goal to positively impact one million people by 2022, by focusing on projects that tackle educational inequality, support social and economic development and community cohesion. However, proceeds from this particular bond are concentrated on environmental rather than social projects.

VF Corp., which owns brands like Timberland and Vans, in February issued a €500 million “green” bond, which it claims was the first green bond to be issued in the apparel and footwear industry. Funds will be used for projects such as those that support VF’s commitment to source 100 percent of its top nine materials from regenerative, recyclable or renewable sources by 2030; renewable energy installations and zero waste distribution centers for the sustainability of its operations and supply chain; and investments in reforestation conversation and regenerative agricultural projects to increase natural carbon sinks that absorb greenhouse gas emissions.

While Chanel and Burberry issued bonds to investors, fashion companies previously turned to banks for loans to finance their sustainability objectives. These financing instruments are also still relatively new, however. In November 2019, Prada obtained the first sustainability-linked financing in the luxury goods industry in the form of a €50 million five-year loan from Crédit Agricole. In June and July respectively, the Italian bank Intesa Sanpaolo granted an up-to €250 million credit facility to Salvatore Ferragamo and an up-to €400 million in funding to Moncler, a producer of down jackets. The terms of all three financings are linked to the achievement of environmental targets.

Taking action and financing projects to reduce their environmental impact and cut greenhouse emissions are essential for apparel and footwear companies. According to the Fashion on Climate report released this August by the consultancy McKinsey & Company and the Global Fashion Agenda, the sustainable advocacy organization, the global apparel and footwear industry produced 2.1 billion tonnes of carbon dioxide emissions in 2018 – more than France, Germany and the U.K. combined – representing approximately 4 percent of total global emissions. Without significant action, that figure could jump to about 2.7 billion tonnes a year by 2030, the report warned. And a 2018 report from the sustainability consulting group Qantis painted an even bleaker picture, putting greenhouse gas emissions for apparel and footwear at an estimated 8 percent of the world’s total.

The interest of a growing number of industries, including fashion and footwear, in improving their environmental credentials is one factor that has allowed sustainable finance to steadily grow over more than a decade. The first green bond issues date back to 2007 and according to BloombergNEF, issuance has now topped $1 trillion, pushing the wider sustainable debt market over the $2 trillion threshold.

As is the case in other businesses, the risk of greenwashing – or making misleading claims about the environmental benefits of products, services and company practices – is high, and there is clearly a lot more work to be done. “The global fashion industry is extremely energy-consuming, polluting and wasteful,” McKinsey wrote in The State of Fashion 2020 report released in November 2019. “Despite some modest progress, fashion hasn’t yet taken its environmental responsibilities seriously enough.”