With the growing importance and need for sustainability, various stakeholders of the apparel industry are adopting innovative ways to be sustainable as well as to promote the same. Now the concept of various kinds of bonds like green bond, the sustainability-linked bond (SLB) of retailers is gaining momentum at the global level. Recently,a global retailer like VF Corporation allocated Green Bond Net Proceeds to advance ambitious science-based targets. Its inaugural green bond issued last year totalled approximately € 493 million. On the other hand, H&M Group’s sustainability work has attracted bond market attention as it issued € 500 million SLB with a maturity of 8.5 years. The annual coupon rate is 0.25 per cent. The bond generated great interest and was 7.6 times oversubscribed.
Socially responsible investing (SRI) has now become a mainstream way for investors to channel capital towards climate action, and corporates are quickly turning to them to fund the transformation of their businesses. SRI helps companies to engage with the investor community and be part of the solution.
Sustainability-linked bonds are something new in the bond market. In contrast to green bonds, where the funds are linked to specific projects, SLBs are coupled to the company meeting a number of defined sustainability targets.
A green bond is like a fixed-income instrument that is specifically earmarked to raise fund for climate and environmental projects. These bonds are typically asset-linked and backed by the issuing entity’s balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations. These bonds normally have tax incentives to enhance their attractiveness to investors.
In 2009, The World Bank issued the first official green bond and this has seen good growth in one decade as in 2019, around US $ 157 billion worth of green bonds were issued across the industries.
On the other hand, SLBs embed an environmental, social and governance (ESG)-related key performance indicator (KPI) that issuers commit to achieving, accruing additional payments to bondholders should they fall short.
Unlike green or sustainable bonds, the funds raised with this instrument are not tagged to a specific use of proceeds but are for general corporate purposes. This type of bond aims to further underpin the key role that debt markets can play in funding and inspires companies that contribute to sustainability from an ESG perspective.
There are five core components in SLBs: a credible KPI; ambitious sustainability performance targets; meaningful changes in bond characteristics; verification and reporting. SLBs offer access to the low-cost ethical debt market while avoiding the restrictions found in traditional green bonds on how the funds can be spent.
Leading French luxury fashion house Chanel has demonstrated its leadership in the SRI space by pioneering € 600 million SLBs in September 2020, which were oversubscribed.
Similarly, adidas’s€ 500 million sustainability bond offers more than 5 times oversubscribed.
It is also pertinent to mention here that VF Corp.was the first company in the apparel and footwear industry to issue a green bond in February 2020. The proceeds allocated to 13 of VF’s eligible sustainability projects worldwide helped to deliver meaningful positive environmental impacts, including 2 million trees planted, approximately 16,000 metric tonnes of carbon dioxide equivalent (CO2e) avoided annually through procurement of sustainable materials, and more than 970 million litres of water saved annually through conservation initiatives.
Scott Roe, EVP and CFO, VF Corp. says, “We believe that business success and environmental stewardship are closely linked together, demonstrated by the success of this effort which has enabled us to advance progress towards achieving our science-based targets while also strengthening our business for the long term. We hope our success will inspire others in our industry and beyond to pursue similar initiatives.”
The allocation of the green bond net proceeds was an important step in VF’s implementation of its ‘Made for Change’ sustainability and responsibility strategy, which supports the company’s business objectives with actions that improve lives and protect the planet.
VF’s use of the green bond proceeds demonstrates its commitment to three key sustainability areas that are core to its business – sustainable products and materials; sustainable operations and supply chain; and natural carbon sinks. In addition, the net proceeds support projects that align with key United Nations Sustainable Development Goals (SDGs): SDG 7 – Affordable and Clean Energy; SDG 9 – Industry Innovation and Infrastructure; SDG 12 – Responsible Consumption and Production; and SDG 15 – Life on Land.
To provide transparency for its green bond initiative, VF has published a Green Bond Impact Report, which includes a complete breakdown of allocated proceeds and select metrics and achievements of related projects.
This green bond was issued in accordance with the ICMA Green Bond Principles (GBP) 2018. VF’s Green Bond Framework was reviewed by Sustainalytics, a leading global provider of sustainability research and services that issued a second-party opinion declaring that the framework is credible and impactful. Netherlands-based Sustainalytics rates the sustainability of listed companies based on their environmental, social and corporate governance performance.
On the other hand, just a month back, H&M Group also issued € 500 million SLB with a maturity of 8.5 years. The annual coupon rate is 0.25 per cent.
It is worth mentioning here that the bond generated great interest and was 7.6 times oversubscribed. The bond will be listed on the regulated market Euronext Dublin and has been placed with the assistance of BNP Paribas, Commerzbank, Danske Bank, SEB and Standard Chartered.
Adam Karlsson, CFO of the company says, “This type of bond creates a clear and transparent commitment and incentive for the company. It is an important step in our continued work to optimise the company’s capital structure, while at the same time provide investors with an opportunity to contribute to the positive transformation of the fashion industry.”
The targets that H&M Group has committed to achieving by 2025 include increasing the share of recycled materials used to 30 per cent, to reduce emissions from the Group’s own operations by 20 per cent besides reducing absolute scope 3 emissions from fabric production, garment manufacturing, raw materials and upstream transport by 10 per cent.
“Our customers are showing on a daily basis that they appreciate H&M Group’s offering with the best combination of fashion, quality, price and sustainability. Today’s successful bond issue is proof that the financial market also values our ambitious sustainability work and we look forward to working together for a sustainable industry,” says Helena Helmersson, CEO of H&M Group.
“The H&M Group Sustainability-Linked Bond KPIs are relevant and material to the issuer and that the SPTs (Sustainability Performance Target) are ambitious and impactful. The goal to reach 30 per cent recycled materials as inputs is a highly ambitious SPT and represents leadership in the clothing industry,” says Evan Bruner, Project Manager, Sustainalytics.
Sustainability-linked loans (SLLs) are also good option
Sustainability-linked loans (SLLs) are also good option in the same direction as in November 2019; Prada signed the first SLL of the luxury goods industry with Crédit Agricole Group. This new facility, named SLL, is a € 50 million five-year-term loan whose interest rate can be reduced following the achievement of targets related to: number of stores assigned the LEED Gold or Platinum Certification; the amount of training hours for the employees and the use of Prada Re-Nylon (regenerated nylon) for the production of goods.
So far, three types of such loans have been taken up by this Italian fashion group.
More players taking similar initiatives