Sustainability-linked bonds grow
Green bonds remain “the largest class of ESG-linked financing,” according to the Climate Bonds Initiative, with more than $1 trillion outstanding in January 2021. However, activity in the separate but related sustainability-linked bond market is growing, too, and is expected to exceed $200 billion by year-end.
Unlike green bonds, such as those issued by CMI hand-in-hand with the Bosch Gutierrez family, whose funds can only be used for projects with a direct environmental impact, funding that comes in the form of sustainability-linked bonds is “unrestricted,” meaning it is “usable for anything, including day-to-day operations.”
Sustainability bonds in fashion
Known for aligning the cost of borrowing with a borrower’s performance measured against prescribed sustainability performance targets, and given the greater flexibility that comes with sustainability-linked bonds, these types of instruments are attractive to fashion industry entities. Prada, for example, became the first big-name luxury brand to tie its green efforts with a €50 million ($55 million) five-year loan from Crédit Agricole Group in November 2019.
Since then, Burberry announced in September 2020 that in support of its “long-standing commitment to sustainability and dedication to using its position and influence to drive social and environmental improvements,” it would offer a £300 million ($385 million) sustainability bond with sustainability conditions attached. Maturing in September 2025, the bond is subject to the targets set out in the brand’s Sustainability Bond Framework.
Also in September 2020, Chanel disclosed that it was offering a €600 million ($699 million) bond, which links corporate debt to specific carbon reduction targets set by the brand. The Chanel bond picks up on commitments made by the 112-year-old brand in support of the climate report it published in March. In the report, titled Chanel Mission 1.5° , Chanel outlines its “commitment to address climate change in line with the goals of the 2015 Paris Climate Agreement, namely to ‘decrease Chanel’s emissions (scope 1 and 2) by 50 percent by 2030; decrease [its] supply chain (scope 3) absolute greenhouse gas emissions by 10 percent by 2030; and switch to 100 percent renewable electricity in Chanel’s operations by 2025.”
As for the structure of the bond, it consists of two different segments: a five-year tranche that Chanel will have to repay at a higher 100.5 percent of face value at maturity in July 2026 if “the company is not fully reliant by then on renewable electricity,” Bloomberg reported at the time, and a 10-year tranche, which “will be charged at a premium of 100.75 percent” in July 2031 if Chanel does not meet its specified greenhouse gas emission targets. Shortly after the issue, Chanel said the sustainability-linked bonds were “well received by the market” and, in fact, “oversubscribed.”
As with green bonds, sustainability-linked instruments will further expand the universe of issuers that can raise sustainable financing to those that may not have sufficient capital expenditures related to sustainability projects, are at the beginning of their sustainability, travel, and/or are in transition and difficult-to-abate sectors, but there is a need for transparency and effective sustainability-related disclosure practices to avoid widespread ESG washout.
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