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Fashion needs to work harder to find green fit


H&M, the Swedish fashion company, has sold a sustainability-linked security for its debut outing in the bond markets. This is an encouraging step, but the fashion industry has a lot more work to do to clean up its look.

The borrower has not so much as printed a Swedish krona note in its home market, so environmental, social and governance (ESG) bankers on and off the deal are taking the company’s decision as big a win for the fledgling sustainability-linked bond market.

But they should not get ahead of themselves, as the fashion industry — labelled the second most polluting industry after oil by the UN Conference on Trade and Development — still has a lot of catching up to do before green can be considered the new black.

The first and most significant thing investors and lenders can do is ensure that sustainability-linked deals — where issuers are not restricted in the use of proceeds but suffer a higher coupon if they do not achieve certain ESG metrics — from the sector have ambitious key performance indicators.

H&M’s deal looks pretty solid in this respect, with the company facing fiscal punishment if it fails to increase the proportion of recycled materials used of its total to 30% by 2025, and if it does not reduce Scope 1 and 2 greenhouse gas emissions by more than 20% by 2025, compared with a 2017 baseline.

Others have seemed less ambitious in their approach to ESG-linked financing. Italian fashion house Prada, for example, brought the first sustainability-linked financing from the fashion sector with a€50m loan.

That deal has three KPIs, two relating to energy efficiency and recycling and one linked to training employees. This last KPI caused some consternation in the market at the time, as it seemed to be one that was largely in line with something the company would have done anyway. Prada did not respond at the time to repeated requests for comment.

The company has since returned to the sustainability-linked loan market with a €90m deal that is linked to seemingly much more ambitious targets: regenerating and reconverting production waste and using self-produced renewable energy. This is better from the lenders and adds credence to the fashion industry’s push to be greener.

The second thing that investors and lenders should start doing is pressing fashion companies to move their entire capital structure to fit ESG metrics. This is not as radical a concept as it first seems. French oil major Total said last week in its earnings call with investors that it was going to issue only climate KPI-linked bonds from now on. If an oil company can rejig its capital structure to work towards ESG goals, there will be a way for fashion brands to do the same.

The benefits of pushing companies to integrate ESG finance fully cannot be understated. If a clothing brand has just a single outstanding piece of debt that is linked to ESG metrics and it misses those targets, it will sting to the tune of around 10bp on the coupon.

But what if that same company has half a dozen bonds linked to KPIs — and also its main bank facility? Suddenly, missing those KPIs becomes a major concern for the company.

Embracing ESG capital markets in full is no longer just a couture catwalk one-off to keep investors dazzled. It is a move that should put fashion houses at serious risk of going out of style if they do not smarten up.