Can the shift from luxury to sustainable finance make a difference?


Key points to remember:

  • Sustainability Loans (SLL), created in 2017, and Sustainability Bonds (SLB), launched in 2020, belong to a wider range of financing tools that have recently increased.

  • While the sustainable finance trend has not garnered the same media attention as green marketing campaigns, it is a testament to a growing need for companies to make environmental, social and corporate governance (ESG) investments.
  • Compared to green bonds (bond issues whose proceeds must be allocated in part or in full to green projects), the proceeds of loans or sustainable bonds can be used as part of a general business, such as daily operations.

Durability, a buzzword that has been around the fashion world for years, now touches every aspect of the industry, from design and supply chains to marketing and consumer awareness. Yet there is one area that is rarely talked about: sustainable finance.

Faced with an international goal to cap global warming at the danger line of 1.5 ° C, companies – including luxury players – have created a new approach to finance that will contribute to this cause. And smaller luxury entities like Prada, Ferragamo, Moncler, and Chanel were quick to combine environmental objectives and financial instruments.

Sustainable Development Loans (SLLs) and Sustainable Development Bonds (SLBs) belong to a wider range of financing tools that have recently increased. While the first instrument was created in 2017, the second category saw the Principles of sustainable development obligations issued by the International Capital Market Association (ICMA) in June 2020. But why are brands eager to launch these nascent financial instruments? And how does this benefit participating companies?

Here, Daily Jing examines recent examples of companies that have chosen to go this route and what it means to link environmental goals to financing.

The rise of sustainable finance

Over the past two years, the luxury industry has started to see a trend in sustainable finance in Europe. While this trend has not garnered the same media attention as green marketing campaigns, it responds to the growing needs of institutional and retail investors who wish to do environmental, social and corporate governance. investments (ESG), amplified by COVID-19.

In November 2019, Prada SpA sign the first loan linked to sustainability in the luxury industry with an Italian bank and signed another similar loan two months later with the Japanese bank Mizuho. Ferragamo obtained a sustainable loan of 250 million euros for its ESG objective in June 2020, while Moncler obtained a loan commitment of 400 million euros in July 2020. Then, in September 2020, Chanel announced that it had raised 600 million euros of SLB. .

Compared to green bonds (bond issues whose proceeds must be allocated in part or in full to green projects), the proceeds from loans or sustainable bonds can be used as part of a general business, such as daily operations.

In addition, SLBs and SLLs are linked to certain key performance indicators. For example, Prada’s SLL is issued by the Italy-based Crédit Agricole Group on a five-year basis, and the interest rate may be reduced depending on the achievement of Prada’s three-pronged sustainability goals, such as the number of stores that have achieved LEED Gold or Platinum Certification (the US Green Building Council’s best-known green building rating program), the number of hours of training provided to employees, or the use of Prada Re-Nylon (regenerated nylon) in the production of goods.

The development of SLLs, born a few years earlier than SLBs, inspired the creation of the latter. “The mechanism linked to KPIs in SLLs has been applied to the bond market in the form of sustainability bonds, thus helping to advance the movement towards the integration of transparent and credible sustainability objectives in the financing of ‘a company,’ said Agnès Gourc, co-head of sustainable finance markets at BNP Paribas, during a public conversation Last September. Based in France, BNP Paribas has helped Prada and Chanel launch their sustainable financing instruments.

Most recently, Hong Kong-based New World Development, owner of the popular K11 art center concept, became the first real estate developer in the world to launch a 10-year $ 200 million PES. The group is committed to achieving 100% renewable energy for its rental properties (mainly K11 shopping malls) in 11 cities in southern China by 2026.

“Businesses must take timely action to tackle climate change, and NWD will contribute to a cleaner future for generations to come as we grow in the [Guangdong-Hong Kong-Macau] Greater Bay Area of ​​China, ”said Adrian Cheng, executive vice president and chief executive officer of NWD. He added that he was eagerly awaiting other real estate peers to take similar action.

In addition to meeting green building certifications, the K11 MUSEA in Hong Kong also has a sustainability-themed education park. Photo: K11

Part of the process

The relatively new concept of sustainable finance not only represents a part of the development of ESG investing, but it also plays a vital role in the sustainability plan of a participating company. “ESG loans are now an integral part of the Prada Group’s financing strategy, which is closely integrated with its sustainability agenda,” said a spokesperson for Prada.

A key indicator for Prada is its Re-Nylon series, which debuted in 2019 as a capsule bag collection for a ready-to-wear collection for men and women in 2020. And, according to Lorenzo Bertello, chef brand marketing and CSR, the ultimate goal is to “convert all Prada virgin nylon to Re-Nylon by the end of 2021”. Prada is on track to meet these targets for its loans, both certified annually by an independent third party, a Prada spokesperson said.

The Prada Re-Nylon 2020 collection merges sportswear and luxury elements while using 100% durable regenerated nylon. Photo: Courtesy of Prada

Meanwhile, in the case of NWD, most K11 malls will use solar panels and wind turbines to generate electricity for their buildings, which could benefit brands that are committed to sustainability in their operations, such as Moncler, Prada and many others. “Our SLB was six times oversubscribed at its peak, with 80% of end investors being ESG-focused investors,” Ellie Tang, head of sustainability at NWD, told Daily Jing. “ESG integration is not only important to us, but also to other developers and industries. What gets measured gets done, and linking financial goals to sustainability goals helps companies drive impact more effectively and efficiently. “

The financial market, in general, has made slow but marked progress in sustainable finance. Since the official ICMA principles were only launched last June, there is still a long way to go in terms of educating investors and engaging more stakeholders. BNP Paribas reported that $ 488 billion in SLB and $ 240 billion in SLL were issued last December.

NWD, which has raised around HK $ 12 billion ($ 1.55 billion) in sustainable funding, is already considering wider application of these vehicles that will result in a win-win situation. “Since the proceeds from sustainability bonds or loans can fund general corporate initiatives rather than pre-selected green projects only,” Tang said. “We will explore other opportunities for these transactions to support NWD & K11’s broader initiatives in Greater China.”

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