Chanel Case Study: How Can Green Bonds Hold Brands Accountable?

Virginia Bingol

Virginia Bingol

Content Specialist
440 Industries

Introduction

When you think about the industries with the worst impact on the environment, you would probably think about oil or an industry that partakes in large amounts of deforestation, like building construction. The first one to come to mind probably is not the fashion industry. However, the fashion industry is among the top polluters in the world, second only to the oil industry.

The fashion industry has received much of backlash over the recent years for its negative environmental impact. According to the UN Conference on Trade and Development, as cited in Forbes, estimates that “some 93 billion cubic meters of water – enough to meet the needs of five million people – is used by the fashion industry annually”.

Fast fashion specifically is a main proponent of this harmful climate impact. Companies like Zara and H&M release new collections almost biweekly in order to get ahead of trends, where traditional fashion companies release new collections once a season. In opposition to fast fashion, “slow fashion” companies have entered the market, such as upcycled websites like ThredUP or TheRealReal.

However, luxury companies are still held accountable for the damages done to the environment during production, or in Burberry’s case, after production. The London-based luxury brand was under fire for burning approximately $107,559,000 worth of unsold merchandise in order to maintain brand worth.

With this recent backlash, many brands are looking for ways to implement more green initiatives in their everyday operations. Companies are looking for ways to produce merchandise with ethically sourced raw materials, cut down carbon emissions in their supply chains, or any other actions that will help them be perceived as if they are helping the environment

But merely just creating the perception of being environmentally conscious is something that a lot of consumers are worried about. The term “greenwashing” refers to these brands that market their green initiatives to make it seem as if they are a sustainable business, when in fact they are doing the opposite. It is apparent that some brands in the fashion industry must be greenwashing solely based on the fact that “80% of discarded textiles globally are incinerated or landfill-bound, with just 20% being reused or recycled” (Daily Orange).

This leaves consumers with the question, how can brands be held accountable for their sustainability efforts? How do we know that when a brand says it is helping the environment that it actually is?

Believe it or not, there is a way for fashion brands to be held responsible for their actions through a financial asset called Green Bonds. Also known as Climate Bonds, Green Bonds are financial agreements between an investor and an issuer that promises that as a result of a transaction, a green goal will be met. And, who else to be a trendsetter for this new practice besides luxury fashion house, Chanel. Chanel has proved to the industry that fashion can be both on trend as well as sustainable, a lesson that to be learned by the rest of the world.

Here’s a guide to the topics we are going to look at in this article:

  1. Chanel History
  2. Green Bonds
  3. Chanel’s Green Initiatives
  4. Inspiring Other Brands
  5. Conclusions

1. Chanel History

Gabrielle “Coco” Chanel was born in 1883 in France and spent her early life in an orphanage raised by nuns. It was at the orphanage that she learned to sew, and she later used her talents to open a women’s hat shop in Paris in 1913. Chanel went on to open shops in Deauville and Biarritz, and expanded her line to include clothes, perfumes, beauty, and a range of both men and women’s accessories. In 1971, Chanel passed away while staying at the Ritz in Paris. Since then, Chanel’s position of Creative Director for the Chanel brand was filled by Karl Lagerfeld, and after his passing, Virginia Viard.

With the Chanel brand has emerged countless iconic styles, from the little black dress, to the signature 2.55 handbag, to Chanel No. 5, a perfume that revolutionized the fragrance world with its unique, clean scent. However, in the company’s century of operation, it is a first that it is known for revolutionizing climate initiatives. Its use of green bonds is already making waves in the fashion industry. But before we understand how Chanel is challenging the rest of the fashion world, it is important to understand exactly how Green Bonds work.

2. Green Bonds

While it’s easy to get lost in the definitions of financial terms, understanding Green Bonds is in reality, quite simple. When an investor buys a regular bond, they essentially give money to a company to use for a period of time. They are paid back by the issuer in the form of periodic interest payments.

Green Bonds follow the same principle, but after receiving the initial investment from a buyer, the issuer can only use the money to fund green-initiative related projects, like low carbon emission or energy-saving efforts. Countries in Europe do not take these investments lightly. According to a video by the European Investment Bank, every Euro involved in a green bond transaction is tracked to ensure that it is going towards green initiatives. The EIB describes Green Bonds, also known as Climate Bonds, as a “socially responsible promise for the good of our planet”. Green Bonds are used as means to measure progress of environmental efforts, and for the issuer to set a goal regarding green initiatives to meet. If the issuer does not meet the goals that are promised by the Green Bonds, they have to face penalties.

Climate Bonds also have tax incentives that make them more appealing to investors over traditional bonds. Unlike taxable bonds, Green Bonds come with tax exemptions and tax credits, which helps incentivize investors to purchase bonds that will help combat the prominent climate crisis.

The first Green Bond was issued in 2007 by EIB and the World Bank. Ever since then, the Green Bond market has grown to be worth over “USD 1 trillion in cumulative issuance” (climatebonds.net). Companies in all sectors have stakes in Climate Bonds, but these investments have taken the fashion industry by storm.

3. Chanel’s Green Initiatives

In late 2020, Chanel announced the issuance of a $700 million Green Bond in order to meet newly set sustainability standards. Chanel was influenced to make this bold financial transaction in hopes to actively support the Paris Climate Agreement of 2015. According to BNP PARIBAS, the goals of this sustainable bond is to decrease Chanel’s carbon emissions by 50% by 2030, decrease Chanel’s supply chain related greenhouse gas emissions by 10% by 2030, and shift to 100% renewable electricity in Chanel operations by 2025. Each one of these goals has been deemed plausible by the Science-Based Targets Initiative.

To hold itself accountable, Chanel has attached a premium to these bonds if its company-wide goals are not met by the bond’s maturity date. If its 2025 goal is not met, Chanel will repay 100.5% of the bond’s face value maturity. And if its 2030 goals are not met, it will repay 100.75% of face value.

The issuance of a Climate Bond this large was enough in and of itself to take over headlines, but the concept of a fashion brand being held accountable for its climate responsibility was essentially unheard of. These are not small goals either, but rather goals that will change the everyday operations of the business at every level. Phillippe Blondiaux, Chanel’s Chief Financial Officer is confident with this decision, claiming that this financing plan is in line with the company’s core principles of creating “long-term value for the business and for society”.

So, where does Chanel even begin to make the change?

Chanel published a press release back in March 2020 to announce the launch of CHANEL Mission 1.5°, which is named after the overarching goal to limit “mean global temperature increases to 1.5° Celsius”. The main points of the press release include:

  • “Shifting to 100% renewable electricity on a worldwide basis by 2025”: In a matter of just two years, Chanel plans to increase its previous use of 41% of renewable energy to 97%

  • “Balancing our residual carbon emissions”: Chanel is committed to supporting reduced carbon emissions in both its own supply chain and in any means possible outside of company operations. The brand intends to support sustainable projects that follow the International Carbon Reduction and Offset Alliance principles in order to “avoid and remove carbon emissions at least equal to the company’s entire carbon footprint”.

  • “Financing climate change adaption”: Chanel hopes to finance projects that support a sustainable raw material supply chain for their own business and others.

The company has even published a full climate report regarding CHANEL Mission 1.5° that can be found on its website to ensure full transparency of its plans to reduce the company’s carbon footprint and partake in sustainable practices. This mission is going beyond helping Chanel’s green initiatives by influencing other luxury fashion brands to follow in its footsteps.

4. Inspiring Other Brands

Of course, in the luxury fashion world, other brands couldn’t just not follow Chanel’s lead. Other luxury brands have been stepping up to link sustainability efforts with debt issuance as Chanel has.

In hopes to come back from the backfire it received from years of burning millions of dollars-worth of merchandise, Burberry announced the launch of an approximately $358,836,600 sustainability linked bond. The bond matures in 2025, and the financed debt is intended to help pay for two main goals—reducing absolute scope one and two greenhouse gas emissions by 95% by 2022 and absolute scope three greenhouse gas emissions by 30% by 2030. Similarly to Chanel’s issued Green Bond, the goals of Burberry’s sustainability linked bond were approved by the Science-Based Target Initiative.

Prada has also launched its own sort of sustainability linked financing. The Italian company’s initiatives are three-pronged: increase number of stores that have a LEED Gold or Platinum certification, train employees on sustainable practices, and completely turn to using a sustainable nylon substitute in production. Prada’s debt is financed by financial institutions, in contrast to Burberry and Chanel’s method of raising funds from investors.

With these three fashion powerhouses leading by example, it is hopeful that other brands in the fashion industry are soon to follow in the Climate Bonds trend. Other brands in the non-luxury sector, like Vans, have already begun to take after their leads.

5. Conclusions

For a century now, Chanel has been a brand that sets the tone for the rest of the fashion industry. In the 21st century it’s no surprise that the luxury brand has paved the way for fashion companies to be held accountable for their impact on the environment— which was previously unheard of. The fashion industry is among the top polluters in the world, and consumers have grown tired of the negative effects it has on carbon emissions, microfiber pollution in oceans, and much more.

This is where Green Bonds come into play. Green Bonds provide means of debt financing to issuers from investors, just like any other bond. However, what is unique about Green Bonds is that they are tied to achieving sustainability goals. If the goals are not met, the issuer must repay the face value and then some when the maturity date rolls around.

Chanel has taken advantage of this opportunity to set goals of decreasing carbon emissions by 50%, reducing greenhouse gas emissions by 10%, and increasing the amount of renewable energy sources to 100%, all within the next 10 years.

Just as expected, other brands have followed in Chanel’s footsteps. Competitors Burberry and Prada have released their own versions of sustainability-linked debt, and other companies are sure to follow them. It is unclear how long it will take for the rest of the fashion industry to catch up to this trend. But, when it does, it is sure that companies involved will be changing the course of fashion for the better.

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Chanel Case Study: How Can Green Bonds Hold Brands Accountable? Chanel is a great example of how the use of new financial tools can allow fashion brands to show accountability, let's see how.
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Virginia Bingol

Virginia Bingol

Virginia Bingol is from a small town outside of Philadelphia, Pennsylvania called Kennett Square. Currently, she is a junior at the University of Pittsburgh pursing an undergraduate degree in Marketing and Supply Chain Management, as well as a minor in Studio Arts. She is excited for the opportunity to share her passion for the fashion industry in her role as a Content Specialist at 440 Industries.

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