Environmental, Social, and Governance (ESG) is a framework designed to enable organisations and countries to assess how far they are with their sustainability goals. It is a collection of non-financial factors that evaluates the robustness of an organisation’s governance mechanism and its competence to effectively manage its environmental and social impacts. The goal of ESG is to encapsulate all the non-financial risks and opportunities immanent to a company’s day-to-day activities. Investors are increasingly using these non-financial factors as part of their analysis procedure to identify material risks and growth opportunities.
ESG issues to consider:
Energy efficiency; CARBON FOOTPRINT; Greenhouse gas emission; Deforestation; Biodiversity; Climate change and pollution migration; Waste management
Labor standards; Wages and benefits; Diversity and inclusion; Pay equality; Human rights; Health and safety; Supply chain management;
Corporate board diversity and structure; Transparency; Risk management
Numerous institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), the United Nations Principles for Responsible Investment, and the United Nations Sustainable Development Goals, are working to form standards and define materiality to facilitate the amalgamation of these factors into the investment process. Ratings have also boomed over the last decade. Morgan Stanley Capital International (MSCI) and specialist firms such as Sustainalytics have been joined by traditional credit rating agencies such as Moody’s Analytics and S&P Global.
Companies in the textile and apparel industry are raising their ESG initiatives in response to growing government action and rising pressure from consumers and investors across the globe. A conscious and effective ESG policy, therefore, has become a priority for many fashion brands and is becoming increasingly important for shareholders, investors, and customers.
United Nations Framework Convention on Climate Change (UNFCCC): The UNFCCC Fashion Industry Charter for Climate Action sets targets to decarbonise the supply chain and halve greenhouse gas emissions by 2030 and achieve net zero emissions no later than 2050 or set Science Based Targets (SBTs), an initiative that lays out a roadmap to reduce emissions in line with the Paris Agreement. The Fashion Charter also spells out targets for securing 100 per cent of electricity from renewable sources with minimal other environmental or social impacts, for owned and operated emissions by 2030, and places heightened emphasis on brands needing to work with their suppliers to reduce emissions—particularly important considering that most emissions (~96 per cent) come from the fashion supply chain.
The setting and the achievement of ESG targets should also be considered as a great opportunities for Corporation to access to credit facilities, through banks or emitting corporate bonds. More and more, in fact, financial institutions are more willing to open credit lines to companies that are concretely engaged in the achievement of ESG targets.
The process, however, must be structured in very well defined and measurable targets that can be certified along the way by external bodies. The achievement of the different milestones triggers to next level of financing, like new credit lines, better rates, expanded timing to return.
Some examples in the fashion industry are Guess?, Inc that on May 2022 has announced a new EUR250m (US$264m) European credit facility of which the interest rate is subject to an annual adjustment based on the achievement of specific sustainability goals, including the US retailer’s use of sustainably sourced material.
Other example is VF Corporation that on March 2023 announced the closing of a €500 million green bond offering, representing its second green bond issued; the inaugural green bond was issued in 2020. An amount equivalent to the net proceeds from the offering has been dedicated to advance programs within the company’s Sustainability & Responsibility strategy and drive progress toward achievement of its science-based targets (SBTs).
Also brands like Lavazza, Italy’s leading coffee roaster, has been granted from pool of Italian banks a 600 millions Euro loan to fund projects aimed at making the coffee company more sustainable. The transaction is aimed at implementing sustainability projects and provides for a reward mechanism linked to the achievement of certain ESG parameters.