In our new series, The Hidden Cost, Vogue Business breaks down everything you need to know about climate finance as it relates to fashion’s supply chains. No jargon, just insights. Read more here.
Some of the most impactful choices consumers can make for the environment are those around money — where they shop, where they bank and the investment decisions made on their behalf.
For businesses, it’s a similar picture. Yet financed emissions — the emissions linked to the investment and lending activities of the financial institutions of brands — are often overlooked, perhaps because they feel far removed or largely out of a brand or sustainability professional’s control. But this means brands that are making strides to reduce their own emissions and decarbonise their supply chains could be unwittingly channelling funds into things like new oil and gas extraction through their bank or pension provider — undermining their net-zero efforts.
While many companies are already working to curb their Scope 1 and 2 emissions (those from their own premises and employees), making a dent in Scope 3 (emissions from their value chains) can be trickier — and not all companies consider financed emissions as part of Scope 3. Further muddying the issue is the fact that companies rarely disclose who they bank with, so financed emissions tend to remain hidden.
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This lack of transparency around what companies are doing with their finances is ultimately stalling progress, says Kristina Elinder Liljas, senior director of sustainable finance and engagement at the Apparel Impact Institute (Aii), a non-profit that identifies and funds ways to cut the environmental impact of the clothing and footwear industries. She says that, for fashion brands, sustainable finance is just not enough of a talking point yet.
“Finance is typically seen as a heavy and boring topic. It’s not as sexy or easy to sell as organic cotton and recycled packaging,” she says. “Finance topics don’t translate as easily into a marketing campaign. Plus, many brands are still in the early stages of understanding what ‘green financing’ means in practice. Sustainability teams often operate separately from sourcing or finance, and with different KPIs. This is starting to change, though.”
With a decades-old reputation as one of the most environmentally damaging industries, fashion is now facing up to its responsibilities. Consumer-led demand has resulted in greater transparency from firms around resource use, waste and labour rights. Finance could be next. Elinder Liljas says that with this growing awareness — as well as a shift in investor expectations and emerging reporting frameworks like the United Nations-backed Taskforce on Nature-related Financial Disclosures (TNFD) — more companies in the industry will align their finances with their sustainability goals. The fashion industry’s dependence on fossil fuels doesn’t signpost a sustainable future, either in terms of production or profit, so it’s vital that companies begin to view every part of the process, including finance, through an environmental lens.
Where to start
For fashion companies, addressing financed emissions means getting to grips with the environmental impact of their financial providers. From assessing their involvement with fossil fuels to judging their performance on biodiversity to ensuring the bank or provider is delivering competitive returns, there is a lot to consider. Changing some — or all — of the company’s operations to a ‘green’ bank is a relatively easy first step.
“There are banks out there that can deliver business performance, better savings rates and zero investment in fossil fuels,” says Dan Sherrard-Smith, whose business MotherTree helps companies evaluate their financed emissions. “It can get complex, but if you just wanted to switch to a greener bank, then it’s actually a much more straightforward process than it’s ever been.”
Between 2016 and 2020 — when the ink was barely dry on the Paris Climate Agreement — the world’s 60 largest private banks pumped $3.8 trillion into fossil fuel projects, per bank tracking organisation Banktrack. But there is a growing wave of banking providers eschewing such investments. After environmentalism moved from the fringes in the 1960s, the link between finance and sustainability solidified with the launch of ethical banks like Triodos (Netherlands), Co-operative (UK) and South Shore Bank (US).
Forty years after its founding, Triodos is now very much in the mainstream, with a presence across much of Europe. It shuns harmful practices such as fossil fuel extraction or factory farms, and it actively supports ventures that work towards a more sustainable future, including marine conservation and community energy projects. It doesn’t have the same range of products as some of its rivals, but today, the bank manages £20.2 billion in assets. This would have been unthinkable a few decades ago, when awareness of sustainability issues was lower and suspicions around online banking were higher.
For smaller brands, moving towards more sustainable finance options may come with challenges. Their risk profiles may not be something that every green bank is comfortable with, and, as with anything environmental, greenwashing can be a hazard. It might even be a reason why finance officers or board members resist change. But shifting mindsets so that companies’ finances become a critical part of their resilience strategies makes a convincing business case.
ESG (environmental, sustainability and governance) scores for banks can be found on ratings agencies, or sometimes there are details in the bank’s own data, notes Sherrard-Smith. “You don’t have to switch the whole bank account — sometimes, we just adopt a toe-in-the-water approach. Trial one of these banks with a smaller amount of cash, and if it’s not for you then that’s fine. But often businesses find the service is just as good, if not better.”
Alternatively, for smaller companies building savings over the long term, the green bond market is growing, hitting $1 trillion for the first time in 2024 — up 3 per cent year-on-year, according to the International Finance Corporation (IFC). Green bonds work in the same way as traditional bonds, but the proceeds must benefit environmental projects. As such, businesses are mitigating their own future climate risks.
Greener pensions
Many of the arguments for green banking also apply to the $56 trillion invested in pensions worldwide.
According to Greenpeace, a third of all shares in fossil fuel industries around the world are held by pension funds. But there are some pension providers whose products perform financially for employees and also align with sustainable values. UK-based Octopus Energy, for example, launched a fund in May that allows investors to have a stake in renewable energy projects across 15 countries. Historically, green funds like this have tended to yield lower returns. But a 2024 report by Morgan Stanley found that, while ESG funds trailed behind more traditional rivals, over the long term they yielded marginally higher returns.
Still, many pension funds are early in their green finance journeys, so there is scope for brands to influence how the space evolves, says Dr Martin Stuchtey, founder of the Landbanking Group, a company that turns resources like arable land into tradable assets, financially incentivising landowners to protect them. For fashion brands that want to improve the sustainability of their pensions, he says, it comes down to factors like transparency and breadth. “Request detailed disclosures on how your pension fund integrates ESG criteria — particularly for nature-related risk and not just carbon. Make sure your fund goes beyond emissions and includes biodiversity, water and land use in its risk and opportunity analysis.”
If the pension fund in question doesn’t meet the standards expected, Stuchtey advises pushing it to be better. “If your provider lacks a nature lens, engage. Ask them to adopt nature-positive mandates or reallocate capital to funds that factor in land use, restoration or regenerative agriculture. As fashion brands start mapping the nature footprint of their own supply chains, it’s only natural to expect their capital should do the same. That includes pensions,” he says.
Climate resilience is financial resilience
On one side of the coin, banks and pension funds may be stunting the net-zero transition by investing in companies and practices that contribute to worsening the climate crisis. On the other side, brands and suppliers alike are scrambling to mitigate the financial risks posed by climate change. Failing to connect the dots on these two issues could cost the fashion industry twice over.
Accounting firm PWC estimates that more than half of the world’s GDP relies on biodiversity. For fashion businesses, the risk of nature depletion is even higher. Companies including Kering and LVMH are already starting to invest in protecting biodiversity and water supplies, both of which have a huge impact on the quality and availability of natural fibres, as well as the resilience of local communities. At the same time, suppliers and retailers are already grappling with disruption from extreme weather. Among the risks is extreme heat, which a 2023 study by Cornell University’s Global Labor Institute and British asset management firm Schroders estimated could jeopardise up to $65 billion worth of apparel exports by 2030 for key manufacturing countries including Cambodia, Bangladesh, Pakistan and Vietnam.
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In other words, it’s about resilience — and so, choosing green finance options helps to protect the future viability of the business.
Business leaders outside of the sustainability sphere are starting to recognise this too. In January, delegates at the World Economic Forum in Davos were quizzed on their perceptions of global risk. Five of their top 10 long-term threats were environmental concerns, ranking above things like conflict and disinformation.
“We’ve started to see companies issue climate warnings,” says Carine de Boissezon, chief impact officer at French utility firm EDF and a passionate advocate for green finance. She points to companies including Porsche, which have issued profit warnings after extreme weather events hit supply chains. “Climate change is happening, it’s going to impact your business if you are not looking at all this interdependency with your supply chain. Climate, biodiversity, all the things that are related to your resilience, you have to start taking it into account now. This means that you have to think about having more inventories, which will cost more money. This is why you have to work with finance to think about this and broaden the issue.”
De Boissezon pioneered EDF’s first green bond back in 2013. At the time, it raised €1.4 billion; now, it’s almost €33 billion. “I truly believe that we have to hack the system if we want things to change,” she says. “If we don’t count what really counts, then we won’t make a difference, right? This is a journey. The good news is there has been a boom in green bonds compared to 2013. It has really increased massively, and there has been so much innovation, which I think is what finance is good at.”
Some of the innovations De Boissezon is referencing include blue bonds (raising finance for ocean projects) and debt-for-nature swaps (that protect forestry and other environmentally valuable sites). In another innovation, in 2019 Prada became the first name in the luxury sector to sign a “sustainability loan”, where the interest rate could be reduced if the company hit certain environmental goals. It has now signed four sustainability-backed loans, totalling €315 million, with interest rates hinging on several factors: the number of Prada stores assigned a Leadership in Energy and Environmental Design (LEED) Gold or Platinum certification; the amount of training hours employees clocked for sustainability; the use of Prada Re-Nylon (recycled nylon) in its products; the regeneration of production waste; and how much of the energy used across Prada’s industrial and corporate sites is self-produced.
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Chanel issued a €600 sustainability-linked bond the following year, pledging to reduce both its own emissions and those in its supply chains. By 2023, the company reported that it had cut its own emissions by 42 per cent from its 2018 baseline.
With sustainability-linked bonds in the fashion industry often oversubscribed, there is clear momentum in the field. But there’s also room for more transparency around how impact is measured and more ambitious commitments around repayments when brands fail to hit their targets.
Other businesses in the fashion industry should take note, says Aii’s Elinder Liljas, especially since it is now clear that decarbonisation needs upfront investment in areas like supplier financing and risk-sharing for new technologies. “If brands aren’t allocating a budget to their climate goals, then it’s not a real strategy — it’s just a statement,” she says. “These investments don’t come with the kind of short-term ROI [return on investment] that brands are used to including in a business case.”
What this means, in effect, is wholesale change in how the business case is framed, to include mitigating the long-term risks of inaction on the fashion industry. But, she says, this is where green finance can come in: helping to bridge the investment gap by aligning capital with climate goals. “It’s about understanding the cost of inaction,” she says. “The penalties, supply chain disruptions and regulatory risks that come from doing nothing.”
From more transparent banking and pensions, to bonds that reward suppliers in fashion supply chains for environmental stewardship, Stuchtey believes finance is a strategic way to embed sustainability going forward. “It’s particularly relevant now that nature has emerged as the ultimate backstop,” he says. “Without healthy ecosystems, fashion supply chains — reliant on cotton, leather, wool, viscose — simply don’t function.” If moving to sustainable finance options protects future profits without increasing current costs, it’s a change that’s hard to argue against.
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