Prada has just signed the luxury industry's first sustainability loan, paving the way for more brands to simultaneously operate their business and improve their sustainability credentials. The "green" loan, offered by Crédit Agricole Group, allows for the annual interest rate to be adjusted if Prada achieves certain sustainability targets. These sustainability targets were jointly agreed by the parties, which surely increases the likely success of the arrangement, by both offering financial returns for the lender and a realistic opportunity for the fashion house to achieve its environmental objectives. Among the factors determining the interest rate of the €50 million, five year, loan are: the number of "green" buildings operated by the brand; the number of sustainability hours training given to employees; and the extent to which Prada uses recycled nylon in its collections.
This is the first initiative of its kind within the luxury goods industry and, given the continuing commentary around fashion's impact on the environment, could be the first of many sustainability linked loans to follow. Uptake by such a well-established and influential business will also greatly raise the profile of sustainability loans and green investments. Whilst still in their infancy, sustainability linked loans are a growing industry, valued at $40 billion in 2018 (according to Environmental Finance data). They work by offering lower interest rates where companies achieve their sustainability targets, and higher rates where the companies miss their targets. "Green" loans are a form of sustainability linked loans, with proceeds used to finance green initiatives.
One of the key obstacles for sustainability linked loans is operating an objective and transparent measure of companies' environmental progress, due to the various ways in which sustainability metrics can be measured. This will need to be considered by both the borrower and lender. That said, sustainability linked loans offer a way in which business and environmental aims can be aligned to support and facilitate environmentally sustainable economic activity. They therefore overcome one of the criticisms directed at reliance on businesses' efforts alone to combat environmental issues - that profits will come before environmental efforts.
Given the increasing recognition of climate change risks, including to financial stability, we expect the growth of these new products and other "green" investments to continue.