Part 1: An Overview of Financing Sustainability
This is a two-part series exploring the relationship between the finance world and sustainability. This segment will break down finance in the sustainability world, to better understand how it can be applied to the fashion industry.
The global fashion industry was worth around $600 billion in 2019, with a forecasted growth of 11.5% annually. By 2023, it is estimated to be worth around $900 billion, becoming a major attraction for investors. In spite of this trajectory, the growing visible impacts of climate change have shifted the emphasis to cutting down carbon emissions. According to Quantis' Measuring Fashion Report, the fashion sector is responsible for 8% of all global climate impacts. Sustainability strategies must not only be present in the processes of collecting raw materials, processing them, and selling them, but also in the process of obtaining funding for these endeavors.
Over 30 years ago, major companies began the trend of creating corporate social responsibility (CSR) and environmental departments, as a means to integrate these initiatives under the company's own brand or matrix. Fifteen years ago, new initiatives in responsible investment began incorporating under the tutelage of the United Nations.
While the political and social spheres have generally been immersed in sustainability, finance as an industry has remained slow to adopt sustainability principles. Arguably, the industry’s lack of corporate responsibility is a reflection of prioritizing short-term profitability over long-term results. Moreover, the few sustainability investments made were directed at large corporations, excluding the small associations and companies operating in the field. In response to this phenomenon, the United Nations Environment Programme Finance Initiative and the United Nations Global Compact developed a guideline to include environmental, social, and corporate governance (ESG) issues: the Principles for Responsible Investment (PRI). These principles are open to support from institutional investors, investment managers, and investment service providers.
PRI Organization: the Basics
The first of these principles assume the analysis and decision-making processes regarding the investments in ESG issues, all focused on the commitment from the signatories. The second point addresses the incorporation of ESG criteria into the companies' internal policies and the disclosure of information on these commitments. In the third point, the signatories will publish their financial reports that integrate ESG. The fourth promotes acceptance and implementation of principles in the global investment industry. The fifth principle is based on sharing measures and pool resources and making use of investor reports as a source of learning. Finally, the sixth principle addresses the commitment to report on activities and progress towards implementation.
In its first years, the companies that signed these principles were a few hundred. Today, they have reached 3,000, with a growth rate of 28% between 2016 and 2018. This positive rise has also been attributed to the implementation of minimum requirements among signatory investors. Some companies do not keep their promises, and thus if the two-year commitment is not fulfilled, the PRI Organization can remove them. However, it is not easy to measure what is sustainable for the criteria of each country. Fiona Reynolds, CEO of PRI Organization, maintained that the organization is “committed to increasing accountability, and [the organization] can't see how you can increase accountability without delisting the worst offenders. If they sign on but don't have any intent, that ruins the brand for everyone.”
Investments are currently taking place in a number of areas globally, such as sustainable land use actions, endorsed by 254 investors representing approximately $17.7 trillion in assets. Another significant investment area includes plastics via the Plastics Investors Working Group, consisting of 29 global investors representing $5.9 trillion in assets. This group is focused on building an understanding of plastics from a global and holistic perspective, including how this material fits within the broader definition of a circular economy.
At the same time, different ways to incorporate sustainable investment into portfolios also opens a debate about the quality of this ESG investment. Other well-known methods include: exclusion (avoiding investment in armaments or tobacco sectors); impact investment (seeking a positive impact on society and/or the environment in addition to obtaining a financial return); or ESG integration (combining sustainable investment considerations with traditional investment parameters).
Ultimately, this leaves a gap for small investors who want to contribute something to the retail ESG agenda, as a means to look for financing alternatives. This is where crowdfunding platforms come in as a solution. Here the criteria for analysis and evaluation of investments can be better followed, as seen in platforms such as Crowdcube or One Planet Crowd. There are alternatives like Kiva, based on loans that can be provided to small projects developed on the field, and have a 96% repayment rate.
These alternative financing initiatives, together with those sponsored by the UN, provide a structural framework for organizations to achieve better long-term investments and to overall increase the number of sustainable markets.
Author: Luis Lazarich
Editor: Kristen Tadrous