Why mainstreaming green finance is key to real industry sustainability
Green finance, at its core, is about funding a more sustainable future. The COVID-19 pandemic has exposed the need for sustainable recovery, including building back better for people and the planet.
Rakesh Vazirani, Head of Sustainability Services, Business Stream Products at TÜV Rheinland Group believes that post-crisis recovery offers a rare window of opportunity to tackle some of the toughest environmental issues the garment sector faces. He sees the progress made so far as leading to make green finance the future of sustainable development.
The momentum towards green finance is already here. When the COP26 Conference took place in Glasgow last October, organizers called on governments and businesses to meet the goals of the earlier Paris Agreement. The event immediately followed the UK government's announcement of its Net Zero Strategy: Build Back Greener, aimed at finally ending the country's contribution to climate change. Across the world, the International Finance Corporation covered eleven low-income countries’ efforts in transforming their financial systems towards more sustainable outcomes. Sustainable finance is crucial for emerging economies, particularly in Asia, to increase their market resilience and new green investment opportunities at a time of pandemic-related losses.
These developments matter to the global garment industry, which has found itself increasingly under the spotlight due to its outsized environmental impact and huge carbon footprint. At the same time, emerging research has shown that climate change – such as heat stress, rising sea levels and natural disasters – will have an adverse effect on the garment industry, impacting millions of workers.
In line with global commitments, brands and retailers in the sector are increasingly making their own environmental pledges, as well as forming supply chain alliances to coordinate and maximize the impact of their efforts. Many major companies, including Decathlon and H&M, have already joined the EU’s Green Consumption Pledge Initiative, which encourages cooperation with businesses to increase the sustainability of production and consumption, and complement regulatory developments.
Building the business case for green recovery
In order for the garment industry to welcome green financing with open arms, stakeholders must continue to cultivate the understanding that building back greener makes sense for people, planet and business.
Incorporating sustainability into business decisions can benefit the bottom line by enhancing brand reputation, increasing stakeholder trust and make entering even the most tightly-controlled markets faster, less painful and more profitable. There are even programmes and tools, from ZDHC to SAC, TMC, amfori and OAR to help make it happen.
Regulators have in turn stepped up to take action on enabling sustainable practices. The German parliament has passed the “Act on Corporate Due Diligence in Supply Chains” where companies with over 3,000 employees will have to identify human rights and environmental risks and take action. Regionally, the European Commission launched its circular economy action plan (CEAP) in 2020 where sustainable consumption, waste prevention and retention of resources is encouraged throughout product life cycles. This has taken shape in the form of EU’s Strategy for Sustainable and Circular Textiles which was adopted on March 30, 2022”
Bridging the (green) finance gap
Despite commercial and business rationale, the question still stands: how do we pay for it? The numbers are non-trivial. The UN currently faces US$100 trillion shortfall in fight against climate change. While the finance sector has aligned to support sustainable development under the auspices of UN PRI and similar initiatives, many bankers are still critical. They want to invest in sustainable projects, but lack the tools or the expertise to help them identify suitable projects to bankroll.
“What is very often missing is a clear definition and agreement on the KPIs and metrics that will be used to manage and track the impact of these investments. In effect, they need a way to measure success and calculate R.O.I.,” said Vazirani.
Progress is being made. The Sustainability Accounting Standards Board (SASB), is bridging the gap between business and investors. It has created guides to direct the disclosure of financially material sustainability information. One of the most recent additions was related to raw materials sourcing in the Apparel, Accessories & Footwear industry. It aims to measure a company’s management of the sustainability issues, such as climate change, land use, and resource scarcity.
Green metrics aren’t yet perfect, but they are evolving and financial institutions are beginning to adopt them. For example, as part of its Sustainable & Transition Finance Framework, Singapore-based DBS Bank aims to allocate SGD10 billion towards renewable and clean energy developments and another SGD10 billion towards green projects, assets and activities by 2024.
Looking good isn’t good enough. Neither is trying to “greenwash” away the environmental impact of a garment or leather product. Independent industry players such as TUV Rheinland are giving the process a push. Vazirani emphasizes the importance of quality and accurate metrics in order to make green initiatives effective and impactful.
“Regulators require them and financial institutions rely on them to identify risks and opportunities, so in-house reports cannot simply be taken on trust. Improvements and outcomes have to be verified by an experienced and completely independent third-party,” he says.
Greening the culture
Ultimately, a green recovery will depend on the financial world’s success in creating a culture that puts sustainability at the centre of decision making. Vazirani outlines three steps to help make it happen:
- Review every investment for its social and environmental impact
- Educate frontline loan officers and insurance officers dealing with textile businesses to adjust insurance premiums and loan rates based on the quality of the customer’s environmental and social performance.
- Take Green Finance mainstream. Normalise green investments where garment factory managers can walk into their neighbourhood bank and receive sustainability linked loans or insurance.
There is no time to lose when it comes to climate change. Although progress has been made in embracing green finance solutions, much is still needed to normalize and widen the scope of sustainable investments worldwide. Innovation and collaboration among governments, stakeholders and industry players are vital in cultivating a more sustainably conscious sector that places the planet as a priority.