HCR Law Events

6 November 2020

The Rise of Green Trade Finance

Consumers and corporates alike are increasingly focusing on environmental and sustainability practices when making financial decisions. In fact, consumer demand for ethically and sustainably sourced products has led to corporate social responsibility (CSR) commitments that reach across industries and supply chains. This in turn has led more and more businesses to consider incorporating environmental, social and governance (ESG) factors into their trade and finance decisions.

In the industrial and energy sectors, attention is focused on how supply chains may adopt alternative resources. For example, automotive companies are looking into reconfiguring their supply chains to buy batteries instead of exhaust systems. While in the consumer and FMCG sector, notably food and beverage, lifestyle and fashion companies, sustainable practices are at the forefront of brand strategies as they seek to address concerns of environmentally aware client bases.

Sustainable trade depends on reforming the nature of commercial relationships, making the whole value chain fairer and more resilient from top to bottom.

Three important areas of sustainability:

  • Environmental sustainability: managing how goods and services are physically delivered and consumed.
  • Social sustainability: sourcing from ethical suppliers to reduce negative impacts while also uplifting societies seeking to upskill and improve financially.
  • Economic sustainability: doing good is good business because when suppliers gain a more equitable, stable foundation, they are able to offer improvements to the supply chain, bringing economic benefits.

Focusing on all three areas gives businesses a better idea of how sustainability can be boosted.

Rise of sustainability in trade finance

The University of Cambridge worked with the International Finance Corporation (IFC) to launch a ground breaking trade finance product, the Sustainable Shipment Letter of Credit (LC).
The IFC states that it may also provide a price incentive for certain commodities under the Global Trade Finance Program (GTFP) and shipped with a Sustainable Shipment LC. This means that any participant bank could share this margin benefit with clients, providing evidence of sustainability measures be included within the documentation. This LC has been prioritised to the palm oil, soya, beef and pulp and paper supply chains, as these are associated with a significant portion of tropical deforestation.

The need for market standards in green trade finance

Today, ESG-linked loans and green bonds are readily available based on well-recognised market standards that define sustainable activity. However, no such market standards exist for trade finance, which creates a challenge for the marketplace and a risk that any offering by financiers is seen as little more than “greenwash.”

At present, if a company wishes to issue a green bond, or takes out a green loan, there are reasonably market standards. However, there are no specific market standards for trade finance, and it is not easy to ‘cut and paste’ these existing rules to apply to trade transactions yet.

If a bank writes a guarantee facility, allowing for the issuance of a series of individual guarantees to support the construction obligations of a contractor for a wind farm, does this qualify? Even though the end application of those funds is for renewable energy, a guarantee is a contingent instrument. Therefore it will not meet the green loan standard for use of funds, and there are many nuances which could factor into how this may or may not be considered sustainable financing.

What is needed is the development of accepted industry standards that meet the core principles of sustainable purpose, independent accountability, and transparent reporting, demonstrating that the green benefits of these solutions are authentic.

Conclusion

For businesses, the impetus to build up their sustainability efforts might begin with environmental concerns but increasingly, it is important to realise that the social and economic aspects are just as important for a more meaningful form of sustainability in the long term. If there’s a lesson from the pandemic that’s universal, it is the importance of building resilience for the future.

Potentially, companies that focus on sustainability may even be better performers, because they are able to better optimise their business to produce positive impacts instead of generating a negative environment that might prove unsustainable in the long term.

In the same vein, innovative companies with sustainability in their internal systems could well outperform others that do not view sustainability as an important exercise in the long term.
Businesses should therefore view sustainability from the angle of innovation and new value creation, and to make it a priority to include environmental and social impact on par with economic performance.

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About the Author
Khalid Javaid, Senior Legal Counsel / Consultant

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