Insight & Analysis

ESG and trade finance

Published: Jun 2021

As a recent industry event demonstrated, trade finance presents numerous opportunities to further the ESG agenda – from harnessing data effectively to driving collaboration between banks, corporations and regulatory supervisory bodies.

Technology globe overlayed on green fields

Treasury teams are continuing to look closely at the importance of sustainability and environmental, social and governance (ESG) criteria. Indeed, Treasury Today’s 2020 Global Sustainability Study found that 61% of respondents said sustainability was reflected in their organisations’ core values, while 43% said their partners were engaging with them on sustainability topics.

One area in which ESG is playing an increasingly important role is that of trade finance – particularly as companies look more closely at the environmental and social costs of their own supply chains. According to McKinsey, “The typical consumer company’s supply chain creates far greater social and environmental costs than its own operations, accounting for more than 80% of greenhouse-gas emissions and more than 90% of the impact on air, land, water, biodiversity, and geological resources.”

As awareness of these issues continues to grow, companies are increasingly looking at ways to further sustainability within their supply chains, for example through the use of sustainability-linked supply chain finance solutions. In March, meanwhile, SWIFT announced that it is integrating the ICC’s Sustainable Trade Finance Guidelines into its KYC Registry, thereby enabling financial institutions to identify ESG risks in their supply chains.

Rise of the ‘S’

The significance of ESG in the world of trade finance was one of the themes arising from the recent virtual conference held by the Bankers Association for Finance and Trade (BAFT). “ESG was a huge theme throughout the conference – and one notable area of discussion was the rise of the ‘S’ in ESG,” says Chris Jameson, head of Financial Institutions for GTS EMEA at Bank of America (BofA). “ESG has been very focused on the ‘E’ for many years, but the societal change and impact that we as an industry can have has really risen to the fore over the past 12 to 18 months.”

From a trade perspective, the conference also highlighted the importance of trade finance in supporting ESG, adds Duncan Lodge, Global Head of Traditional Trade and EMEA Head of Trade and SCF Product at BofA. “That’s because it has a number of inherent features that make it very useful in this regard – you get visibility over the underlying transactions, you know what you’re financing, there are controls over how and when funds are dispersed, and often to whom.”

He notes that the bank’s initiatives in this area include seeking to broaden the definition of sustainable finance to support wider social goals. “For example, we as a bank issued a US$2bn equality progress sustainability bond last year – and one of the use of proceeds of that is to finance minority-owned business enterprises that we onboard onto our supply chain financing programmes as suppliers.” Last week BofA also announced the launch of an ESG Strategic Council for EMEA. The Council’s activities will work to minimise the bank’s impact on the climate, assess and manage climate-related risks, support clients in their low-carbon transition, and help drive related public policy and advocacy activities.

Another theme arising from the BAFT conference was the importance of data in driving ESG, notes Lodge. “This includes the use of data to prove the provenance of the goods you’re financing – where do they come from? Were they sustainably sourced? What about the vessels that were used to move the goods – what’s the carbon impact associated with that?” According to Lodge, answering these questions is one way that technology platforms and distributed ledger technology “can really play a part in bringing together the ecosystem and the various different data sources.”

Last but not least, Jameson notes that a further important theme is the rise in collaboration between banks, corporations and regulatory supervisory bodies where ESG is concerned. He adds: “There’s a halo effect from these conferences that then stimulates other banks to try and replicate some of the things they hear from the industry, and help achieve a consensus towards some of those goals.”

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