Insight & Analysis

Trade finance, the people and the planet

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Businesses can plan all they want for future profitability but unless many more start taking issues of sustainability very seriously, none of that planning will matter. One of the world’s largest banks outlines its activities in the corporate treasury space.

Business has the greatest impact on people and the planet; business therefore has a responsibility to manage that impact. Sustainability should now be top of the agenda for all.

Corporate environmental, social and governance (ESG) policies – of which sustainability is a convenient shorthand – are a starting point. For now, some see ESG as a box-ticking PR exercise. But as more people take a firmer stand on sustainability, then expectations will rise and positive action will be demanded. If in doubt as to what this means, replace ‘people’ by customers, investors or governments.

Treasurers may not realise it, but they can play a huge part in the shift to a more sustainable future. As ‘owners’ of the main corporate banking relationships, they can steer their business towards sustainable finance and, in doing so, help to educate and ultimately change corporate attitudes for the better.

Most major banks are engaging with this idea now, all understanding that it is a catalyst for change. As one of the first global institutions to commit to the UN’s Sustainable Development Goals (set in 2015 for the year 2030), Citi has a commitment to lend, invest and facilitate a total of US$100bn to finance green initiatives, sustainable growth and a reduction in the environmental impacts of its own global operations and supply chain, by 2025. This target follows on from one set in 2007 to make US$50bn in green investments by 2016 (a goal which it met three years early).

Green trade

Although ESG-linked loans and green bonds have been on the agenda for some time at Citi, the trade finance space in Europe had been relatively quiet in terms of sustainable products until this year, says Natasha Condon, Head of Trade sales Europe, TTS, Citi.

In 2018, the bank’s export agency finance team secured a small number of marquee trade finance deals, including the largest export credit agency deal of its kind for Hornsea Windfarm (itself the world’s largest offshore wind farm).

“We’re now seeing a far wider range of multinationals talking to us about sustainability,” says Condon. “This has spurred us into thinking more widely about how we can apply market standards on ESG-linked and green finance to our trade finance solution set.”

Indeed, although export agency finance tends to be straightforward in that it links to a particular project, it is less clear for a related guarantee facility, for example. Although the outcome is green, a guarantee facility is, by its own nature, contingent, so that ICMA green loan standards cannot be applied as these require green loans to be used directly for green purposes.

“This is why we need to think carefully about what a trade facility is designed to do and how we can make sure funds are being used for green purposes and not just being re-labelled as green,” notes Condon. She is keenly aware that with the wider market for sustainable solutions maturing – and thus a greater understanding of what it means – the days of ‘greenwash’ trickery are numbered.

Standards needed

One of the challenges that most participants have encountered is how they can be fully satisfied that their efforts are genuinely green, and how they can monitor and validate their solutions in the face of close market scrutiny.

For Condon, independent guidelines on sustainable trade finance are essential to ensure credibility. Retro-fitting more generic lending rules into the specific requirements of trade finance does not offer the requisite clarity, she believes.

The creation of an ICC trade finance committee to work on international standards for sustainable trade finance is, she comments, “long overdue”. However, the call for standardisation is not a cue for commodification of products.

Although sustainable trade financing standards demand full market collaboration, competition will still be encouraged in this space. “This is very much led by the clients and I see no issue with the idea of banks competing to demonstrate how they can provide a better solution to help clients meet their own ESG goals,” explains Condon. “It can only help to move the market on faster, which is good for all of us.”

Trade solutions

The branded consumer market is particularly under pressure to adopt sustainable measures. With firms under immense pressure to demonstrate their green credentials to an enlightened customer base and watchful media, Condon sees many participants adopting supply chain finance (SCF) as a way of driving ESG-compliant behaviour in their supplier bases.

Often SCF programmes are implemented alongside working capital or cost-of-goods initiatives. As long as the providing bank’s SCF platform has the facility to differentiate between individual suppliers that meet the requirements and those that don’t, Condon says that SCF is a relatively easy means of incentivising suppliers to adopt a positive ESG approach at least in alignment with the buyer’s own stated aims.

In this context, validating sustainability credentials can be achieved through independent assessors such as EcoVadis. These third parties can physically check that what a supplier is reporting is what’s really taking place, explains Condon. A dynamic score is awarded for each supplier which can be used to adjust the pricing of finance accordingly. “It is fully within our capability at Citi today to take that independent data and apply pre-set rules in terms of pricing.”

Sector challenges

Each sector has its own set of sustainability issues to overcome. One that has a very public journey to make is automotive. Manufacturers here are looking to make some of the most dramatic changes to their business models as they move away from traditional motive power sources. It will require them to restructure their entire supply chains, says Condon.

This transformation is driven by, and running in parallel with, new consumer behaviours in terms of the vehicles they buy and how they buy them (with electrification and the driver-subscription model as respective examples).

New financing challenges are surfacing, forcing banks to take a creative view of their clients’ new pain points. “If new consumer behaviour and growth in cleaner vehicles is to be encouraged, then, as an industry, we need to come up with new ways of financing the supply chain that will help to achieve that,” says Condon.

Opportunity

Sustainability is influencing the transformation of the entire automotive sector, from manufacture of vehicles to the provision of new infrastructure. There can be few other sectors that are not on a transformational pathway of some description.

But, says Condon, there is opportunity aplenty in change. Where entire economies are predicted on a model of constant growth, running out of commercial steam suddenly seems less likely as new markets open up, but this time the net results should be beneficial for everyone in that people and the planet are now very much considered factors.

In terms of the importance of trade finance as a function, Condon says its reach has extended “to every nook and cranny” of the bank. Indeed, clients with wide-ranging needs arising from their response to a sustainability issue – such as those in automotive – often meet with multi-disciplinary teams from the bank, from lending and trade finance, to payments and collections.

As the push continues to ensure sustainability has an intuitive and compliant fit for its trade finance solutions, Condon says Citi is now taking a strategic approach to delivery. “It’s not a product specific approach – it’s more about developing our philosophy around it, and the standards we are going to apply, in a consistent and transparent way,” she explains.

With more businesses understanding the vital role they have to play in the whole sustainability movement – and customers, investors and governments scrutinising their every move – she feels that this approach “will give comfort that what we as a bank are doing is real”.

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