Sustainable trade finance will be a cornerstone of reaching net zero. Our new Sustainability in Trade and Trade Finance programme, with Coastline, is helping bank staff get up to speed.
Trade finance and sustainability
Global trade generates around 38% of greenhouse gas emissions according to the Overseas Development Institute.
So, to get to net zero by 2050, trade and trade finance will have to change. There are already important moves in the wider sector.
For example, the Poseidon Principles is a voluntary framework under which banks that finance ships, monitor – and try to incentivise – the greenhouse gas efficiency of the ships in their portfolio.
Haris Zografakis is Head of the Commodities Group at London law firm, Stephenson Harwood.
He pointed out in February’s Financial World that it’s “only a matter of time” until trade finance banks also start considering carbon intensity as factor in lending.
How to reduce the effects of climate change
Mitigating climate change has been discussed for years – often under the “nice, but too difficult to really do” label. There are certainly challenges.
Sustainable trade finance must help tackle one of the toughest parts of sustainability: greening supply chains. That means helping to cut emissions that neither the bank nor bank’s client are directly responsible for. (So-called ‘scope 3’ emissions)
Getting good data on the environmental, social and governance factors in supply chains – and getting that data right down into the capillaries of a supply chain – is far from easy.
And even if banks have that data, and can have it verified by third parties, they will also have to use it properly to inform good banking practice.
Although it will be hard, real change is coming. Banks themselves want to do the right thing, as the Poseidon Principles show.
And legislators and regulators are going to act.
For example, the European Commission (EC) is bringing in a carbon border adjustment mechanism (CBAM) to equalise the price of carbon between domestic EU products and imports.
The EC put forward a proposal for a ‘European Green Deal’, in December 2019. Within this, the EC advocated making “the respect of the Paris agreement an essential element for all future comprehensive trade agreement”.
So how can professionals prepare?
What trade bankers need to know about ESG
To be part of the drive for net zero, all trade bankers will need a good grasp of:
- what drives climate change and what it means for trade
- international standards, conventions and regulations on sustainable trade finance
- client onboarding and due diligence in sustainable banking
- how sustainability will inform trade finance governance
- how good ESG practice will change risk management
- assessing and monitoring transactions to ensure sustainability
There will be much more to cover in daily practice – particularly as trade banks are just starting out on their sustainability journey.
Over time, trade finance won’t talk about how to do sustainable trade finance. Sustainability will be baked into everything that trade bankers do.
More about our Sustainability in Trade and Trade Finance Programme