“It’s not easy being green” – managing the trade ESG balancing act

20 July 2021

Rowan AustinHead of Trade Origination & Advisory, Corporates & Institutions, NatWest Group

View bio

Other insights

View more insights

From the mailroom to the boardroom, sustainability is becoming more embedded in businesses. But becoming more sustainable can only be achieved if supply chains and trading partners come along for the journey.

The need to manage environmental, social and governance (ESG) risks has never been more acute and the trade and export finance community has a big role to play here.

Rowan Austin recently participated in a discussion covering some of the issues linked to the move towards sustainability, particularly from a supply chain perspective. Below we go through some of the key trends and considerations for trade.

1. The importance of a balanced ESG approach

Everyone knows how vital it is for the world to reduce carbon emissions, but economic factors have to be considered too. In recent months UK Export Finance has been working to roll out a new transition development guarantee scheme to help oil and gas companies switch towards less polluting operations as the UK government ended support to foreign fossil fuel schemes at the end of March. There’s been concern about the impact of the government’s decision on smaller firms in the supply chain.

A transition plan is vital because without it, we risk causing significant harm, and there’s growing awareness within the financial community of the need for a “just” transition. Government mechanisms that help firms diversify their income streams away from fossil fuels or retrain and retool are essential in this context. Transition plans need to be credible, but their impact on communities that are affected is also moving up the investment agenda. Measuring overall impact can be difficult – the E in ESG needs to be weighed alongside S and G factors, not just considered on its own.

2. Supply chain transparency is improving but still a focus area is vital

More and more investors have contractual obligations that their money should be invested in the right supply chains. But it’s still difficult to get full transparency across these supply chains. There’s generally good data available for the first supplier, but the further upstream you go the less transparent it becomes. Big improvements have already been made, but there is still some way to go.

It’s also important to remember that supply chains are at the heart of many business models, so companies don’t want to give away all of their secrets by being too transparent. Providing a broad overview of your supply chain’s carbon footprint will in many cases suffice

3. Technology is there to help companies and has become more affordable

Technology to help businesses provide information about their supply chains has been around for some time, but in the past it hasn’t always been affordable. That’s beginning to change and is now supporting companies, banks and regulators as they put initiatives into action.

There are certain frameworks available on distributed ledgers and software-as-a-service at a price that companies can now afford, enabling them to prove their sustainability-related credentials so that they can receive preferential treatment from banks.

4. Green trade finance frameworks are vital

As it stands, individual financial institutions are developing their own views about what sustainable finance actually means. There are green loans and green bonds whose proceeds are used for sustainable purposes, and sustainability-linked loans and bonds, which provide capital to companies to help them meet certain KPIs linked to sustainability. There’s huge appetite for all this – we’ve seen more than USD 50 billion invested in ESG instruments so far in 2021. We’re now starting to see more formal frameworks introduced to support these products: later this year the EU will introduce its sustainable finance taxonomy, which is likely to be adopted in the UK too. All these frameworks are driven by engaging and embedding the principles of the Paris Agreement into sustainable finance practices.

But it’s earlier days in trade finance. Trade is much more complex – it’s multi-layered, covers multiple jurisdictions, and there many more counterparties involved. We’re seeing ICC committees put together some principles on sustainable trade finance, and the EBRD and IFC are also starting to work on green trade finance frameworks.

The risk of not having frameworks in fragmentation and market disorganisation. It’s important we get a framework that enables standardisation so our industry can move forward with sustainability.

5. Existing frameworks have a big role to play in incentivising sustainability

Existing financial mechanisms can be used to incentivise the firms at the beginning of supply chains to become more sustainable and more transparent. Digital trade finance could be used in a data-for-benefits swap, for example, if a producer provides additional sustainability data in exchange for preferential trade finance terms. This could be a key focus of sustainability over the coming years as the digitisation of trade finance gathers pace.

6. Going green has big benefits

Firms able to demonstrate that their carbon footprint is getting smaller and that they understand their interactions with the natural world, engage with their community and have a good handle on their suppliers’ ESG footprints are likely to be much better placed to find and retain talent and access capital at favourable terms over the coming years. Investing time and money on sustainability today will provide clear benefits in the future.

Glossary 

  • ICC – International Chamber of Commerce
  • EBRD – European Bank for Reconstruction & Development
  • IFC – International Finance Corporation
ESG


This document has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this document has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this document, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this document. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this document and any issues that are of concern to you.

This document does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2021 © NatWest Markets Plc. All rights reserved.