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