Estimated reading time: 8 minutes
In recent years, the trade finance industry has gone through a paradigm shift. In the past, the industry viewed sustainability as a mere side project that could be ignored. But in 2023, this is no longer the case.
The trade finance industry now has shifted its focus heavily towards the sustainability space, leading to new innovations and strategies that prioritise climate-friendly outcomes.
Understanding the need for sustainable policies, and what the challenges are is vital for the industry to make tangible progress.
To talk about Absa’s sustainability plans, Trade Finance Global’s Brian Canup (BC) spoke with Msizi Khoza (MK), Managing Executive ESG, Absa and Ovizikhungo Sicwetsha (OS), Pan African Head, Short Term Finance, Absa.
Brian Canup (BC): Thank you for joining us today! Please give a quick introduction.
Msizi Khoza (MK): My name is Msizi Khoza, head of ESG in our corporate and investment bank. What that means is that I provide overall leadership to our ESG-related initiatives across the bank. I work very closely with all of my colleagues across client coverage, as well as the respective set of product areas, including our trade and working capital space.
Ovizikhungo Sicwetsha (OS): My name is Ovizikhungo Sicwetsha, I look after all the short-term lending products within the broader Trade and Working Capital business unit.
I also lead the ESG from a Transactional Banking business unit, working with Msizi at a CIB ESG level to define the position that the Transactional Banking unit (Corporate Bank) should take around ESG and making sure that we are aligned strategically with what the business is trying to achieve at a CIB level, as well as what the group is also trying to achieve from an ESG perspective.
Financing the just transition
BC: Many countries across the world still rely on traditional fossil fuels for everyday life. How can trade finance play a role in accelerating this transition without unfairly hampering the development of these countries?
OS: Trade finance has been hard at work trying to bridge the funding gap that we see in developing markets. And part of the process is understanding how we can support and finance the sustainability transition.
We have to find a way to do this in a just transition, especially from a developing economy perspective, because of the abundance of natural resources in these economies.
How do we effectively support this? The first point is a bit obvious, we need to provide favourable financing for sustainable transactions. This will help support climate-friendly projects while also improving livelihoods across the African continent and other developing countries.
The second point revolves around making sure that we provide the right support for education costs and the development of technologies at the forefront of sustainability, especially in energy and related fields.
At the Africa Climate Summit earlier in the year, William Ruto, the president of Kenya (speaking as Chair of Africa Climate Summit 4 – 6 Sept 2023), said that developing countries need to lead the conversation and efforts around sustainability, as it relates to education and technology. But this requires more than just financing, but investment into technology and education. If the developing nations are going to be playing an important part in the energy transition, it has to be led, in part, by them.
I think at Absa, we’ve always taken these ideals seriously. We want to provide the right level of education around sustainability, connect large corporates and SMEs to improve collaboration and increase resources to help developing countries lead the efforts.
But we can’t solve it alone. There needs to be an effort to pass sustainable policies and standardise them as well.
The energy trilemma: Security, affordability and sustainability
MK: The IEA estimates that the demand for fossil fuels will peak before the end of the decade. Looking at this, it’s clear to me that the momentum is behind clean energy and sustainability, and it will be hard to reverse this trend.
There is a clear sustainability and economic case for developing renewable energy technologies, and it helps with the energy trilemma: security, affordability and sustainability. And you cannot go down this path without involving trade finance.
In 2020, one in twenty-five cars sold globally was electric. Last year, it was one in five.
Every day, $1 billion is deployed to solar technology. If you think about the manufacturing components and supply chain systems required to support such volumes, trade finance is a vital part of the process. Trade finance will underpin the entire system which will eventually lead to sustainable development.
BC: How can the industry take steps to ensure effective, tangible actions towards a sustainable future and avoid greenwashing accusations?
MK: The first step is clarifying the very idea of ESG, and the trade finance industry has been working to put together a framework that defines what ESG means in the context of short-term lending and trade finance in particular.
And I think those kinds of initiatives are very welcome and will go quite a long way in protecting the industry from the potentially negative consequences of greenwashing.
Absa is currently developing an anti-greenwashing policy. We view this in a similar respect as more traditional risks that we have historically dealt with. We apply the same level of rigour to greenwashing risks as we do towards anti-money laundering or corruption, and I think the industry at large should view it in this way.
It is no longer an afterthought, the risk of greenwashing needs to be front and centre of the risk mindset.
OS: It is also all about data transparency and accountability i.e. what is being measured and how we track this. We need clarity on the metrics and other measuring mechanics in order to be consistent in what we measure. Once we are clear on the goals, we can hold ourselves and our clients accountable. This ensures that there is transparency across the board, thus minimising the instances of “greenwashing”.
BC: Can you share examples of innovative projects that Absa has worked on with a local SME?
OS: We are working on a variety of projects across different themes of sustainability with SMEs, women and youth-owned businesses. We are seeing a lot of opportunities in the agricultural sector, where we are funding developmental farming projects. But there are many other projects in the renewable energy space, manufacturing, retail and other sectors, many of them involving or centred around SMEs.
As an example of an SME-focused programme, we have exciting projects coming out of Kenya at the moment, where we are helping to fund what we call “stockists” through a program called WezeshaStock. This programme is centred around SMEs who buy their inventory from larger entities for reselling to their own customers, helping them with funding to increase their sales and expand or meet the demand in their markets.
By funding these small retailers, we increase the flow of business for everyone involved in the process, from the manufacturers and distributors, to retailers and consumers at the end of the chain.
The WezeshaStock programme helps retailers, of all sizes, automate stock financing and provide information on capacity and management of orders. This enables the seamless onboarding of retailers, efficient stock order management, and the use of data analytics to facilitate unsecured stock financing for participating retailers. This is just one example of many programmes we are driving across the continent specifically targeting the SME segment.
We have developed a trade finance facilitation system called Trade Management Online (TMO), with the idea of increasing transaction speed and accuracy. So far, TMO has been a great success with our clients.
We will have more public information on similar programmes in the next few months, so be on the lookout for this. However, our main focus is making sure that we use technology efficiently to properly fund SMEs and to begin bridging the financing gap.
Cooperation in sustainability
BC: Last but not least. How important is it for multilaterals to work with banks in order to achieve sustainability goals? And how can these partnerships accelerate or improve climate action?
MK: I think multilateral development banks have a truly indispensable role to play, especially as a way of complementing traditional private capital.
Recently, there has been a transition where multilaterals have started competing with larger banks for business, which has not been the case in the past. Their best role in the ecosystem is to work higher up on the risk curve, with a mixture of concessional and non-concessional loans.
Earlier this year, the G20 released a report on their recommendations for multilateral development banks (MDBs) and private financing for sustainable development.
I think this is quite compelling as it speaks about how MDBs can be bigger, bolder, and better in their thinking around capital adequacy frameworks in order to unlock investment headroom.
Thinking differently about capital adequacy frameworks, using tools such as SDRs from the IMF, and becoming bolder in addressing credit and risk appetite, MDBs can sufficiently de-risk projects so that private capital can flow and accelerate the sustainability transition.
To summarise, I think MDBs have a critical role to play, but in order for them to play that role effectively, they need to rethink their approach. And I believe that the G20 report is a good starting point.
However, I don’t want to be overly critical of MDBs, as we have a close working relationship with many of them.
We recently completed a large transaction with the IFC for 4.5 billion rands, looking at green construction, for first-home buyers, particularly first-time female home buyers.
We also just received board approval from the African Development Bank (AfDB), where they are putting together a facility for us which is going to be our first sustainability and social bond as a firm. The idea is that we will use that capital for particular deployment to women and youth-owned businesses.
Ultimately, the appetite is there for MDBs and large banks to work together to help SMEs, but we still have a long way to go to unlock the large pools of capital.
OS: To add to this point, MDBs have an important role in policy advocacy and alignment. These institutions have access and influence that regular banks do not have, so they can really push for effective alignment of regulation across different jurisdictions.
Also, MDBs play a vital role in capacity building for funding and credit risk appetite for commercial banks. They are able to help reach SMEs by providing capacity to Commercial Banks for more specific funding and credit risk appetite. These efforts allow traditional financial institutions to leverage their systems, reach, and capabilities to extend their services to clients they wouldn’t ordinarily reach.
The relationship between us, as a bank, and these institutions is a key catalyst to the sustainable finance journey.