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The energy transition appears to have been a constant back and forth between opportunities and complex regulatory and ESG challenges, and nowhere is this more pertinent than in commodity finance. Trade Finance Global (TFG) spoke with Christine Dirringer, Global Head of Trade and Commodity Finance at Rabobank, about how the industry is evolving to meet these demands.
As demand surges for critical minerals essential to renewable energy infrastructure, commodity financiers find themselves at the centre of a transformation that extends far beyond simple product diversification. Financial institutions must balance support for essential supply chains with stringent environmental and social governance requirements, all while navigating an increasingly fragmented regulatory landscape and persistent concerns about market concentration among smaller trading companies.
Critical minerals: The new commodity frontier
In the 1850s, the Gold Rush opened a new frontier in the US, drawing prospectors in search of individual fortune into remote and challenging territories. Similarly, the energy transition has opened a ‘new frontier’ for commodities: this time, however, the rush is a global effort with the intention of securing the industry’s future.
The energy transition’s dependence on specific metals and minerals has created what many consider the most significant shift in commodity demand patterns in decades. Copper, often described as the “lifeblood” of the energy transition, exemplifies the challenge. While demand continues to accelerate, with global copper prices having climbed 14% this year, and demand expected to surge 70% by 2050, sourcing these materials often involves complex ESG considerations that require sophisticated risk assessment.
A study by Institutional Shareholder Services (ISS) has found that some sustainability issues prevalent in the metals and mining industry include access to water, pollution, and human rights, which all present potential risks to investors.
The industry’s response, as Dirringer explained, has been to develop more nuanced approaches to due diligence that acknowledge these challenges while supporting essential supply chains.
Rather than avoiding difficult markets entirely, leading commodity financiers are implementing robust discussion frameworks and deep due diligence processes to evaluate sourcing practices. This includes understanding trade-offs between perfect ESG scores and the practical reality of where these essential materials are currently available, while actively encouraging improvements through financing structures.
The focus has shifted toward sustainability-linked loans and other mechanisms that incentivise ESG improvements, though market participants acknowledge concerns about greenwashing have made these tools more challenging to implement effectively.
Changing how emerging markets are perceived
Africa’s role in global commodity supply chains highlights another area where the industry is adapting its approach. Despite often negative perceptions driven by disproportionate media coverage, experienced commodity financiers report that actual risk levels frequently differ from perceived risks, with well-structured deals proving resilient even when tested in challenging conditions.
According to the International Trade and Forfaiting Association (ITFA), African trade finance demonstrates remarkably low default rates that often outperform developed markets, indicating that credit risk concerns may be overblown. Whilst African markets do face legitimate challenges, including immature regulatory frameworks and concerns about corruption and financial crime, these issues don’t justify complete withdrawal from African trade financing. The solution lies in implementing robust risk management and stringent compliance measures rather than avoiding African markets altogether, as transparency and proper compliance can enable safe and sustainable trade financing across the continent.
“There’s a perceived risk on Africa versus the actual risk. The perceived risk, I think, is higher. It’s influenced by the disproportionately negative news we get on Africa,” Dirringer observed. “In our experience, and we’ve long had a presence in Africa, our experience shows that our financing structures are effective, and even when they’re tested in court.”
The key differentiator lies in structuring and local presence. Collateral management agreements are employed more frequently in emerging markets, while blended finance solutions help manage the additional complexities of foreign exchange (FX) volatility, political instability, and infrastructure challenges. Local teams on the ground remain essential for effective risk assessment and relationship management.
Import and export flows require different approaches in these markets:
- Import financing faces greater exposure to local currency fluctuations, requiring partnerships with local financial institutions and careful assessment of companies’ foreign currency access.
- Export financing, typically repaid in hard currencies, allows for more flexibility in working with smaller companies or accepting slightly higher risk profiles.
The Basel IV challenge
Perhaps no issue looms larger over the commodity finance sector than the implementation of Basel IV regulations. “The Basel IV framework really didn’t recognise the value of physical commodities as eligible collateral, and that’s a huge problem. That is what led to or has been leading to a ‘flight to quality’, so to speak,” Dirringer explained.
Recent adjustments, including the EU’s Capital Requirements Regulation III effective from January 2025, have introduced more nuanced treatment of physical collateral, including commodities in leasing and secured lending contexts. However, uncertainty remains about how different banks will interpret and implement these requirements.
“It’s a bit bespoke how this is affecting each bank’s view of commodity finance,” Dirringer observes. The calculation method used for risk-weighted assets—whether standardised or advanced approaches—can significantly impact how individual institutions assess the economics of commodity financing. Cross-selling opportunities, particularly in cash management, may help maintain viability for smaller client relationships.
The industry response has varied, with some institutions maintaining engagement with regulators to communicate their perspectives on appropriate frameworks, while others take a wait-and-see approach. Regulatory uncertainty adds another layer of complexity to an already challenging environment for mid-market traders seeking financing options, and raises the barriers to entry in terms of education.
The technological catalysts for market transformation
The intersection of technology advancement and market structure changes is creating new opportunities alongside regulatory challenges. Major transmission upgrades for cross-border renewables are being financed through complex legal and financial frameworks, such as virtual tolling agreements for battery storage in Australia; Grid modernisation requirements represent a significant shift that will reshape power markets and create new financing needs that don’t always fit traditional project finance models.
The massive infrastructure investment required for transmission lines to connect renewable generation with demand centres, combined with increasing electrification across industries, is creating opportunities for power traders who can help balance grid intermittency. This structural change supports demand for financing solutions that can adapt to new market realities, as seen across US states incentivising new power plant development to address intermittency, altering financing needs beyond traditional centralised generators.
Battery storage technology, while still developing, could prove transformative for market structure. “We know the purpose. It’s to buffer the intermittency of renewables and ensure a stable round-the-clock power supply. But we don’t have long-duration storage yet. I think those solutions will be ever so important,” Dirringer observed. This will require a number of energy transition metals, like copper, aluminum, cobalt, and lithium.
Looking ahead, policy frameworks will remain paramount in driving market development. “I do think, one of the big swing factors is policy and regulation. Which, as we saw with things like the US Inflation Reduction Act (IRA) or the EU Emissions Trading System (ETS), can really accelerate the transition. But they are dependent on the political powers that be and the support they want to give to the transition,” said Dirringer.
The US IRA extends and enhances tax incentives for renewable energy projects, including wind, solar, and energy storage, offering up to a 30% credit for qualifying investments that meet prevailing wage and apprenticeship requirements.
The EU ETS is the world’s first international emissions trading system, operating on a cap-and-trade principle where a cap is set on the total amount of greenhouse gas emissions allowed from covered sectors. As of 2023, the EU ETS has helped reduce emissions from European power and industrial plants by approximately 47% compared to 2005 levels.
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Despite regulatory uncertainty and geopolitical tensions, commodity finance institutions are maintaining their market positions while adapting to new realities. Pricing has remained relatively stable, partly because existing market participants are reluctant to lose market share in an already concentrated sector.
The industry’s challenge lies in balancing the need for higher returns to justify increased regulatory costs against the competitive pressure to maintain client relationships. This dynamic may shift if further bank exits reduce competition, but for now, the focus remains on selective growth and careful risk management.
As the energy transition continues, commodity finance will play an increasingly critical role in enabling the physical flows that support decarbonisation goals. Success will require sophisticated approaches to ESG assessment, regulatory adaptation, and risk management, capabilities that will likely determine which institutions are able to see opportunity and navigate the “paradigm shifting”, as Dirringer summarised, in this evolving landscape.
