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Trade finance providers have a critical role to play in the low-carbon transition. Through their lending decisions, they hold massive influence in some of the most carbon-intensive companies and supply chains, and they can use this leverage to push for much-needed progress on climate. 

The industry also has a role – outside of the high-emitting sectors it finances – to provide support and investment for climate technologies, as well as new energy and commodity markets that will be critical for reaching our global climate goals.  

Currently, carbon regulations are hitting supply chains, and global temperature records are repeatedly being broken. At the COP28 climate conference later this month, commodities, the main perpetrator of the majority of the world’s emissions, will be under the spotlight.

Now more than ever, trade finance providers must acknowledge their significant role in solving the climate crisis and take action to guide global trade towards low carbon targets.

This COP marks the end of the first global stocktake, whereby progress against the terms of the Paris Agreement is assessed. It is already clear that the world is nowhere near where it needs to be, but there is hope that COP28 will provide an opportunity to accelerate climate action. 

This means pressure will be on countries to demonstrate progress and take urgent action to move the dial. We can expect more ambitious regulation on the cards, bolstered off the back of the recent launch of the world’s first carbon border tax in the EU as well as more collaboration on climate disclosure through the ISSB. 

Phasing out fossil fuels will also be high on the agenda, as will climate finance. These outcomes could have significant impacts on the shape of trade finance. 

Climate sustainability

What are the next steps for net zero?

So what should trade finance providers actually be doing to ‘take action’ at this time? 

The first step, as boring as it sounds, is carbon data and accounting. 

In order to have any impact, it is vital to work out the total carbon footprint associated with your financing practices, as these will be significantly higher than operational emissions for financial institutions. And you need to get granular – understanding the carbon emissions associated with each commodity trade finance is key.

However, the difficulty and expense of measuring these emissions have forced many to delay the effort, especially for those with relatively new sustainability departments. 

It is hard enough to track the production, processing and transportation of these commodities, let alone the emissions associated with each step. It is even harder to do so one step removed from the source. 

However, whatever the challenge, whatever the excuse, this data needs to be collected, and shortcuts don’t work. We know that many companies that lack the supply chain data they need to properly calculate their emissions end up using broad-based estimates and assumptions. 

But this won’t do – not only does this open them up to accusations of greenwashing and potential regulatory penalties, but it also puts their whole business at risk. 

In a rapidly decarbonising world, you need to be able to compare performance between similar trades and traders and identify even the smallest changes in performance over time. Imprecise estimates can also hide carbon hotspots, masking the most significant risks. 

Increasingly, voluntary disclosure is transitioning to mandatory disclosure and with 23% of global emissions now covered by carbon pricing schemes, the costs and risks of carbon are increasing. 

More and more regulation is coming in – from the ISSB to the SEC reporting rules, to the EU’s Carbon Border Adjustment Mechanism, and much of this regulation is turning its attention to supply chain emissions. This means trade finance providers are coming into the spotlight, and their portfolios are under increasing scrutiny. 

However, there are some bright spots for companies that are struggling with carbon measurement and management. 

Big data, AI and machine learning are enabling companies to fill in the gaps in supply chain tracing speed up the process of tracking emissions over time and identify solutions. Using tech in this way is a no-brainer. 

Not only does it take the pressure off internal teams in responding to the plethora of external data requests they receive, but it also saves time versus working with consultancies – in our estimation, approximately 8 months’ time.

Of course, getting the data and ensuring regulatory compliance on climate is just the first step. Once companies know where they stand and where the hotspots and risks are in their portfolio, they can use this knowledge to push for change and actually reduce emissions.

Sustainable loans: A bank’s way to leverage green finance and climate action

One way we are seeing banks use their leverage here is through green finance schemes such as sustainability-linked loans. Banks can offer interest rate discounts for lower carbon supply chains and put penalties in place for higher-emitting trades. 

For example, at CarbonChain, we have worked with Société Générale, to offer sustainability-linked loans to commodity trading partners, help to support them on the development of climate KPIs, provide emissions dashboards and allow them to monitor the climate impact of each financed trade, and track progress. 

This innovative approach demonstrates how – enabled by tech and transparent data sharing – producers, suppliers, traders and banks can work together to tackle emissions, manage risks and future-proof their businesses. 

These types of sustainability-linked incentives could have a real impact. As traders start to compete for this green finance, they will need their suppliers to offer better and more competitive low-carbon solutions, driving progress up and down the value chain and triggering system-wide change. 

And given green trade finance is still relatively young, there is a significant opportunity for early movers to get ahead of the game here and lead. 

On the eve of COP28, there is no time to waste. Early action brings rewards, but this window of opportunity is narrowing.