Sustainable Trade Finance

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Trade Finance Global / Sustainable Trade Finance

Sustainable Trade Finance

Welcome to the TFG Sustainable Trade Finance Hub, your one-stop-shop for market insights on ESG, sustainability, and climate change and decarbonisation initiatives in relation to trade finance.

International trade is an engine for economic growth and development, but it also accounts for some 80% of the world’s carbon emissions.

This hub aims to report on how companies are tackling the challenge of meeting the targets of the 2016 Paris Agreement and the 2020 Glasgow Agreement, which set a path for signatory countries to reduce greenhouse emissions.

Additionally, the hub will offer information on how companies are aligning with the United Nation’s (UN) 2030 Sustainable Development Goals (SDGs), and how sustainability priorities are being integrated into global supply chains.

Finally, a transition towards sustainable and inclusive trade will require standards and definitions, the latest of which you can also find here.

Featured ESG and trade insights

ITFC on the impact of COVID-19 on Islamic Finance Sibos ITFC on the impact of COVID-19 on Islamic Finance TFG’s editor, Deepesh Patel, interviewed Nasser Al-Thekair, general manager of trade and business development at the International Islamic Trade Finance Corporation (ITFC), to discuss the impact of COVID-19 on Islamic Finance.
New Standard Chartered research shows companies in Europe, North America are doubling down on supply chain resilience final New Standard Chartered research shows companies in Europe, North America are doubling down on supply chain resilience New research from Standard Chartered has found that environmental, social and governance obligations are top of mind for corporates in Europe and North America, as the post-pandemic business recovery gets underway.  
Helicopter view- Barclays, on creating sustainable supply chains and trade finance Helicopter view: Barclays, on creating sustainable supply chains and trade finance Trade finance as an asset class has benefitted from developments in loan and debt capital markets, which have led the way in sustainable product development.
ICC Trade Register ICC Trade Register 2021 – 6 top takeaways and the low-risk nature of trade finance as an asset class The 2021 ICC Trade Register summary, on the credit risk profiles of trade finance, supply chain finance and export finance transactions. Read our summary on 38m transactions representing USD $19.2t exposures, and 28% of global trade flows.
SCHUMANN Interview- Robert Meters - the trade credit insurance market, post-pandemic overview SCHUMANN Interview: Robert Meters – the trade credit insurance market, post-pandemic overview TFG interviewed Robert Meters (RM), Head of Marketing and Sales, Global Business & Financial Services at SCHUMANN to discuss how the trade credit insurance has changed as a result of the covid-19 pandemic.
Veridapt Q&A ESG, fraud and managing risk: How Veridapt is using tradetech to change commodities for good TFG’s Joana Fabiao, had the opportunity to sit down with David Thambiratnam, CEO of Veridapt, a global force in commodity management for over 15 years.
COP26 Rishi Sunak, UK COP26 wrap-up: UK vows to become world’s first ‘net zero-aligned financial centre’ Over the last two weeks, the UK has been at the forefront of some of the biggest announcements to come out of COP26.
COP26 with Veridapt CEO David Thambiratnam - Finance more, pollute COP26 with Veridapt CEO David Thambiratnam – Finance more, pollute less Lenders are being asked to allocate more capital than ever to manage risks and seize opportunities, as the world strives to achieve net zero carbon emissions by 2050.
Trade Finance Talks Louis Explained: UKEF’s Climate Change Strategy By working together and tackling these challenges head-on, we can reduce our emissions and work towards our net zero goal by 2050.
TFG Weekly Trade Briefing TFG Weekly Trade Briefing, 27th September 2021 Your morning coffee briefing from TFG. Costs of climate change far greater than green transition warns ECB, UKEF commits to an ambitious goal of going carbon neutral by 2050
Transforming the economy in the 21st century Transforming the economy in the 21st century: financial inclusion, diversity and climate change Hundreds of companies are building the foundations of exemplary corporate climate action. The next decade will witness accelerating efforts to transform the economic system.
Trade Finance talks Deepesh IPCC issues stark climate change warning – but what about trade? Today’s IPCC report warns that temperatures are very likely to reach 1.5°C of warming by 2050. But what could this mean for global trade, trade finance and supply chains?

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Sustainable trade finance – Frequently asked questions (FAQs)

What is sustainable trade finance and what does it include?

In response to growing concerns over climate change and global warming, companies are increasingly looking at ways to minimise and mitigate their impact on the environment. 

Companies are now identifying environmental, social, or governance (ESG) risks associated with their business activities, such as the use of fossil fuels or other polluting goods and services within their supply chains.

By better understanding those risks and their potential reputational, credit, and regulatory impacts, companies can play an active role in creating sustainable trade and encouraging sustainable practices, and can assist in the global implementation of sustainability policies and standards.

Green loan

As the name suggests, a green loan is a loan that is taken out to finance green projects. 

The term ‘green loan’ was first introduced in March 2018, when the UK-based Loan Market Association (LMA) and several other industry bodies published a report known as ‘Green Loan Principles’

In the report, as green loan is defined as follows: “The fundamental determinant of a green loan is the utilisation of the loan proceeds for Green Projects (including other related and supporting expenditures, including R&D), which should be appropriately described in the finance documents and, if applicable, marketing materials. 

“All designated Green Projects should provide clear environmental benefits, which will be assessed, and where feasible, quantified, measured and reported by the borrower.”

As such, green projects could refer to those in sectors like renewable energy, waste reduction, and clean transportation, and can also cover related and supporting expenditures like research and development (R&D).

At present, one of the biggest challenges for the sustainable financing industry is its lack of common standards, and that’s why the LMA and its partner organisations published the ‘Green Loan Principles’, which attempts to set out market standards and guidelines.

Other industry bodies, such as the International Chamber of Commerce (ICC), are also currently in the process of introducing a draft framework of globally accepted standards and definitions for sustainable trade and trade finance, which would also cover green loans.   

Within the trade finance industry, major banks are already issuing green loans, and their numbers continue to grow. 

This year, for example, UKEF announced a £430 million green loan –  first-ever government-backed green transition loan to engineering and consultancy firm Wood to seize new clean growth export opportunitiesfirst. 

 

Sustainability-linked loan

In 2019, the LMA and several partner organisations published the ‘Sustainability Linked Loans Principles’, as a follow-up to the ‘Green Loan Principles’ mentioned above.

According to the 2019 report, sustainability-linked loans are defined as “loan instruments and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) which incentivise the borrower’s achievement of predetermined sustainability performance objectives”. 

In contrast to green loans, a sustainability-linked loan can be issued for non-green purposes, such as the financing of general business operations.

Specifically, a sustainability-linked loan could link conditions such as the term or price of a loan to the borrower’s performance against particular sustainability targets. 

As such, these targets are usually negotiated and agreed on by the borrower and the lender for each transaction.

And finally, it should also be noted that a loan can be structured using both green loan and sustainability-linked loan principles simultaneously.

 

Sustainable supply chain finance

Sustainable supply chain finance refers to financial practices and techniques that incentivise sustainable behaviours among parties to a transaction.

In practice, sustainable finance supply chain finance rewards suppliers for integrating ESG priorities into their supply chain.

 

Sustainable shipment letter of credit (SSLC)

A sustainable shipment letter of credit (SSLC) is a green financing product that was developed specifically for trade finance. 

It was first launched in 2014 by the International Finance Corporation (IFC) – which is part of World Bank Group – and the Banking the Banking Environment Initiative (BEI). 

The BEI is a group of global banks that aims to promote a more sustainable economic future.

It was convened in 2010 by the Cambridge Institute for Sustainability Leadership in the UK, with the shared goal of expanding the global trade of sustainably-sourced commodities.

Like a regular letter of credit, an SSLC allows for discounted financing for trade transactions, but unlike a regular letter of credit, it is only issued based on specific sustainability criteria.

To qualify for an SSLC, a supplier must provide evidence that their product meets internationally-recognised sustainability criteria, and that is usually done in the form of a sustainability stamp that is specific to the supplier’s industry.

For example, the first use of an SSLC was for a shipping of palm oil backed by a Roundtable on Sustainable Palm Oil (RSPO) certificate, which guarantees that no forests or communities were harmed during the extraction of the oil. 

What is green finance and why is it important?

Green finance is a broad term that typically refers to financial investments that contribute to sustainable development and environmental initiatives. Learn more about green finance here.

Green finance is important as it promotes and supports the flow of financial instruments and related services towards the development and implementation of sustainable business models, trade, and investments. 

More broadly, green finance facilitates the introduction of sustainable economic, environmental, and social policies. This includes the advancement of policies oriented towards the United Nations (UN) 2030 Sustainable Development Goals (SDGs), which seek to shift the focus of commercial activity from shareholders’ value creation (economic value) to stakeholders’ value creation (economic, environmental, and social value

 What are green finance products?

Green finance encompasses all the initiatives taken by private and public agents (e.g. businesses, banks, governments, international organisations, etc.) to develop, promote, implement, and support projects with sustainable environmental impacts through financial instruments.

Examples of green finance projects could include the promotion of renewable energies, energy efficiency, water sanitation, and environmental audits.

Green finance could also be used to reduce transportation and industrial pollution; to tackle climate change and deforestation; or to lower a company’s own carbon footprint.

What is the difference between sustainable finance and green finance?

The terms ‘sustainability’ and ‘ESG’ are often used interchangeably, including by business leaders and environmental campaigners. 

Sustainability and ESG are similar concepts, but in their current usage the main difference is that ESG often refers to specific metrics that can be quantified and measured, whereas sustainability does not.

Sustainability is more of an umbrella term that encompasses a company’s efforts to reduce the negative impacts of its business on the environment, such as by reducing or offsetting its carbon emissions.

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About the Author

Joana Fabiao is the Marketing and Editorial Assistant at Trade Finance Global.

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