Sustainable finance is gaining ground – but global trade needs more detail
Sustainability series: From blue bonds to ESG-linked loans, take-up of sustainable financial products is growing as lenders, investors and corporates seek a more inclusive path for business. In our second blog of this series, we explore how players in trade are utilizing sustainable finance.
Sustainable finance is fast gaining popularity, with economic incentives and investor pressure steering business towards a lower-emissions and more inclusive future. In global trade, players are beginning to adopt ESG-friendly solutions, but without a universal sustainability rulebook to measure transactions against, progress can be tricky to gauge.
Bonds – green, blue, and social – sustainability-linked loans and revolving credit facilities are just some of the products being used by financial institutions and corporates, with take-up increasing recently as the focus on environmental, social and governance topics has sharpened.
Depending on the instrument, the focus is on either projects or borrowers; sustainability-linked loans reward borrowers if they hit certain sustainability targets, for example. While these products are not designed specifically for trade, and therefore may not capture all the complexities of the industry, they are being utilized with banks rolling out sustainability-linked facilities with their corporate clients. Meanwhile, the boards of large businesses, including energy giants Shell and ExxonMobil, are coming under pressure from investors over sustainability.
Indeed, the ESG prize is lucrative and growing. The value of managed assets furthering the sustainability agenda topped $35tn globally in 2020, an amount that is expected to rise to $50tn by 2025, representing almost one third of all projected assets under management.
Dealing in detail
While the use of ESG-friendly financial products in trade can only be welcomed as a step towards a more sustainable future, the lingering issue of the absence of a universal sustainability framework for industry remains. There is welcome overlap in trade with the current frameworks available – but assessing the overall progress in sustainability is complex without a common approach by industry players.
Without a universal way of measuring sustainability in trade, industry participants are taking varied actions as they strive to be more sustainable. And as to be expected, different lenders based in different regions with different clients will view sustainability and sustainable trade differently if there is no agreed common approach.
Many of the major European banks have taken some of the hardest stances against financing fossil fuel companies and projects, potentially to the detriment of socio-economic activities, while financiers in Asia are focusing more on socio-economic and development activities, potentially to the detriment of the environment. As we explored in the first blog of the series, this leads to financiers caught between competing objectives when determining what may or may not be sustainable.
The International Chamber of Commerce (ICC) is putting together a roadmap for sustainable trade finance which includes scoring the different elements of a transaction against an infographic – for example, the seller in a trade would be rated against environmental, economic, and social factors. While this is a step in the right direction, much more work needs to be done before sustainable trade can be embraced on the ground.
A wider issue
But it’s not just trade that has struggled to define sustainability and ESG criteria. As Forbes reported this month, some experts are dismissing the entire concept of socially responsible investing because of how ESG funds are structured, viewing it as “greenwashing”. The publication added that if ESG ratings were “grounded” in more accurate assessments of corporate responses to both social and environmental challenges, ESG investing would have great potential.
The issues weighing on trade and beyond with regards to sustainability hover over definitions and reporting. For trade, work on the former is being made by industry bodies such as the ICC, and with regards to the latter, technology can certainly advance progress in measuring transactions against the current frameworks available, including the UN Sustainable Development Goals and the LMA’s Social Loan Principles.
Technologies, such as artificial intelligence and machine learning, will support financial institutions in assessing transaction data against targets and frameworks. It is essential to have clear and robust reporting mechanisms in place to measure specific ESG targets to avoid accusations of “greenwashing” and bring clarity to where businesses are in meeting their expectations and obligations regarding sustainability.
The role of finance in bringing global sustainability goals within reach cannot be understated; it will drive change across the world. When we begin to map this vision out, details become harder to pin down as definitions and reporting need to be carved out more precisely.
In trade, players are deploying ESG-friendly products using the current frameworks available, with tech offering a simpler way for reporting. Meanwhile industry bodies have much work to do in bringing the trade community together with the creation of a universal sustainability standard that meets the needs of those on the ground.