As environmental, social and governance (ESG) issues have moved up the corporate agenda across the Asia Pacific region, more and more corporates are looking to their supply chains to achieve their sustainability goals.


However, this is often easier said than done, as revealed by a recent HSBC survey of 415 large corporates across nine markets in the region. Four in 10 corporates say there are barriers to incorporating sustainability into their supply chains, with over a third citing a lack of definitions around ESG measurements, and nearly one in 10 admitting to a lack of knowledge and understanding of what to focus on.

As a result, although tools such as formal ESG ratings, competitor benchmarking and sustainability-linked financing solutions are gaining wider acceptance as a means to support companies to reach their goals, putting them into practice remains a challenge – with just 5% of those surveyed by HSBC saying they had implemented a sustainable finance solution so far.

Ajay Sharma, Asia-Pacific head of global trade and receivables finance at HSBC, discusses the current demand for sustainability-linked finance in the region, and outlines the enormous opportunity for banks and corporates to work together to drive supply chain ESG improvements.


Q: What are you hearing from corporates in the Asia Pacific about their ESG objectives?

Sharma: In recent months, supply-chain resilience has become an urgent priority for corporates. Faced with various logistical issues, our clients are increasingly looking to ensure continuity of supply, so the first hurdle problem is to make sure that their suppliers have enough liquidity. That is challenging our thinking from a primary supply chain perspective, and driving us to innovate around traditional funding mechanisms, taking them deeper into the supply chain. We already have multiple customers running live deals with us where we are using the analysis of historical performance data to extend credit to suppliers. That is an essential way to increase the resilience of the supply chain.

Once our clients have that greater reach and visibility into the lower tiers, they begin to ask more complex questions. Our clients are coming to us to explore what sustainability in the supply chain actually means from a financing perspective, how to quantify and report it and what the benefits are. Equally, internally we have spent a lot of time at HSBC making sure our relationship managers are more aware of what the possibilities are, and because we partner with corporates in numerous industry verticals, we can create structures that are easily replicable. Overall, there is far more dialogue around ESG happening than ever before.


Q: HSBC research shows that 40% of Asia Pacific corporates don’t yet have sustainability metrics in place. What needs to be done to address this?

Sharma: One of the factors holding back the adoption of sustainable trade finance is the difficulty in measuring what is and isn’t considered sustainable. We’ve seen a huge jump in corporates that say that they have barriers to incorporating sustainability – from just 4% in 2020 to 43% in 2021.

Without proper metrics, any corporate sustainability initiative runs the risk of becoming a greenwashing exercise. However, the problem is that, for many trade finance transactions, industry ESG standards do not yet exist. There is work underway in this regard, and at HSBC we are working with regulators and industry bodies to develop sustainable financing frameworks. We are a member of the ICC sustainable trade finance steering committee, which is looking at developing standard definitions. We have also successfully piloted the Monetary Authority of Singapore’s Green and Sustainable Trade Finance and Working Capital (GTF) Framework – a guide for banks and financial institutions in extending green financing to buyers and suppliers – in transactions including an import letter of credit for solar components and a green trade loan for the recovery of precious metals from electronic waste. We see these initiatives as a great step in the right direction on the wider journey towards making trade sustainable.


Q: Until an industry-wide sustainable trade finance framework is in place, what is your approach to developing ESG-linked transactions?

Sharma: Some sectors or industries have a set of principles that clients can align to. Our approach is to co-create with the client, looking at what they are doing and what they can measure in a transparent manner so that they can be audited by third parties. We need to make sure that ESG claims are not based on the opinion of the client, but are independently evaluated. However, this co-creation process takes time, which is another reason why the adoption of sustainability-linked finance is still relatively slow.


Q: Last year, HSBC and Boston Consulting Group (BCG) released a study warning that simply mandating new standards and demanding more of suppliers would lead to “limited progress and missed goals”. Is sustainability-linked trade finance enough to drive ESG improvements in supply chains?

Sharma: Sustainability-linked finance is just one small part of the solution. Our research with BCG found that decarbonising global supply chains – which account for as much as 80% of the world’s total carbon emissions – will require upwards of US$50tn investment into SMEs. That is a huge amount of money that clearly cannot be delivered by supply chain finance alone. Driving sustainability improvements in trade will require a concerted effort from multilateral development institutions, corporates and banks to direct funding as well as knowledge, technology and resources to SMEs.


Q: What is your outlook for sustainable trade finance solutions over the coming months?

Sharma: Sustainability-linked trade finance is still in something of a nascent stage, but we expect to see demand grow rapidly. Some early adopters such as Puma and Walmart have been running sustainable supply chain solutions with us for multiple years now, and we’re now receiving enquiries in Asia Pacific from companies in a variety of industries, from cocoa to garment manufacturing and beyond [see box-out].

We expect to double the number of sustainability-linked trade transactions we do this year, and all indications are that our growth in the future will be exponential.

There is no lack of spirit from corporates in the region in terms of wanting to implement these structures. The real challenge lies around getting the substance behind it. The size of our trade book means that adding in ESG metrics cannot be a boutique operation.

We’re talking about a huge number of small ticket transactions for clients of all shapes and sizes; this is not like issuing a one-off US$1bn green bond.

The complexity of execution, and being able to do it rapidly and achieve scale, is a challenge. However, this is where the size of the prize for institutions is so big: we have an enormous opportunity to make a tangible difference. We need to help our clients on their sustainability journey, and we have to succeed.


Backing Guan Chong Berhad’s commitment for a more responsible cocoa supply chain

In July 2021, HSBC successfully completed the first green trade financing facility for sustainable cocoa sourcing in Malaysia with a bespoke transaction for cocoa and chocolate producer Guan Chong Berhad (GCB). The structure innovatively blended various post-shipment solutions for sustainable sourcing that can be clearly assessed, quantified, measured and reported. Through trade documents, the procurement of certified cocoa beans by GCB – using sustainable sources – was attested to be in compliance with the environmental, social and economic aspects by recognised certification bodies.

“It is our vision to move towards sustainable practices that benefit both our customers and our business,” says Elsa Tay, GCB spokesperson. “HSBC’s support will help in GCB’s transition to achieve our ambitious yet necessary target of 100% traceable and sustainable cocoa by 2030 from the direct supply chain.”


Helping Hong Kong’s Epic Group meet sustainability targets in garment manufacturing

In January, HSBC carried out its first sustainability-linked trade finance transaction in Hong Kong, for Epic Group, a multinational garment manufacturing group with activities spanning across the entire supply chain, from design and fabric sourcing to manufacturing. The facility supports Epic Group’s working capital and trade cycle, with pricing tied to its performance in greenhouse gas emissions intensity, freshwater use intensity, as well as Higg Facility Environmental Module – a system commonly used by leading garment brands to review suppliers’ sustainable capacity.

“More companies have set supply chain sustainability as a key corporate goal, focusing on the environmental and social impacts of their product life cycles,” says Frank Fang, head of commercial banking, Hong Kong, at HSBC. “We are delighted to arrange the first sustainability-linked trade facility in Hong Kong and extend the range of our green finance solutions.”