Companies are swiftly moving to embrace a range of sustainability goals that go beyond green. It’s time for trade finance to take a more holistic approach.
The beginning of the 2020s is a watershed moment for the pursuit of environmental and social ambitions. Up until now, companies have largely signed up to targets for improvement with no great sense of urgency.
Yet since the onset of the pandemic, and with the increasing frequency of extreme weather events, implementation is beginning in earnest.
Finance is a catalyst for change, as acknowledged by Societe Generale in its ESG by Design strategy that aims to assist companies evolving to more environmentally and socially sustainable business models. Trade finance is an important part of that, as it lubricates the wheels of world trade, worth approximately US$22tn in 2020 and at the heart of the global economy.
Yet until now, green trade finance has focused its attention on the most obvious sectors contributing positively to the environment, like renewable energy, clean transport, waste management and water management. However, as companies start to take a far broader and deeper approach to sustainability than just shrinking their carbon footprint – moving to limit their impact on biodiversity and tackle social issues in line with the 17 UN Sustainable Development Goals – it’s time for trade finance to also support those that are in transition in the broadest sense.
Between the pure green offshore wind farm company at one end of the spectrum and companies drilling for oil at the other, lie the majority of companies that are beginning to evolve their business models to make them more sustainable. Societe Generale intends to provide environmental and social advisory to maximise their positive impact – whether at the corporate or transaction/project level.
Transition trade finance’s four big ideas
Firstly, the bank is providing transition trade finance to a wider range of sectors, effectively a hybrid of green and sustainability-linked trade finance. For the last 18 months, it has been open to providing hybrid trade finance to a range of clients in transition. For instance, a cruise shipbuilder transitioning its business model by building vessels powered by natural gas liquids for installing maintenance equipment to offshore wind farms would clearly be in transition.
Secondly, the range of sectors within green trade finance has grown. Carbon capture is now part of the bank’s green trade finance framework, for example. Construction has also been added. It might not immediately appear ecologically sound, but some construction companies are clearly taking a more sustainable approach and are committed to developing ways of building that are good for the environment. Companies involved in hydrogen are also now within the framework; hydrogen clearly being part of the energy transition.
“This does not mean that any carbon capture, hydrogen or construction project will be green by essence in our framework,” explains Sebastien Halley des Fontaines, Head of Structured Trade Finance. “This is a new area where we judge whether a green label is appropriate project by project, according to a thorough internal review to make sure that eligibility to our framework is met – all without breaching the DNH ‘do no harm’ principle of the EU taxonomy.”
The third big idea is the development of new social and sustainable labels. In line with Societe Generale’s strategic focus on Africa, the bank is combining environmental and social aspects in trade finance. For instance, it might provide trade finance solutions for batteries in Africa that are fuelled by photovoltaic panels: they would supply much-needed electricity yet have no carbon footprint. In a recent example, Societe Generale acted as fronting and issuing bank in 2021 for an advance payment bond for Mota-Engil Africa’s construction of Bugesera International Airport in Rwanda: valuable infrastructure that will foster the country’s economic development.
Fourthly, the bank will expand its offering in line with new regulations and market developments. Notably, the EU taxonomy now classifies nuclear energy as a green economic activity, which makes it eligible at some point for green trade finance.
Additionally, the International Finance Corporation has issued so-called ‘blue’ financing guidelines for ocean-friendly projects and clean water resources protection, which could be a future avenue for trade finance.
Assisting ESG more broadly
Illustrating the pace at which companies are transitioning their businesses, a high proportion of Societe Generale’s conversations with clients about trade finance have a green or sustainability angle.
“It’s fair to say that 40% of our approaches from clients have a green, sustainable or transition angle, which reflects the fact that there is a significant traction from many clients in many sectors who are very serious about the matter,” explains Marie-Laure Gastellu Head of Trade Services. “Our book is changing at a slower rate because it takes time for conversations to turn into transactions, but this shows the direction things are going.”
What’s more, the nature of these conversations has changed. “Whereas two years ago most clients were asking what’s the upside for me in doing this green or sustainability-linked trade finance, today they are telling us that they are very interested but ask about the downside in terms of greenwashing,” says Halley des Fontaines. “Some banks have come to the market very quickly without a lot of methodology and that is creating some anxiety for clients that they might be accused of greenwashing.”
As the market quickly evolves, there’s an urgent need for new standards. Currently, the trade finance market borrows and adapts the Green Bond Principles and Green Loan Principles, developed by the International Capital Market Association and Loan Market Association respectively. However, the International Chamber of Commerce is working on dedicated standards for trade finance.
Such standards would help trade finance to accompany companies, and incentivise them, as they transition their businesses with greater urgency. It would also clarify trade finance’s standards just as it needs to widen the definition of green, sustainable or hybrid trade finance – which brings greater scope for ambiguity. This wider scope mirrors the broader transition among companies away from the current narrow focus on the most obvious green sectors.
“Green used to be the motto two or three years ago, but now ESG has really become a much broader thing than pure carbon footprint and environmental issues, including diversity, inclusion, protecting the ocean and a lot of new things,” notes Gastellu. “We need to make sure that we are able to propose a solution for clients that reflects their changing needs.”