Banks are making the right noises about sustainability, but action and innovation are lacking. Finbarr Bermingham reports from Singapore.
We are hurtling dangerously towards the 2 degrees Celsius increase in global temperatures from their pre-industrial levels that would set in motion increasingly dangerous forest ﬁres, extreme weather, drought and other climate-based disasters.
Over recent weeks, as the Paris Agreement gradually gained the requisite number of ratiﬁcations to be signed into force, there have been rare moments of optimism about our planet’s future. Countries, led by the biggest polluters, the US and China, have vowed to cap global warming at “well below” the 2-degree target, in a move that will have far-reaching consequences for global trade.
Between the time of US-Sino ratiﬁcation of the Paris Agreement and the date in early October when it reached its target, GTR held its Asia Trade and Treasury Week in Singapore. One of the most prominent areas of discussion was sustainability. The conversations proved a sobering reminder of how slow the trade ﬁnance industry has been to awake to the challenges ahead.
Good work has been done by researchers at the Cambridge Institute for Sustainable Management (CISL), in tandem with the Banking Environment Initiative (BEI), which have developed number of sustainable ﬁnancing tools and initiatives.
They have also established a forum in which these topics can be discussed and, according to Thomas Verhagen, CISL’s senior programme manager, are hoping to establish more regional and sector-speciﬁc bodies to continue this.
But very few in the industry seem to be aware of the products the CISL has developed. Those who have argue that some of the tools – the sustainable shipment letter of credit (SSLC) for instance – are already outdated. When everybody is looking to digitise their trade cycle, how useful can a sustainable LC really be?
At a panel discussion in Singapore, the audience was asked whether they had used green bonds, SSLCs, or whether they were members of the Soft Commodities Compact.
Despite the clear presence of member banks in the audience, nobody had heard of or used these tools and solutions.
Chris Pardey, the group CEO of commodity trader RCMA, said that he had been seeking ﬁnancing for a sustainable investment in the UK but that no banks had shown any interest: their concerns were solely with the bottom line. Pardey hadn’t heard of any of the aforementioned sustainable products, despite spending more than 30 years in the soft commodities business.
Verhagen is honest about the material success of the tools so far. “We’ve identiﬁed that the product we developed, the SSLC, is currently less effective than we hoped it would be. I have a background in innovation and they always say: ‘fail fast, fail cheap’. There’s no defaults so far so it’s been really cheap up to this point, but I do feel that we need to make a next step,” he admitted in Singapore.
Banks aren’t innovating
Bruce Blakeman, a vice-president at Cargill, is also unaware of the SSLC and was unsure if Cargill had used green bonds. However, their sustainability activities are substantial. If they are not sourcing their coffee, soya or palm oil from sources that can be maintained continually, large buyers will simply look elsewhere.
A case in point is the fate that befell Malaysian palm oil giant IOI earlier this year. In April, IOI was suspended from the Roundtable on Sustainable Palm Oil (RSPO) amid allegations that it wasn’t fulﬁlling obligations to stop deforestation in Indonesia.
Immediately, a host of the world’s top commodity buyers, including Mars, Nestle and Unilever, dropped it as a supplier. Undeterred by the public outcry, IOI sued the RSPO, claiming no wrongdoing and that it had been “unfairly affected” by the suspension.
In June, it dropped the case and agreed to take on an action plan to meet the RSPO’s highest level of accreditation by the end of this year. The episode shaved 17% from IOI’s share price and is a lesson to all parties not meeting their obligations.
You are going to have to look at ﬁnancing smallholders. There is no point in ﬁnancing the likes of Wilmar or Olam, because they already have the ability to be sustainable.” Perpetua George, Wilmar International
At a roundtable discussion held on the sidelines of the GTR event in Singapore, this ﬁnancial cul de sac of sorts was seized upon by Perpetua George, assistant general manager for sustainability at Wilmar International. These tools, she said, are probably being pitched at the wrong organisations.
“If you look at the transformation of sustainability on the ground, you are going to have to look at ﬁnancing smallholders. There is no point in ﬁnancing the likes of Wilmar or Olam, because they already have the ability to be sustainable,” she said.
Wilmar is working with an unnamed Indonesian bank on a pilot which would offer lines of credit speciﬁcally for the sustainable replanting of oil palms. There is “considerable interest from the investment banking sphere”, and George says it will be beyond the microﬁnancing solutions often offered to smallholders in these industries.
The problem with microﬁnancing is that farmers need to be ﬁnanced for the ﬁrst ﬁve years of replanting – the immature phase – in one shot. There is almost zero income in this phase, but thousands of smallhold farmers in a co-operative. In short, it’s anathema to the lending models of most commercial institutions.
George’s assessment of the banking sector’s efforts is withering: “I wouldn’t say there are a lot of innovations right now. I think it’s been a struggle to even try and get this one. Many banks are not yet prepared to innovate.
“Traditional, local Indonesian banks can lend, but they will lend at 30% APR to the farmer. They can’t afford that, so how do you reduce that to make it more affordable to the farmer? You need to somehow upfront the risk sharing, which traditionally has only been done with the mill.”
The suggestion is that traders are having to take matters into their own hands and drive innovation in the banking sector.
Banks’ customers arguably don’t make the same demands of them as soft commodity traders. If Cargill isn’t providing sustainably sourced palm oil products, Unilever will go elsewhere. Banks do face similar pressures from their clients, but are usually grilled ﬁrst on the cost of capital, rather than sustainability.
Is it reductive, then, to claim that banks will never be in the driving seat of sustainable ﬁnancing? Does it require the leadership of commodity giants, along with government and NGOs, to instigate the changes required to meet Paris Agreement targets? It seems at this urgent stage to be a fair assessment.
Chinese banks unsure how to act
China imports 60% of all the world’s soy beans and 11% of all palm oil – two of the most destructively-grown crops. Its importance to global supply chains is massive and growing.
Deforestation is the second biggest culprit in carbon emissions after power emissions. It is thought that up to half of tropical deforestation is the result of illegal conversion of forested land into agriculture, much of the crop then being exported, and a lot of it ending up in China.
In China, ﬁnancial regulators have been looking at ways of “greening” the sector, with particular focus on these destructive soft commodities imports.
A report authored recently by the CISL, BEI and the Research Centre for Climate and Energy Finance (RCCEF – a Beijing-based organisation) focuses on the nascent progress.
Verhagen, who helped write the report, tells GTR that CISL was approached by Chinese regulators to explore ways in which international practices can be implemented in China. He says the workshops were productive, but “clearly there is much to be done”.
One of the key takeaways is the importance of regulators and authorities: banks in China are not acting fully on sustainability because they have not been told to by the powers that be. This reiterates the suggestion that banks will not change their modus operandi unless they’re cajoled into it.
The report found that when it comes to overseas ﬁnancing, the China Banking Regulatory Commission (CBRC) already requires Chinese banks to adhere to international sustainability norms.
However, no guidelines exist on short-term trade ﬁnance and the authors write that “without further speciﬁc guidance, Chinese banks are unclear what more is expected of them”. Furthermore, Chinese banks don’t necessarily subscribe to the various industry guidelines on palm oil, soya and so on.
Will Chinese banks adopt these standards without being forced to do so by a government or regulatory diktat? We may never know, given the direction being pushed by the Chinese government, but history tells us it is unlikely.
The negativity pervading this report is intentional. For years, talk has been cheap on the issue of sustainable ﬁnancing but consequential action seems elusive. The Soft Commodities Compact, through which a group of banks agreed to ﬁnance products resulting in zero net deforestation, will be a huge boost if its targets are met: we await the results with interest.
For now, banks are making baby steps in the right direction, without fully taking ownership of the problems: continuing to ﬁnance destructive projects and sectors with one hand, as they naval-gaze over how to be sustainable on the other.
An example of the dichotomy is the coal sector, where in the wake of the Paris Agreement a number of banks have stopped directly ﬁnancing new coal projects. The likes of BNP Paribas and Société Générale, however, will continue to ﬁnance coal projects in emerging markets.
Consolidated action and thinking is required – and fast. If governments push through the required policies to meet the goals of the Paris Agreement, this is hopefully what we will get.