Already considered a pioneer in sustainable trade finance, thanks to a number of market-first transactions, BNP Paribas is now rolling out a broader range of solutions for its clients. In this interview, Viktor Ivanov, the bank’s head of Sustainability for Transaction Banking EMEA, discusses the progress of sustainable trade finance to date, how BNP Paribas is harnessing existing sustainability frameworks from the wider finance industry to deploy innovative solutions for trade finance, and why the current Covid-19 crisis will ultimately drive a greater focus on sustainability.


Q: What is your impression on the progress of sustainability efforts within the trade finance sector to date? 

Ivanov: I believe that there is a kind of paradox with sustainable trade finance. There has been a tremendous growth of sustainable solutions in the wider finance industry. Take for instance the case of bonds or loans. In the ‘green’ space, the issuance of bonds with a defined ‘green’ use of the proceeds has been steadily increasing for a number of years now. More recently, we have seen the rapid development of the sustainability linked loans, which involve a set of objectives (or KPIs) for the borrower to improve their sustainability profile and a financial incentive in the form of a pricing variation.

One would have expected trade finance to follow a similar trend, especially as it seems a natural fit for sustainability initiatives. Trade is indeed very much about the real economy, we know what we are financing and its economic purpose. Yet, sustainable trade finance is still in a nascent stage, looking at one-off deals rather than a consistent flow of transactions.

This is probably because trade tends to be more granular than the kind of solutions that have emerged so far. The size of a green bond, for example, is in the range of several hundred millions to more than a billion dollars. The additional effort to define the applicable framework, the use of the proceeds and/or the objectives, and the reporting around that can be easily absorbed. This would rarely be the case in the trade finance space.


Q: What is needed to drive forward sustainable trade finance, both from a market and a client perspective?

Ivanov: For several reasons, I believe that we are at a turning point for sustainable trade finance.

Over the past few years, the sustainability space has become less of a terra incognita; it has been mapped and it is being codified. From the publication of the United Nations Sustainable Development Goals (SDGs) and the Paris Agreement back in 2015 to the launch of the EU Taxonomy more recently, to mention just a few, we see the emergence of norms and standards which provide a clearer understanding of what can be considered as sustainable.

Then there is also the broader recognition from companies that sustainability is not only important for some of their investors or employees, but rather something that is strategic for their business. Timing is important – embracing sustainability today can be a source of competitive advantage. Failing to do so tomorrow will render certain business models irrelevant five or 10 years down the road. We are already seeing companies being pushed out of business, or having to declare default due to climate-related issues.

As a result, a growing number of corporates are repositioning sustainability at the core of their strategy, identifying priority areas, both internally and/or within their supply chains. Treasury departments are having to figure out ways to support the effort. Trade finance is one of the obvious choices.

At the same time, the leading banks in sustainability continue expanding the range of their solutions for clients. We know that we have a crucial role to play in the reallocation of capital and redirection of trade flows to build the economies of tomorrow. So things are shaping up favourably for sustainable trade finance.


Q: What can trade finance learn – and adapt – from other areas of banking in terms of sustainability structures and frameworks?

Ivanov: A significant amount of work has already been done in the financing space with the definition of frameworks. We can build on these, and adapt them.

An important factor to consider is that in trade finance, there is always an underlying – in terms of merchandise, equipment or contract. In many cases, it can be assessed and qualified from a sustainability perspective, based for instance on the green bond or loan frameworks.

Similarly, the Sustainability Linked Loan Principles cover revolving facilities and term loans, but crucially also guarantees or letters of credit facilities – not many people know that.

At BNP Paribas we have put that to work and have defined a range of solutions for our clients, where we are extending the use of the existing frameworks to the world of trade finance.


Q: Tell us about these new, innovative deals that BNP Paribas is working on which extend the use of existing frameworks to trade finance? 

Ivanov: Going back slightly, last year we were among the first banks to arrange a green guarantee line. We did this with our client Siemens Gamesa. As a global leader in the wind power industry, they are using the line to fund their business of manufacturing and selling onshore and offshore wind turbines worldwide. This is renewable energy equipment, which brings an obvious contribution to combating climate change. We relied on the existing green frameworks to confirm it qualifies as a green ‘use of proceeds’ or underlying, if you prefer.

Just recently, we have also closed a sustainability linked letter of credit (LC). We believe this is a market first, combining two underlying logics of sustainability. The LC finances the purchase of equipment with a clear sustainability benefit, in this case energy recycling. So that’s the use-of-proceeds approach that we have mentioned before.

The transaction also involves a sustainability-linked mechanism, which creates an incentive for our client to fully extract the environmental benefits of their investment. Objectives were defined for the expected energy savings – depending on whether they are achieved, the client can benefit from a rebate on the LC fee.

Bottom line, we are financing sustainable equipment, which is good, and then fostering its use, which is even better.


Q: What is the next wave of developments and initiatives that you expect to see emerging in the sustainability space? 

Ivanov: I believe that some exciting developments will come from the combination of sustainability with digitalisation. As the digital transformation of trade is finally gaining pace, the same set of technologies is also being tested in the sustainability space. This opens up a number of new perspectives.

A good example is the Trado project, to which we contributed as part of a broader consortium and which GTR has already covered. One of the many interesting aspects of the Trado pilot was to demonstrate how blockchain and smart contracts could be used to collect and store social or environmental data on suppliers, and make these instantly available and traceable across the supply chain. Suppliers in turn could obtain preferential access to trade finance.

Hence, traceability is one area where digital is bringing a step change, and this will lead to a wave of innovation in sustainable trade finance and supply chains.

Similarly, Trado has demonstrated the possibility of harnessing technology for greater transparency and visibility into the deeper tiers of the supply chains and up to the first mile, where often the greatest needs for positive sustainable action lie.

I think we are going to see a number of other technology-based initiatives that also look at supply chains in a holistic way, as a critical part of the ecosystem in which a company operates. And the current coronavirus crisis is only going to reinforce the need for such approaches.


Q: You mention Covid-19 – what impact do you think the current crisis will have on sustainability? 

Ivanov: It is difficult to answer your question, this is a unique crisis and we have yet to figure out how our world would look after it. The UN pointed out that the pandemic will negatively affect most SDGs. In the short term, some earmarked resources will be diverted away. My intuition though is that sustainability and ESG will remain as key factors in our response to the crisis and will emerge as an even stronger priority going forward.

Consider what happened during the first days of the pandemic. Many corporates rushed to secure vital additional liquidity, braving extremely volatile conditions. The fact that several still made the extra effort to structure their bonds or loans under a sustainable format tells us something about the strength of the sustainability concept.

This crisis has also shifted the focus towards the ‘social’ part of the ESG continuum. There is a strong reputational incentive for firms, notably the largest ones, to do the right thing in terms of corporate and social responsibility, even if it is to the detriment of profits.

Companies are also looking at their supply chains. Right now, the priority is to identify the weak, yet critical, links for the revenue generation. Some buyers will have to extend support for business continuity as well as social reasons, both of which are sustainability considerations. In the longer run, I would expect to see companies reshaping their supply chains with ESG and resilience considerations gaining in importance over efficiency and cost.

Finally, there is the great unknown about how governments will spend the huge stimulus packages. This is a historic opportunity to accelerate the transition of the economy towards a more sustainable future. I sincerely hope that it won’t be missed.