Sustainable finance is the backbone of the energy transition, but has historically faced challenges around cost, fragmentation and competing priorities. The European Bank for Reconstruction and Development (EBRD) is tackling these issues head on through its rapidly expanding Green Trade Facilitation Programme (TFP).
Launched nearly a decade ago, the Green TFP supports trade in high-performing sustainable technologies, from sustainably sourced materials to the renewable energy sector and the circular economy.
The need for transformation is increasingly urgent. The International Energy Agency warned this month that fossil fuel demand is not expected to peak before 2050 – two decades later than previous forecasts – and that current emissions policies globally are not sufficient to keep global warming below 1.5°C.
This scenario also brings risks to vulnerable societies through the risk of floods, droughts, food insecurity and other natural disasters.
Against that backdrop, the EBRD is rapidly scaling up support provided through the Green TFP, which offers a range of guarantees and financing lines to partner banks engaging in eligible sustainable transactions.
The programme has supported more than €3.7bn in green trade finance since its inception in 2016, across thousands of transactions in 27 countries.
“Sustainable finance is very much at the core of our funding mandate and completely integral to our strategy and the way we do business,” said Nathalie Larrousé, an EBRD associate director and leader of the Green TFP, speaking on a panel at the bank’s TFP Trade Finance Forum in Cairo in October.
“Trade is the backbone of the economy, and if you don’t have green technology, materials and products, it’s impossible to reach decarbonisation targets. We’re trying to support partners and their corporate clients every step of the way, whether that means capacity building and knowledge sharing or practical tools.”
Growing momentum
Without access to green technology, materials and products, it will be impossible to reach decarbonisation targets, Larrousé said at the event. It is highly encouraging, then, that the Green TFP has gathered remarkable momentum over the last five years.
“Last year, we saw 30% growth in the share of green finance we provided compared to 2023,” Larrousé said.
“That’s not an isolated figure; we are seeing four times as many green transactions as we were in 2020. That trend speaks for itself.”
One of the drivers of this growth has been a multi-year effort by international trade associations, standards-setting bodies and market participants to develop guidance on sustainable practices that is sufficiently harmonised to be globally applicable.
For an international institution like the EBRD – which has 120 partner banks, spanning Mongolia to Morocco and currently expanding into Sub-Saharan Africa – these improvements around standardisation are helping lenders understand which transactions can benefit from sustainable certification.
“That’s still work in progress, but it is really supporting the growth of the market,” she said. “That then helps with certification, making it easier to tag types of products or financing as green.”
Setting the right incentives
Panellists at the event agreed that the first hurdle to growing sustainable finance, as cited by banks, is often cost.
Compared to regular trade finance, green or sustainability-linked facilities typically require additional verification or certification, establishment of processes to ensure targets are met or proceeds are used as expected, and additional documentation.
But sometimes, the perception that green finance is expensive or impractical in the short term means banks can lose sight of the wider benefits.
“That’s where incentives are important,” said Ahmet Kinalisoy, head of financial institutions at Türkiye’s Alternatifbank, speaking at the TFP event. “If the right motivations are not in place, banks or their clients might not be willing to put in that level of effort and cost.”
In sustainability-linked financing, incentives typically work by providing the borrower with favourable rates if certain pre-agreed targets are met, or introducing penalties if they are missed.
Larrousé said the EBRD has piloted a programme in several countries that offers preferential pricing for green transactions, and is encouraged by its success so far.
“The bottom line is that it works,” she said. “Finding the right incentives actually works and stimulates growth.”
Setting sustainability-linked pricing at appropriate levels – significant enough to act as a true motivation and to avoid suggestions of greenwashing, but not so significant that client relationships are harmed – can prove a challenge.
But as Alternatifbank’s Kinalisoy pointed out, the increasingly collaborative approach being taken among financial institutions should help harmonise practices and create a robust green financing ecosystem.
“Trade finance is a competitive market,” he said. “But it’s also important to take an industry-wide shared approach in order to reduce that additional burden, from the client’s point of view.”
Tackling fragmentation
However, for all the progress made so far, trade is by nature a global phenomenon, and sustainability principles cannot easily be applied in the same way in every market.
Zuzana Franz, managing director, international banking at German lender Oddo BHF, emphasised the need for a multi-perspective view, where guidance and principles “have to fit the business”.
“Most carbon emissions are not coming from the emerging markets – they are coming from the Global North, not the Global South – and the principles that have been adopted are generally aimed at the Global North,” she said.
“What is sustainable for a bank in Germany might not be sustainable for a bank in Nigeria. There are certain things that are common across all markets, but you cannot apply the exact same standards everywhere.”
The ease of integrating sustainability principles into the trade finance market also varies depending on the kind of transactions being supported.
Franz said long-term project finance or export credit agency-covered deals, common across sectors such as infrastructure, renewables or equipment, are now generally set up in line with ESG principles.
This process typically involves standard questionnaires and detailed analysis over a long period of time.
“But the short-term documentary trade finance business is a different picture,” she said.
“If you look at our portfolio of letters of credit from last year, a part of that business is still connected to fossil fuels, because if some countries – particularly in Sub-Saharan Africa – cannot access energy, they cannot invest in sustainability.
“We cannot forget the ‘S’ in the ‘ESG’ abbreviation. The immediate priority is to keep the country running, and unfortunately, much of that is based on fossil fuels.”
But for Franz, the longer-term perspective remains positive. She compares the rise of ESG to the development of financial crime compliance in the banking sector, which over the last two decades has become a critical part of doing business.
“I think the same will happen with ESG,” she said. “When you think about the world future generations will live in, there is no way around meeting sustainability goals.”
