GTR and Standard Chartered brought together key industry players at GTR Nordics, held in Stockholm in November last year, to discuss how banks and corporates alike are preparing to meet the demands of the clean energy transition.
Roundtable participants:
- Victoria Claverie, head of trade and working capital products, Europe, transaction banking, Standard Chartered
- Nadia Dobreva, director, trade finance sales, Standard Chartered
- Emil Foghammar, senior advisor, structured finance, Scania
- Seija Haavisto-Virtanen, head of customer finance and trade finance, Kone
- Roshel Mahabeer, global head of clean tech and sustainable finance, trade and working capital, Standard Chartered
- Patrik Marklund, head of trade finance and working capital solutions, Volvo Cars
- Jenny Messenger, reporter, GTR (moderator)
- Marion Reuter, regional head of corporate transaction banking sales, Europe, Standard Chartered
Pictured: From left to right: Marion Reuter, Victoria Claverie, Emil Foghammar, Roshel Mahabeer, Patrik Marklund, Seija Haavisto-Virtanen, Nadia Dobreva
GTR: As a society, we are on the brink of a transformative era of sustainable energy. How is your company planning for the energy transition and what are your priorities?
Haavisto-Virtanen: From the corporate side, all ESG is important, but then it’s the question of which parts of ESG can be reviewed – especially when it comes to trade finance transactions. In terms of the energy transition, of course, it is very important for a manufacturing business. We are presently looking into supply chain finance programmes, and how we can include various ESG targets in them, including energy.
Mahabeer: Supply chain finance is a big discussion with almost every one of our large corporates right now, because they’re spending a lot more time and effort on trying to measure their emissions in their supply chain, with a view to ultimately reducing them. I think everybody acknowledges that the bigger scope to have positive impacts is within that space.
Foghammar: From our perspective, with respect to the transition to cleaner transportation, I think there are a few points to make. Firstly, as a company, we are paving the way globally within transportation, always pushing on our customers’ ambition towards an ever-cleaner future. Although we are adhering to the EU Taxonomy, it is unfortunate that the taxonomy only considers tailpipe emissions. Although fully electric vehicles are fantastic, they are only truly green if the electricity is generated by green sources. Hence, many battery electric vehicles are basically coal powered yet still considered green, whereas you can run a vehicle on clean fuel biofuels that emit recycled CO2, making that vehicle black. This makes the whole transition difficult.
Secondly, lenders provide loans and financing that are labelled green loans, green bonds, etc. But this is only money; it isn’t green, black, pink and or any colour. In my opinion, ‘green money’ especially when lent to export finance customers of highly limited means, needs to get considerably less expensive than ‘black money’. It is only when the lender or investor sacrifices part of their return that they can proudly wear the future-friend pin on their jacket.
Marklund: We have had safety at the top of the agenda for many years, and what we are doing now is putting sustainability on a par with safety. That’s a really strong commitment from our side. We have also set quite ambitious targets when it comes to the CO2 footprint. We have said we will be a climate-neutral company by 2040, that by 2025 we will reduce the CO2 footprint by 40%, and that we will only sell electric vehicles by 2030. We are really taking a bet that electrification is the future for the automotive industry. In order to meet all these goals, we can use trade finance and sustainability-linked supply chain finance programmes. But that’s really to support the transition of our supplier base. Because when we have all electric cars by 2030, it means that we have killed the end-of-pipe emissions, which is our scope 3, downstream. If you look at the automotive industry, that’s actually 90% of the downstream emissions. That will turn the focus to our supply chain upstream. That’s where we have to mitigate or reduce the CO2 footprint. I think what you need from the banking side isn’t financing for the already-green suppliers, but support for the ones who need to transition.
GTR: What role do banks play in the energy transition?
Mahabeer: There are a few things the bank is doing. We’ve set positive targets in terms of what we’re going to finance, including a commitment of US$300bn in clean and transition finance, up to 2030. We’ve also set a very ambitious revenue target for the bank to get to around US$1bn of sustainable finance revenues in two years. This is a big shift in terms both of our balance sheet and how we bank our clients. We’re supporting positive and proactive investment. On the risk management side, a few years ago we made a commitment to stop financing new coal projects. We’ve also committed to the Net-Zero Banking Alliance and set very specific goals in terms of clients that we bank and the emissions intensity per sector. We started in the very intensive sectors: oil and gas, mining and metals, and power and energy, and we’re adding on sectors like shipping and aviation as we go.
Our intention is not to stop supporting our clients, it’s to facilitate and help guide them in terms of the transition.
Dobreva: There’s a huge focus on sustainability, not only from a pricing perspective but also from the investor and financing perspective. We are not only looking at the green aspect of the deal but also the social impact as well as inclusion, especially in emerging markets economies.
Reuter: I’ve been part of many supplier finance or sustainability-related conversations, and I think we’ve seen a massive leap in the last couple of years, and how the conversations go in terms of depth, as well as in terms of commitments, which are much more tangible now. Before, it was more of an intention rather than a firm plan by banks and corporates. The key thing for me is that we’re on this journey together, and we need to come together to achieve something. We are all in a global business, so we also have a responsibility to transfer it to the markets we either source from or where we produce, where it’s much more challenging to achieve these targets.
GTR: Should banks be playing a bigger role in providing better terms for sustainable financing?
Haavisto-Virtanen: There’s a huge cost involved in all this, particularly with ratings, audits and so on. So, the question is how to then manage that, for example, in supply chain finance, when you are trying to have your suppliers meet better targets. There’s still the cost. A kind of free advice comes from certain institutions, but there has to also be physical improvements, such as with suppliers and manufacturing. How can we get to a place where us being involved means we can help our suppliers get cheaper financing?
Mahabeer: There are a couple of things to unpack because I think what you’re talking about is how do we leverage some of that more development-side capital, which doesn’t necessarily have that commercial financial return pool and then upscale it to really kickstart transition? I think it’s a fair challenge, and in most cases, banks do actually offer discounts. This comes through a business decision, not because a regulator is offering a financial incentive, despite the push for the industry to decarbonise.
From a regulatory perspective, one point to make is around climate risk. Insurers and banks in Europe and the UK had to do a stress test of their balance sheets to make sure that they could withstand the impact of climate risk, which means that in negative climate scenarios, will the infrastructure withstand these changing conditions? Are our clients going to transition fast enough? Have they set targets? And do we have enough capital to withstand all of these impacts? By implication, I think it will mean that clients who aren’t on a credible strategy could be ones that will attract high capital requirements eventually. I think it’s a fair assumption, given that regulators are asking banks to do these stress tests and track these in their balance sheets. There was a regulation, but not sadly for trade and working capital finance, that came out of Europe that does allow capital relief, but purely for projects. It’s very restrictive, and the market is so competitive for the sort of transactions that allow the banks to stay above water in terms of the hurdle rate. The competition is probably driving itself a little bit more than the regulation.
In terms of bringing in the development institutions, I think it is an easy way to move forward. Banks do need to get smarter around structuring, and we do need to partner better with those in the development industry. We have executed a few of what we call blended finance deals, where we take partial cover, and it allows us to either extend the tenor or reduce our pricing on a lot of programmes. That should be accelerating, and hopefully, the timelines for what is needed to get these projects up and running – which can take multiple years – can be reduced.
Marklund: If I look at our business, the first generation of fully electric cars comes with a margin that is approximately half of the margin of a non-electric car. That’s quite a hit on the margin but this is a phase which I think all will have to go through during the transition. Cars built on next-generation electric architectures will take us back to or close to the margins of today’s non-electrical cars. During this transition, the margins will be lower and I think that’s fair for the banks as well.
Reuter: It’s the question of when niche becomes mass and where we are on this journey. For example, you have a different margin if you produce more cars, while batteries and so on are more expensive. Hopefully, when we move more into mass production, the cost comes down.
Dobreva: The export credit agency (ECA) aspect is very important as well. We had a meeting with our global head of structuring and a Nordic ECA, and they’re also looking into supporting corporates from this perspective, but the question is how developed the products are. For example, with supply chain finance, they don’t have a product designed that can fit the corporate model. There is also a question as to how commercial banks can step in when it comes to, let’s say, sustainable supply chain finance product offerings and how banks can play a key role in helping the transitioning of the smaller suppliers. It’s one thing for the bigger suppliers, but then how do you connect the mid-sized and the smaller suppliers so that it can really make a difference for the corporate, when it comes to the payment terms as well?
Mahabeer: We put together these sustainability-links supply chain financings, but we rely completely on what the buyer is doing with its suppliers to build a credible structure to try and incentivise meeting a buyer agenda. I feel for the suppliers – some of them tell us that they are answering multiple company questionnaires, sometimes 200 questions per company. They’re trying to gather data, and they’re obviously much smaller and don’t necessarily have the money to spend on reams of reporting. More help needs to go into supply chain financing, knowledge sharing and training. In some markets, much is outside of that supplier control, so that’s where it’s really important to work with the governments to try and support that.
GTR: Where are you seeing the biggest opportunities in markets globally? Where are new customers and new demand coming from?
Foghammar: If we look at our bus division, regardless of the vehicle you’re using, the big gain is moving people from cars. If you move them onto a bus, you have done 95% of the work. That’s a big opportunity, but the problem is that bus systems are very slow, especially in emerging markets. In Europe, where we have a lot of electric vehicles with subways and trains, it’s not a problem, but moving big buses into over-congested cities with low adherence to traffic laws is a major challenge with high risk, making things worse rather than improving. Here, strong political will and courage are of utmost importance.
In Stockholm, the use of biofuels is key. Then we not only solve a transportation problem but we also reduce methane leakage, for example, from landfills, which is a huge negative contributor in the green shift.
Mahabeer: Investment in the demand for energy that supports the transition, like electric vehicles or better materials in the manufacturing process, is quickly overtaking investments into renewable energy. So much is happening in the electrical vehicle space.
In terms of what’s happening outside of Europe, China is the biggest investor in all types of clean energy right now. We cannot also forget the other types of emerging markets, which are desperate for capital in general. I agree that we should be trying to push ourselves to provide that capital, especially if it’s supporting decarbonisation, or social aspects in those markets. You get a lot of support from banks on clean energy, in all parts of the world, but very few banks are willing to support in the African continent or countries like Bangladesh. That’s where I feel the most impact can come in.
Claverie: The demand and opportunities are definitely there. However, there needs to be more standardisation around what needs to be reported across geographies, especially in emerging markets, to move from ambition to reality, as many of them are not on the same path as Europe or the US.
Marklund: Our future really is focusing on the upward supply chain in order to meet our CO2 targets. When it comes to the next step, we are already committed to the circular economy. Adopting circular principles will significantly reduce our environmental footprint, reduce costs and create new revenue streams. We need to make better use of valuable and often finite materials within our vehicles.
I think we are running faster in terms of sustainability targets than some of our suppliers. Some of them have adapted their business for 2030 and we are going for 2025, so there will be different paces in all aspects there.
GTR: What are the biggest challenges you face when it comes to trade finance and working capital management?
Marklund: If we’re looking at working capital, you need to have a cash conversion cycle with some thinking behind it; you need to understand your business and the connection to financing solutions in order to have some understanding of what is happening, and what is driving what. Then, when you have a strategy, you can support it with financial solutions – trade finance or working capital solutions. The hard part, at least for us, is the complexity. Normally you can find a financing solution in whatever area, but they are often too complex to scale up. We have thousands of suppliers and hundreds of purchasers who need to understand how the setup works and what possibilities it brings. When setting up any kind of solution, it’s of great importance to keep it simple.
Haavisto-Virtanen: In terms of tying ESG ratings to a transaction, to me that sounds scary. Because again, somebody has to provide the data. Somebody has to be using that data for some purpose. This is something that I would really want to have an open discussion on in terms of how banks are seeing it. I think it would need a wider discussion, especially with the corporates who are at both ends of the trades.
Mahabeer: When we thought through how to put together our sustainable trade and working capital proposition, we had supply chain finance, but I think the majority of our business now is in letters of credit, invoices, receivables and so on. We look at the underlying activity and essentially the end use, and we ask for practical evidence – if you’re selling to an EV manufacturer, we know that that’s going into something that has a practical outcome. We do accept certain certifications, but we have also done a lot of work analysing how, for example, certification agencies support farmers as they’re going through audits, or knowledge sharing, covering both the environmental side and the social side. I think a lot more thought needs to go into that, and it does need to become fit for purpose to make sure that it can really take off industry-wide.
My personal frustration is there are probably five banks right now that are trying to do comprehensive sustainable trade and working capital. A lot more needs to happen to make this easy for our clients to adopt and simple to understand, and that’s when more capital gets invested. I saw it in the bond market and the loan market – once the market came up with guidelines, the amount of sustainable bond investment went up five times, within two or three years. Trade is lacking that standardisation, which will take away a lot banks’ uncertainty and concern over greenwashing, because if they try and do something that they don’t completely understand, and the expertise isn’t necessarily there, bank-wide, they get quite nervous. That’s why you don’t see as much differentiation coming through.
Dobreva: Cost is extremely important in an environment when everybody’s trying to pull the costs down. As mentioned, certificates, committees and so on, come with a cost. Who is paying this cost and how is this cost giving an advantage and incentivising the corporate to start searching for sustainable solutions?
GTR: What about export finance? Are there sustainability trends?
Foghammar: The financing i.e., the money as such, is neither green nor any other colour. But of course, it’s easier to attract better offers for projects that have a strong ESG profile, including also the social aspects such as democratic inclusion, care of the elderly and women’s rights. Bus projects generally tick a lot of boxes, and we get high attention from the creditors.
Generally, we don’t see lots of banks using different standards in terms of KPIs they request, because the IFC performance standards are quite established; so as long as you focus on those, I think you can make the banks come into the right lane. On the other hand, different regulators and/or authorities often ‘invent’ their own ESG requirements, which first of all doesn’t make sense but, secondly, constitutes a potential obstacle and driver of unnecessary cost.
Haavisto-Virtanen: Certain buyers understand; they have the money and can do the reports or certificates. Then you have those who can’t afford to or who don’t understand why they are being asked to provide these. Then you need to have some form of aid to produce these requirements for them.
