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As environmental concerns have moved up the global agenda, trade has often come into the crosshairs. Though banks are keen to lend money for sustainable finance in theory, a lack of regulatory clarity and increased fears over greenwashing claims mean the market is more cautious than in the past. The International Finance Corporation (IFC) and the Asian Development Bank (ADB) hope a reference note on sustainable trade finance issued in June will go some way towards clearing that up.

The document aims to “communicate areas of agreement between IFC and ADB related to the financing that supports sustainable trade”. It covers goods and commodities that the two institutions consider sustainable, outlines ways for companies seeking sustainable trade financing to effectively present these requests, and details the possibility of support from IFC and ADB for such loans.

Steven Beck, ADB’s head of trade and supply chain finance, and Nathalie Louat, director of trade and supply chain finance at IFC, speak to GTR about multilateral cooperation, market access risks for lenders that don’t go green, and how ADB and IFC hope to build a sustainability standard for lenders and borrowers.

 

GTR: What is the current state of availability for sustainable trade finance?

Beck: For Asian Development Bank, and I’m sure I can speak for the other multilaterals on this – and for much of the private sector – there’s a hunger to do more transition finance and environmentally sustainable transactions. It’s now become a core part of our mandate, so I don’t think there’s any question that we all want to ramp up what we’re doing on environmental sustainability and related transactions.

I think part of the challenge is that the market is confused around what constitutes environmentally sustainable transactions because there are so many different standards out there. In addition to that, there’s now a concern around being accused of greenwashing. Institutions operating in this space may be well intentioned, then suddenly there’s an accusation they’re doing something that shouldn’t be considered environmentally sustainable. This is really where this reference note on trade finance sustainability comes in.

We put this reference note together with IFC to provide some clarity to the market. That’s one thing. The second main thing is – with that clarity – to encourage our partners in the private sector to originate these transactions. We have the capacity to do more.

We hope and believe it will help our private sector partners know what we’re looking to originate that we can legitimately consider to be environmentally sustainable.

Louat: The role of trade finance in facilitating the goods and services essential for climate change mitigation and adaptation is critical. The first step is to clearly define what we mean by sustainable trade finance, as it doesn’t have a universally recognised and standardised definition. It was important to us that we all agree on the terminology so we can have comparable measurements and have our partner banks look to generate more of these types of transactions.

 

GTR: There has been criticism of multilateral development banks failing to work together in the past. What led to the development of this joint reference note, and do you see more banks joining in on it?

Beck: Conversation. Multilateral development banks meet annually in Dubai, and we were talking about the confusion in the market, how we are keen on working with our private sector partners to originate more environmentally sustainable transactions, and what could help achieve that objective.

This reference note is a very good example.

Why IFC?  We were able to move at some pace with IFC, but we’re very much hoping that, over time, other multilateral development banks will sign on to use the reference note. The idea is this is very much a dynamic live document. Hopefully, it’s going to become a broad market standard, and not just for IFC and ADB partners and clients.

There has been a criticism in the past, an entirely legitimate one, that multilateral development banks haven’t cooperated as much as they should. I think this represents one example of how that’s changing now in the trade finance community. We have always worked together, but now we are taking this to a completely different level.

Also, standards change over time. This is a practical document; it’s four pages with a short addendum, and it’s designed so someone could just pick it up. It’s by no means a comprehensive study on the whole issue, and it will change and expand over time as standards evolve. This is just phase one.

Louat: At IFC, we introduced the concept of sustainable trade with our clients in 2010, so it’s been 14 years of monitoring individual transactions to validate the sustainable nature of the goods being exchanged. We’ve put in a lot of work to identify transactions supporting trade of goods related to renewable energy, energy efficiency, climate-smart agriculture, green transport and green buildings. We’ve done a lot to support that segment of the business – more than US$7bn since inception. The next step for us was to make sure that our partner financial institutions were able to identify these transactions as well.

Many of our banks share our interest in developing this business segment. Several of them have indicated that it is important for them to have IFC-labelled criteria. We shared ours with them but felt that there was a need to take it one step further, because it is important to financial institutions that when they work with several MDBs there are no contradictions. That message came loud and clear from Asia.

We heard that the collaboration between IFC and ADB was very welcome, and now we are under the clear impression that banks in Asia will use this as their criteria going forward. Ideally, from there, we can continue to expand and onboard MDBs in other regions of the world.

 

GTR: There is an obvious incentive for improving access to trade finance for sustainable trade, which is that climate change is real and dangerous, but is there a shorter-term benefit to businesses and banks for engaging with it right now?

Beck: Anywhere from 25% to 80% of the global carbon footprint can be traced back to trade and in supply chains. If we don’t green that space, we’re not going to be able to achieve our ambitions on climate. That’s of course number one. Number two is that a lot of companies in Asia see this as a competitive issue and a market access issue.

Now that you’ve got the EU and other markets with regulatory requirements around carbon footprints, and extra levies around carbon itself, this has become a market access issue. Especially for companies in developing countries; if they don’t lower their carbon footprint and do their bit in the supply chain, they’re going to lose market access.

Louat: We are not putting this forward as a key argument, but there are benefits in terms of pricing. An institution like ours is willing to provide price incentives or longer tenors, for example, for clients who meet the eligibility criteria for sustainable trade. We’ve also heard from banks that if they can prove that their transactions can be labelled green, they can access funding at a lower cost. If you consider a funding bank and a guarantor providing coverage on the risk, you could combine both benefits, making that a significant incentive for these transactions. We do not put this forward as the key reason for us to do this, because we’re focusing on how sustainable trade is good for everybody, but clearly, price incentives do encourage a focus on these transactions.

 

We have mentioned increased access to financing for sustainable trade, but on the other side, do you see efforts to decrease funding for unsustainable trade, like oil and coal?

Beck: It’s not an easy question. If you dissect bits and pieces of it, I don’t really know what unsustainable trade is, necessarily. You might give extreme examples like coal, but outside of that, it becomes difficult to define, at least at this point in time.

But no one is saying that you should only do the transactions that are referenced in the reference note. We recognise that the global economy is dependent on a whole variety of goods that people rely on for energy security, food security, livelihoods, medical needs, whatever the case may be. They may not be classified as sustainable transactions, but that doesn’t mean that they’re damaging, necessarily.

I don’t think that by supporting environmentally sustainable transactions, we’re cutting off funding from the goods that we require for development of our economy and our livelihoods.

Louat: It’s definitely an issue that is much broader than trade finance, but to give you an idea of how we look at this, coal has always been excluded from all of our financing. In terms of oil and gas, it’s really approved on a case-by-case basis, and it’s subject to a lot of conditions. We look at those on a very short-term basis, and more importantly, we look at it in the context of countries that are in crisis where there is a specific emergency need for oil and gas. It’s a very small portion of our portfolio, and it’s only on a need basis.