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Five topics that shaped trade finance in 2022

Moving to a sustainable economy is arguably the most pressing challenge of our time, and banks have a vital role to play. So says the University of Cambridge Institute for Sustainability Leadership (CISL) in its latest report, titled Bank 2030: Accelerating the transition to a low carbon economy.

The current policies of governments around the world mean that the world is likely to reach 3.2°C of warming above pre-industrial levels by the end of the century – in sharp contrast to the limit of 1.5°C targeted by 196 national governments in 2015 in the Paris Agreement.

All is not lost, however. The report says that with “ambitious action”, a pathway consistent with 1.5°C is possible, if capital providers change their financing approach to unlock the latent supply of, or demand for, low carbon measures – by 2030.

Among other recommendations, the report calls for banks to “break free from passivity” and see a low carbon future as a “strategic opportunity” to adjust the business and operating model of the bank, by channelling more capital into green loans, sustainability-linked revolving facilities, and collaborative financing.

Speaking to GTR, Nina Seega, CISL’s sustainable finance research director and academic visitor at the Bank of England, who co-authored the report, explains the key findings.

GTR: How urgent is it that the banking sector accelerates its financing to support the transition to a low carbon economy?

Seega: It is very urgent. When we were talking with our leaders about the report, we felt that we could have gone even further in terms of urgency on the timeline, because we are saying that there are certain actions that have to be taken today.

GTR: How confident are you that 10 years from today the vision laid out in the report will become a reality?

Seega: We had effectively two starting points for the report. One was looking at what the opportunities are within the industry. Before we went and spoke to senior bankers, we compiled a document that said, if we were to transition to a more sustainable future, where are the opportunities? Based on that, we went and had those conversations.

On the other end, we started thinking about what would we like the financial system to look like. There, we set out three tasks for finance, which was ensuring that capital acts for the long term, pricing capital according to the cost of business, and innovating financial structures.

The UK recently announced it would bring forward the deadline for the ban of petrol car sales to 2035. It hasn’t been that long since there was a whole industry-wide discussion of whether the previous deadline of 2040 was too unrealistic. But this has now been brought forward, because the market has depth. Because the sales of petrol vehicles have come down. So we have to set ambitious goals, and I think we will achieve them.

GTR: The report lays out a roadmap for change, starting with “banking-as-usual”, then describing a zone of transition and finally a zone of institutionalisation where bank operating models are aligned with net zero carbon emissions. How does this work?

Seega: If you think about the three banking zones that we are talking about, we included things like exclusion policies or financing renewables in the “banking-as-usual” zone, and that very much must be the baseline. What needs to be done is almost to go back to relationship banking, where we are taking our clients through with us on the journey and where we are helping our clients transition. We are saying that we understand that this is a different type of economy that is being built around us, so let’s bring together experts, let’s bring together capital, and let’s think about how we can help sectors transition. Banks must have an active mindset and step away from waiting for regulation or waiting for their clients, and move towards educating clients and educating themselves, and then that will enable them to take some steps into the transition.

GTR: Is it reasonable to put this amount of responsibility on banks to lead the charge?

Seega: If we are thinking about a fundamental transformation of the economy that we have to get through, first of all, it is not an option. There are risks out there in the world. There are risks sitting in our financial system. There are risks sitting in banks’ financial portfolios that mean they have to get on the front foot of it. So, it is not that we are expecting banks to go it alone. If you look at the financial regulation activity in the world, you see the Bank of England, the Banque de France, and the Dutch central bank all taking very reasonable steps and asking banks to take a deep look at their portfolios and understand what they are holding. We also see the corporates moving.

It is a systemic picture. We need the economy to move, we need the banking sector to move, and we need policy to move. But finance has a very key role to play. With access to capital comes responsibility. And that responsibility is to help the economy transition. I don’t think that the banking sector can sit on the sidelines and wait. If there is one sector that we can transform in the hope that it will transform the rest of the economy, it is the financial system.

One of the big reasons we are doing so much work around sustainable finance is that we believe that finance is at the core, and if you can transform those practices, then not only the leaders of the economy will move, but the whole of the corporate world will transition as well. And it is in the interest of the bank to transform, because they need to take steps to understand what risks they are sitting on.

GTR: The research was based on 100 interviews, including 88 with senior bankers in Europe, Asia and the Americas. What feedback did you receive from banks about the feasibility of the Bank 2030 vision?

Seega: We have had a number of conversations with many bankers and most of them were very open in those conversations. We had a very frank talk about what is being done and what is not being done, and we have not seen any pushback. We have, however, seen a lot of conversation around the structural barriers that make it difficult. For example, the fact that there is not enough time to devote to developing sustainable projects. The fact that it is much easier and much quicker to put out a normal financial bond in comparison to a green bond. That’s problematic.

Much of this comes from those structural issues of having a very substantial transaction cycle, and the question then has to be how do we move it out of the transaction cycle towards a more relationship client focus? That involves having sustainability at the core, and having sustainability is a strategic imperative. Sustainability has to become completely core to the organisation’s strategy, and then you need to build up capacity. People in finance have been educated in a particular way. They understand particular products. We need to bring them up the curve on what this means for the rest of the economy, and then they can apply this knowledge to their clients.