An industry-led taskforce has introduced a new framework for green trade finance and working capital transactions in Singapore, though participating banks admit that the initiative is still in its nascent stages, despite being a “step in the right direction”.

The Monetary Authority of Singapore (MAS) announced last week that a green finance taskforce it helped set up had launched a framework to allow lenders across the region to identify and assess eligible green trade finance transactions and work out which industry certifications to use.

Major banks such as HSBC, DBS, Standard Chartered, and Deutsche Bank are some of the lenders with representation on the Green Finance Industry Taskforce (GFIT), alongside NGOs, corporates and financial industry associations.

The move comes as part of broader efforts from the taskforce to accelerate green finance in Singapore and confront the potential threat of greenwashing by organisations.   

“The GTF [green trade finance] framework sets in motion a move towards a clear, unified methodology to qualify trades and working capital loans as sustainable, and represents a tangible blueprint for financial institutions to assess, monitor and report on how ‘green’ a company’s activities are,” says Iain Morrison, head of global trade and receivables finance at HSBC Singapore.

Morrison tells GTR that the trade finance and working capital framework will be supported by “other aspects of Singapore’s GFIT initiatives, in particular, the GFIT taxonomy”.

In one key move, the framework outlines that the use of funds by a bank’s customer in a green trade finance transaction must meet at least one of the environmental objectives laid out in the taskforce’s taxonomy, which include climate change mitigation, climate change adaption, protection of biodiversity, or promoting resource resilience.

GTR understands the taxonomy is still undergoing industry consultation.

The framework also directs lenders on how to perform suitability assessments, and offers guidance on the documentary evidence needed for the underlying activities to qualify as green.

Such evidence could come in the form of a recognised industry certificate, government license, or accepted third-party assessment that shows the greenness of the activity or the goods.

Guided by the new framework, HSBC and UOB have piloted four green trade finance transactions for renewable energy, recycling, agriculture and farming activities.

In one deal, HSBC Singapore issued an importer letter of credit facility to Swelect, a Singapore-based subsidiary of an Indian solar photovoltaic module manufacturer, to facilitate the purchase of components.

HSBC says that Swelect’s use of the funds achieved the “climate change mitigation” environmental objective, with its activities being defined as those that would “enable low carbon activities or those with substantial emissions reductions”.

Meanwhile, in a separate pilot, the bank extended a green trade loan to World Metals, a Singapore-based SME in the metal recycling sector.

As the firm was seeking additional working capital to finance the refinery and recovery of precious metal from electronic waste, the transaction qualified for funds under the criteria that it would “promote resource resilience”.

As part of the agreement, World Metals also had to show documentation – including licenses and certificates – proving it was certified to carry out the tasks of collecting, disposing and recycling of metal and electronic waste.

It must also demonstrate that it continues to meet the requirements of a Singapore-accredited independent third-party certification provider and a waste collection and disposal license.


“Nascent stages”

While global banks based in Singapore and local lenders have welcomed the introduction of the new green trade finance framework, there’s little suggestion major lenders will entirely abandon their own criteria for assessing whether a trade finance transaction is green or not.

Sriram Muthukrishnan, group head of trade product management at DBS Bank, tells GTR that the creation of a common framework in the region is a “step in the right direction” and will help banks decide what constitutes a green, dark green or brown project.

However, he says that the Singapore framework is still in its nascent stages and that “it will take time to flesh out a concrete framework or methodology with specifics on how green trade finance transactions should be assessed”.

Muthukrishnan adds that while DBS will look to take overall direction from the new framework proposed by GFIT, the bank will also continue to refer to its own definitions and processes for measuring the eligibility of a green trade finance transaction.

In June last year, DBS laid out its own sustainable and transition finance taxonomy and framework for classifying transactions as being “green” or for “transition” purposes, which also draws upon the United Nations’ Sustainable Development Goals (SDGs).

Nevertheless, concerns have been growing in Singapore over the lack of common standards among banks in the green finance sector, culminating in the creation of GFIT by the city state’s central bank.

The taskforce said in a consultation document in the early months of 2021 that the different approaches taken by financial institutions means there is little by way of a “recognisable framework” on what green or sustainable finance is, what products in these areas should do, and what outcomes a client should expect.

For the global trade finance industry, the picture is much the same.

Efforts are ongoing to bring in common definitions for sustainable trade finance, such as through the ICC’s working group on sustainability. Meanwhile, DBS’ Muthukrishnan says that trade finance banks often use the UN’s SDGs as a reference point.

But generally, there is still a lack of an objective measurement of what constitutes green or sustainable trade finance or supply chain finance, and lenders currently have to rely on their own metrics or those provided by a third party.

At the same time, DBS’ Muthukrishnan says that trade finance banks also have to contend with a lack of common standards in the various sectors they provide financing to, which only adds to difficulties in assessing whether a transaction should be categorised as green.

“In the cotton industry, for example, there are some apparel manufacturers who might have different ways of defining their sustainability goals. There’s no common industry standard…. Similarly, the rubber industry doesn’t have a common standard. So while you get certified that this particular rubber came from a sustainably grown produce, there can be other ways for people to certify the goods.”