At the ICC Banking Commission annual meeting in Beijing on April 8-11, the ICC sustainable trade finance working group launched its global best practice in sustainable trade finance.
Through an easy-to-use questionnaire, the guidelines will provide clarity to banks on the implementation of sustainability policy and standards as well as promote industry-wide consensus on the definition of sustainable trade finance. The aim is to discourage inaccurate use of the term and to prevent greenwashing, a practice in which trade transactions are inaccurately labelled as sustainable without any means of verification.
GTR gathered members of the working group to discuss the key drivers for the guidelines and how they will be implemented.
Doina Buruiana, project manager, ICC Banking Commission
Nigel Beck, executive & global head environmental and social risk and finance, Standard Bank
Ruediger Geis, sustainable trade finance working group co-chair, ICC Banking Commission and head of product management trade, Commerzbank Transactions Services
Roberto Leva, executive director, JP Morgan
Eleanor Wragg, senior reporter, GTR (chair)
GTR: Why now? What are the main drivers for this work, and what’s at stake?
Leva: It comes ultimately from consumer demand. People want to know how their financial providers are operating and what they are financing. It is good for us to be able to prove that we have the right controls in place, and ultimately this reflects on the corporate clients, which are our direct clients, and they now demand or expect this from banks. We have also had quite valuable feedback from quite a big chunk of banks and there seems to be an industry acknowledgement that the topic is important.
Beck: Banks traditionally, from an environmental and social risk management perspective, have focused on project finance and term debt. Short-term finance and trade finance is an area that has been overlooked. We are trying to be proactive while meeting market demand. There is customer, client and investor demand, and a strong incentive from investors globally to move towards ESG integration within business. Additionally, trade often involves more than one bank, and having a common framework where banks are talking the same language makes it more efficient.
GTR: What are the incentives for following the guidelines?
Leva: It’s a combination of managing reputational risk and tapping into client demand. Clients now expect a sustainable approach, so it’s important to demonstrate that one is ahead of the curve and provide the necessary comfort by having the relevant controls in place. It’s in the interests of both banks and corporates to follow these guidelines. Most of the companies that we deal with, especially multinationals, acknowledge the importance of reputation. We need to make it feasible for them to manage this risk. When we created the [sustainable trade finance] questionnaire, we took the blueprint of the anti-money laundering questionnaire which they were already familiar with in order to make things simple. If we manage to create a standard, its more efficient and effective for both the banks and corporates.
Beck: We are also starting to see environmental and social risk translate into credit risk. This type of risk management process manages the banks’ reputational risk as well as the credit and commercial risk in the transaction.
GTR: What are the timelines for adoption of the guidelines?
Geis: There is no timeline from our side for adoption. The impetus might come from external regulators, for example. We already see a lot of pressure coming from the European Union. As always with the ICC, our approach is: feel free to adopt it; we will provide you with the solutions, but we won’t force you.
Buruiana: This is what ICC does best: standardising existing best practices. There are so many banks, especially the larger players, who have had sustainability policies in place for a while now. What we did was to map everything and say, these are the common denominators. We then had lengthy discussions about what should be that common denominator that a bank can easily integrate, especially a bank that does not have this in place already. The process and set of guidelines that we are suggesting are modular.
GTR: What are the challenges involved in making sure that even the smallest bank is able to get on board with this?
Beck: It is about momentum. At this stage, a framework has been created, and we have piloted it within a handful of banks. It is going to be an iterative process, which means that over the next few months there will be continual feedback on the process and corresponding improvement. As it becomes more and more mainstream in the financial industry, you will start finding other banks applying it. I don’t think you can force banks to adopt it. It’s more a case of major players endorsing, supporting and agreeing to use it and then asking counterparty banks if they are doing the same. I will equate it to the Equator Principles, which started with four banks, then it went to 10 banks, and now it is 93 banks.
GTR: What steps are you taking to ensure that all stakeholders have a voice in putting together sustainability guidelines?
Geis: A big asset of our working group is that it covers various bank areas, from sales to the ESG department and product management. We have now decided to expand, so we are bringing in a handful of corporates to give their input in order to make this workable, and to avoid working in a silo.
Leva: We are inviting an agro-commodities trader to the table. Also of interest is the automotive industry, which is seeing a lot of change because of the diesel issue. Another area is the garment industry.
Buruiana: ICC has recently got involved in the UNFCCC fashion industry charter for climate action, and there is a specific workstream on financing for the whole fashion supply chain, so we will be working with them.
GTR: To what extent could sustainable guidelines for trade finance and supply chain finance transactions increase the load on banks and corporates from a compliance and cost point of view?
Geis: We only have one planet, and we all live on it. The understanding in society is that we have to do something. Within our organisations, within corporates, personally I hope that all of us are moving in the right direction. Our goal behind everything is to start a process with our customers, with our corporates as well as with our correspondent banks, to help them become more educated around sustainability. And yes, there might be an additional burden, but I am convinced it will be a positive one and people will understand.
Beck: It has always been the same issue: isn’t this going to come out at an additional cost to the corporate? Isn’t it going to be that much harder to implement? I think it depends on how you implement it. If you implement it with business in mind and there is full-on integration in existing systems, which is what we are trying to do, and there is a commercial imperative, then I do not think there is a disincentive for business. We are trying to ensure that it is commercial and positively influences corporates in the right direction. Banks operate in a lot of different geographies and laws are inconsistent in standard and application, so having a consistent framework that we can apply across all geographies will eventually improve the efficiency of these trade finance mechanisms.
GTR: Is cheaper finance for sustainable transactions the answer? What works best, carrot or stick?
Geis: There are various ways. As an example, the European Union is working on different capital treatment for green financing. If I need less capital, I can give you a better price and all of us have at the same time the same earnings. Having said this, personally I would prefer other solutions, because although many people mix up sustainability with environmental issues, it actually also incorporates financial inclusion, gender diversity, child labour, and so on. I would also like to make sure that the cotton farmer in Burkina Faso is getting a fair deal, not that one side is simply getting a better price. Therefore, I would prefer longer tenors as an incentive.
Beck: On positive incentive loans, I think there was a need for traction in the market. If you were to try and launch that concept without having a margin ratchet, I don’t think you would get sufficient uptake. Because there is a pricing ratchet, savings can be ringfenced and attributed toward ESG improvements. This creates a growth in the market until the product is standard, when pricing will come back up to par.
Leva: What seems to work is when multilaterals provide guarantees for programmes, but ultimately that comes at the cost of the taxpayer. You need to understand what the balance is, whether you can actually discuss with a multilateral and try to understand that capital treatment improvements could be better, but then those should be given based on what the actual supplier is doing. Ultimately it’s the change that is important; you need to incentivise the ultimate supplier to be sustainable.
GTR: What ways are there to integrate ESG due diligence into trade finance transactions?
Geis: There is a major difference between short-term trade finance and 10-year, large volumes project financings, where you can do much deeper due diligence. If you are talking about a constant flow of business with small tickets, you can’t spend millions on checking whether something is happening. There are two ways to build it in, in my opinion: on the customer due diligence level, and then at the transactional level.
Leva: We are trying to put as much of this information as possible in the customer record, because the challenge with trade finance – compared to project finance or export finance perhaps, which then sits within the Equator Principles workstream – is the fact that you have a mélange of transactions coming through the whole time. The more you can tackle at the customer knowledge level, the more you can rely on the client, and the less work there is to be done at the transactional level.
GTR: How do these guidelines prevent greenwashing?
Leva: The whole focus is on gaining a deeper understanding. The training that we are providing is designed to aid understanding of the potential red flags that might exist in these types of loans. Some things can be very clear. For others, it is open to interpretation and each bank needs to interpret this based on what their appetite is. We can help them understand what the business says. Whether a bank defines an activity as sustainable or not is a risk approach. We can’t as an industry body say what is right and what is wrong, but we can help people put things on a scale and make a decision from there.
Beck: That is essentially it. We are providing the tools. Your interpretation of the tool and the outcome is up to the individual bank. But we are providing something which you could use. Whereas previously we had, ‘Are you sustainable?’ ‘Yes.’ Now we have the tools in place that can substantiate this.