Banking
Banks have to help drive down global trade’s carbon emissions
Global Banking & Finance Review®
Company
By Simon Ring, Global Head of Maritime Trade Technologies & ESG, Pole Star
The trade finance sector knows it must play a major role in reducing the maritime industry’s almost three per cent annual contribution to global carbon emissions.
Targets imposed by the International Maritime Organisation and the 2021 COP26 climate change conference last October have increased the pressure for trade finance banks to incentivise reduced emissions through preferential terms. Regulation is looming and EU banks, for example, are to undergo climate stress tests this year, meaning they must show they are reducing their overall carbon risk.
But assessing each trade transaction for its greenhouse emissions is complex, covering vessels, fuels, cargoes, routes and operational practices. Banks’ compliance departments are already burdened with anti-money laundering and sanctions requirements. And, with major companies engaged in trade having access to finance from dozens of banks, it could be difficult to stand out from the competition without risking compliance failures.
Although banks are advancing the green agenda in many new ways, such as sustainability-linked bond transactions and loans, when it comes to trade finance they need to adapt quickly. Failure to act could see them lose out when new regulations come into force and newer, more agile financing platforms are quicker to adapt. As the sustainability debate focuses on all types of transport, the banking sector could be exposed as the funder of carbon-emitting vessels running on dirty fuel.
The solution lies in obtaining greater insight into each transaction and the vessel or vessels involved. This is the only way to ensure the banking industry is financing transactions that use compliant vessels and fuels and that all the parties involved are following best practice.
The new reality is that governments and regulators increasingly expect banks and lenders to incorporate ESG (environmental, social, and governance) standards into their operational and financial decision-making processes. The global drive for increased sustainability increases pressure for banks to offer preferential financing rates for transactions that demonstrate compliance with emissions reductions targets and are as environmentally-friendly as they can reasonably be. Banks cannot offer such green incentives, however, unless they can see what and who is involved in a trade transaction, including charterers and operators.
The push for maritime trade to reduce emissions constantly grows in intensity. The International Maritime Organization, which is part of the United Nations, is aiming for a 40 per cent reduction by 2030 against a 2008 benchmark, for instance.
The challenge for banks’ and lenders’ risk, compliance, and legal departments is how to obtain accurate, real-time intelligence and information about the compliance and sustainability status of vessels in transactions and the routes they will follow. It is often even more complicated to quantify the environmental impact of the commodity that a vessel is transporting, but this should also be assessed.
Benchmarks and automation of ESG screening
While the emissions targets and regulations often feel like yet another administrative burden, there is no escaping the demands of sustainability. Many vessels are now built to higher standards and banks need to identify those with superior environmental ratings in order to offer preferential financing terms to the charterers and owners.
The Poseidon Principles, launched in June 2019, were an attempt to connect ship financing with environmentally-friendly behaviour and decarbonisation. Applicable to lenders, lessors, and financial guarantors including export credit agencies, they have established a global baseline in relation to climate goals.
Benchmarks of this type that use annual evaluations are fine, but in the era of 24/7 finance and blockchain platforms, the banking industry needs more up-to-date information. It should have access to real-time, detailed data about the current status of a vessel and full visibility of the proven and monitored ESG credentials of all the main organisations involved in a transaction.
Achieving this manually would never be cost-effective. What has changed is that banks can now use automated solutions that monitor emissions sustainability right along the supply chain.
Automated solutions include the carbon emissions measurements conducted by expert companies using recognised techniques. In practical terms, it enables a compliance department to rate a vessel, its peer group, and its carbon tonne per mile within a matter of seconds, while also producing an essential audit trail. Banks can access and analyse this information on the same set of screens they use for sanctions and money laundering compliance checks. Such integration enables them to use the high quality data produced to demonstrate compliance and best practice to governments and regulators.
End-to-end monitoring and due diligence
The arrival of this technology means banks can screen the environmental impact of each commodity transaction they are considering, using a range of real-time indicators that includes climate effect, human exploitation, soil erosion, deforestation, and water productivity.
All trade finance institutions now need to screen vessels, carriers, and charterers for ESG compliance as a standard part of due diligence. As governments and regulators move to reduce emissions from global trade, banks, trade finance platforms and insurers will need more effective technology to promote the growth of green, sustainable trade finance. The only effective way of achieving this without a huge administrative burden is through automation and integration of ESG monitoring into systems and workflows. This is an integration that trade banks should embrace so they can demonstrate to the world they are doing all they can to promote sustainability.
Trade finance refers to the financial instruments and products that companies use to facilitate international trade and commerce, ensuring that exporters receive payment and importers receive goods.
ESG stands for Environmental, Social, and Governance. These standards measure the sustainability and societal impact of an investment in a company or business.
Carbon emissions refer to the release of carbon, particularly carbon dioxide, into the atmosphere, primarily from burning fossil fuels, which contributes to climate change.
A sustainability-linked loan is a type of financing where the terms are tied to the borrower's sustainability performance, encouraging environmentally friendly practices.
Climate stress testing is a method used by financial institutions to evaluate how their assets and operations would perform under various climate-related scenarios.
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