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How ESG impacts trade finance

Trade finance has a crucial role to play in supporting companies’ efforts to position sustainability at the core of their strategies and across their supply chains. As banks expand the range of their green and sustainable trade finance solutions for clients, often drawing on existing frameworks from the wider finance industry, we consider what is possible to help build the economies of tomorrow.

A burgeoning agenda

The sustainability agenda continues to develop at a rapid pace, becoming an even greater priority as a result of Covid-19, with stakeholders across the business ecosystem – governments, investors, banks and companies of all sizes – realising that building back from the crisis and addressing sustainability issues are not mutually exclusive efforts.

In the financial sector, there has been substantial growth of sustainable solutions - many of which have originated in the capital and loan markets. These include several types of bonds (such as green, social, blue and sustainable) which are committed to supporting ESG-related projects, for example, green bonds used for investing in renewable energy. There are also various loan products (green, social and sustainable to name a few) that can be used for correlated projects. These loans are similar to bonds, but the difference lies in how the funding is raised. Other instruments include sustainability linked loans and revolving credit facilities, which broadly focus more on the ESG performance of the borrower itself, and are used to incentivise these companies’ commitment to environmentally and socially sustainable activity.

Although solutions such as these have been in existence for several years, it is only relatively recently that their take-up has been accelerated.

“We have seen, and continue to see, consistent growth in investment demand for green, social and sustainability assets,” says Susan Barron, Global Head of Green and Sustainable Capital Markets at Barclays Investment Bank.

Although this demand has been further supported by an increasing focus on ESG more broadly, market responses to Covid-19-related challenges have also played a pivotal role – so much so, Barron reports, studies showed that investments and companies with a strong ESG profile outperformed over the periods of market volatility.

Regulation, too, has provided a strong driving force for progress with the development and evolution of market practice guidelines and standards.

We have seen attention by regulators and policymakers to provide definitions for ESG and sustainability, as well as initiatives that encourage increased disclosure and other requirements.

Susan Barron

Global Head of Green and Sustainable Capital Markets at Barclays Investment Bank

In comparison, within the trade finance sector – a natural fit for sustainability initiatives – the roll out of green and sustainable products and solutions is in a more nascent stage. But with stakeholders across the trade ecosystem demonstrating a growing commitment to sustainability, and allocating more resources to developing it, the industry may now be at a turning point.

Getting serious about sustainability

“We’ve seen a lot of developments across the broader banking market, and trade is the next logical extension of this,” says Matt Jolley, Head of ESG Origination at Barclays Corporate Banking. “This is being driven by the broad spectrum of players across the trade ecosystem, who are increasingly focusing on ESG metrics, and demanding businesses measure and address their ESG footprints.”

Stakeholders include investors, seeking to increase their focus on the ESG impact of their investments; governments and regulators, looking to support the growth in green and sustainable markets; and companies, becoming more aware of the ESG impacts, risks and opportunities within their supply chains and their own day-to-day activities.

Faced with an ever-changing business arena in relation to sustainability, from rapidly increasing consumer pressure to a shifting geopolitical and regulatory environment, it is key – from a commercial as well as a reputational perspective – that companies act now to embed ESG into their strategies.

“The agenda is changing very swiftly,” says James Binns, Global Head of Trade and Working Capital at Barclays Corporate Banking. “Consumer behaviour is developing remarkably quickly – just look at the impact that Covid has had on people's consciousness around environmental impacts, for example – as is the regulatory environment with, for instance, the US recently rejoining the Paris Agreement, having exited the accord late last year.”

But responding to these shifts takes time.

Companies, particularly large corporates, can take years to build up and diversify their supply chains – and very often these cannot be shifted quickly. Nevertheless, there are actions that can be taken now to start moving in the right direction.

James Binns

Global Head of Trade and Working Capital at Barclays Corporate Banking

There’s also the inherent danger that if companies do not react swiftly to these changes – and their competitors do – a delay could end up costing them in the long run.

“There are two sides to it: there's the profitability angle, the fact that sustainability does create business prospects for companies that are able to identify those opportunities and grasp them, thereby creating a competitive advantage – particularly when they’re being judged more and more on their ESG credentials,” says Jolley. “But there is also the risk that companies or supply chains that aren't fundamentally sustainable, that aren't as resilient to shocks – such as Covid – can be under a lot of pressure.”

Banks play a critical role

The role of banks within the sustainability agenda is both to raise awareness of the related issues and challenges for their clients, as well as provide a financing option for all aspects of clients’ sustainability journeys.

“There’s a significant amount of capital spend involved in shifting supply chains or making a climate transition, whether it’s long-term funding or short-term working capital financing,” says Binns.

While banks can certainly step in to finance companies’ sustainability initiatives, being able to meet these funding requirements with sustainability linked financing products is important, so that companies are able to demonstrate this commitment to their investors and other stakeholders.

It’s this entire chain of events that banks can support, Binns explains: the actual financing in the first place, but also the verification that the funds that a company is putting into its business are aimed towards meeting its sustainability objectives.

Developing trade finance solutions

The growing interest in ESG opens up a number of different areas for consideration in the trade space.

“There's a lot of momentum in the trade finance world to understand ESG solutions better, and how we can learn from other areas of financing, and apply those within trade,” says Binns. “Clearly, trade instruments are quite different from the loan and bond markets, because trade tends to be very granular, such as individual receivables or single shipments of goods.”

This, he explains, is where the complexity may lie in how the trade finance industry applies what it is learning from other markets. Nevertheless, progress is being made.

Barclays, from a corporate banking standpoint, has had a range of green and sustainable solutions in the market for a number of years, and has recently been refining its overarching framework. To that end, in partnership with Sustainalytics^, an independent provider of ESG and corporate governance research and ratings, Barclays has put in place a Sustainable Finance Framework1, which sets out the parameters for what qualifies as green or sustainable, and the factors to consider when adapting that framework to existing products within the bank.

“We’ve been working with our colleagues across the bank, including trade, to identify what green solutions we already have, where opportunities exist, and how this framework can be applied,” says Jolley.

A recent success in this regard is Barclays’ launch in early 2021 of a new Green Bonds Guarantees & Indemnities (BGI) product, which focuses on tackling the challenges that businesses face when entering into trade-related contracts.

“We’re going to continue this work to look at what other solutions we can roll out,” Jolley adds.

1Barclays Sustainable Finance Framework

The Barclays Sustainable Finance Framework sets out our methodology for classifying financing as sustainable and serves as the basis for tracking and disclosing our performance against our commitments. We are committed to being transparent about our definitions and approach. Barclays has drawn on industry guidelines and principles in developing this Framework in collaboration with Sustainalytics, a leading provider of Environmental, Social, Governance (ESG) and corporate governance research and ratings.

> Open the Barclays Sustainable Finance Framework PDF

The next step

In terms of future product innovation and growth, the team at Barclays agrees that – while green products will remain a priority – there will likely be an increasing prevalence of social and sustainable solutions across the financial markets, including trade.

In the loan markets, there’s been a trend away from just looking at green to also addressing social and governance issues. This is really coming through in sustainability linked facilities.

Matt Jolley

Head of ESG Origination at Barclays Corporate Banking

Where traditionally companies would start out with a focus on the environmental aspect of their business, borrowers are now increasingly setting performance targets across all three principles, the ‘E’, ‘S’ and ‘G’, says Jolley.

“It really depends on what's important for the specific company and their stakeholders and what kind of challenges they're looking to address. But that's the trend that we expect to see come into the trade world quite strongly.”

Reflecting on the future of sustainability efforts within the wider trade industry, while there are lessons to be learned from other areas of banking in the ESG space, rather than being too prescriptive, says Barron, it’s about being able to start at a point that feels the most appropriate.

“For trade, it's an opportunity to understand that everyone might be at different stages of their own journey. But the market is collaborative, and people are keen to have a positive impact, so it’s about working together and finding innovative solutions that encourage rigour and have a clear structure.”

Barclays Investment Bank disclosure

Read the Barclays Investment Bank disclosure here

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