Published: October 01, 2024
Sustainable finance has formed strong roots in the loan and bond markets, but where does it stand in the world of trade? Societe Generale’s Charline Profillet, Deputy Head, Structured Trade Finance, and Marie-Gabrielle de Drouas, Head of ESG Global Transaction Banking, shine a light on its developing role.
Trade finance is a more recent addition to the family of sustainable finance products. But as trade finance activities are often linked to the development of physical projects that have an environmental and social impact, more businesses are accepting their responsibilities to a very broad base of stakeholders. This, says Profillet, is raising ever-more interest in trade-related sustainable finance solutions.
The reason why trade finance is a step behind the loan and bond markets in this respect, she notes, is simple. At the early stages of market development, there was a lack of “strong and dedicated market standards” capable of clearly defining a trade finance transaction as sustainable, and thus supporting market growth. But this is changing.
Standardisation through frameworks created by legitimate bodies, such as the Loan Market Association (LMA), builds more clarity and certainty around sustainable finance solutions, explains Profillet. This provides end users with additional confidence that financial products developed within these frameworks will credibly align with their own sustainability aims and values. As such, more businesses feel inclined to use them.
For 5 years now, Societe Generale has accompanied its clients through trade finance in their transition and more globally their sustainable journey. As an example of a sustainability-linked solution, if the CO2 volume generated by a client on an annual basis and measured through its scope 1, 2 and 3 is reduced as agreed in the legal trade finance documentation, the pricing of the related trade finance instruments will be lowered accordingly. “It’s a way to incentivise our clients to improve their environmental and social (E&S) performance,” comments Profillet.
While Societe Generale was one of the first of a select group of banks to begin working on that front back in 2019, that group has since expanded. This has been supported by the adoption of the Loan Market Association (LMA) & Loan Syndications and Trading Association LSTA ’s Green Loan Principles (GLP) and the Sustainability-Linked Loan Principles (SLLP) now formally covering trade finance facilities. With most banks seemingly taking a comparable approach to their products, the industry is beginning to coalesce around the same idea.
A major push in that direction, notes Profillet, comes from the International Chamber of Commerce (ICC) and its Principles for Sustainable Trade: Wave 2. Whereas SLLP, GLP, and the much broader EU taxonomy, are general financial frameworks with trade finance adaptations, ICC’s Wave 2 is, from the outset, dedicated to trade finance. It integrates appropriate components of the other frameworks to, in ICC’s own words, “provide a frame to assess both the environmental sustainability of a transaction, and how it supports socio-economically sustainable development”.
To reach its current phase, ICC has been working on a pilot programme for two years, alongside a panel of more than 30 banks and corporates, and Boston Consulting Group. The aim has been to define a global framework, and a full scope of definitions, for sustainable trade finance deals. By progressively opening up to additional industries and sectors under Wave 3, the pilot is expected to move towards a common global solution.
One of the final hurdles identified is the wider use by trade partners of digital trade documentation. Cross-border acceptance is slowly being addressed by eUCP, the ICC’s supplementary ruleset for the Uniform Customs and Practice for Documentary Credits (UCP), and the UN’s Model Law on Electronic Transferable Records (MLETR), the latter giving digital trade documentation the same legal value as its paper counterpart.
Although this process is underway, the timing of expected outcomes remains uncertain. Other factors need to be addressed to ensure sustainable trade finance is a credible option. These factors, says de Drouas, are reliability, transparency, stringency, and scarcity.
On reliability, she believes that each participating bank must present a consistent and robust approach, demonstrating how potential negative impact of the underlying projects covered by the guarantees have been analysed and mitigated while positive impact has been duly measured.
The more transparents banks are on their approach, the more coherent practices will be. This is why Societe Generale has created, and externally published, its own detailed 40-page Sustainable GTB Framework. “Our clients approached us, wanting to know more about our framework, and to understand and see what possibilities it offers.”
Publication of the Sustainable GTB Framework has also attracted comment from the bank’s peers. “This was less expected, but our banking partners have been as keen to understand how we created a credible framework, with eligibility criteria considered nearly in full aligned with the EU taxonomy, as our corporate clients,” comments de Drouas.
With the notion of green being somewhat variable between the different regions of the world, de Drouas also calls for global banks “to remain stringent in terms of the requirements of what can be considered as green”.
With this in mind, she reveals that Societe Generale is a vocal element of French ICC discussions, providing valuable feedback on advocacy. “We think that market initiatives should push further to introduce incentives around sustainable trade finance, because clearly that’s what’s needed to help it mature.”
Elena Sanguineti, Head of MLT Treasury & Guarantees, Erg S.p.A.
“Our corporate model aims for sustainable growth in coherence with the transition process of the energy system, where we play a primary role. In finance, our target is to maintain 90% funding through sustainable finance by 2026. We are committed to achieve our ESG goals, and broadly implement all possible strategies for a full energy transition, as an independent power producer from renewable energy sources on the front line in the fight against climate change. We have successfully collaborated with Societe Generale to transform our trade finance facility into a Sustainability Linked - Green Hybrid trade finance facility, which is part of an integrated sustainable finance vision, as most of the guarantees issued are closely linked to our business and assets.”
ICC’s positive influence on the business community is driving members to keep abreast of change. But it helps that common ground is now being found within initiatives across geographies, with de Drouas noting that both Chinese and EU taxonomies, for example, share many elements. Of course, as a global bank, she says Societe Generale is in favour of finding a common global approach because its larger clients reach across multiple territories. But she adds that “any move at a regulatory level that enables a unified approach is absolutely key in terms of adoption”.
Having worked in the ESG space for almost two decades, de Drouas has seen an increase in individuals and corporates changing on a voluntary basis. However, she understands that at this stage of market development, voluntary initiatives alone may not be sufficient to drive the required level of progress. “Financial incentives make it easier, but time has shown that regulation always makes it move faster.”
Green and sustainability-linked trade finance are part of the wider remit of how trade finance can support our corporate clients’ transitions.
The notion of transition finance emerges but has different definitions. The Glasgow Financial Alliance for Net Zero (GFANZ) states that the term relates to the financing and related products necessary to support the transition of clients in all industries. Other frameworks target the hard-to-abate sectors. Clearly, there needs to be clarification within the various initiatives as to what transition finance is.
However, suggests de Drouas, stakeholders should not wait for a suitable market standard to mature. Societe Generale has already begun to identify, sector-by-sector, the types of activities that are able to support the transition of its clients and the related financing needs. It also launched a €1bn fund in 2023 in support of client transitions through debt and equity. “This has led to new and innovative discussions with clients, including those in trade, around how they must transition and how they are impacted globally by the transition of their overall value chain” she reveals.
The E&S shift can present solid ground for new business activity. Indeed, just as many traditional industries are now seeking transition and are finding innovative opportunities within that process, de Drouas notes that new industries are also emerging.
It’s not just banks supporting these emerging sectors, notes Profillet. “We’re seeing increasing support from public bodies, either directly from governments or through export credit agencies, for example. Of course, this helps secure the banking contribution to these companies, which in turn enables greater exposure to and support for this area.”
Patricia Gentile, Group Head of Finance and Insurance, A2A
“We have successfully collaborated with Societe Generale to sign an agreement to use the existing credit line to issue green guarantees. Thanks to their qualification methodology applicable to trade finance solutions, we were able to find a common ground approach between the eligibility criteria of our sustainable finance framework, and Societe Generale’s Global Transaction Banking framework requirements, in order to qualify our guarantees covering projects with positive environmental impacts as green.”
The successful support of all sectors and industries engaging with sustainable trade finance depends heavily on data accessibility and quality, comments Profillet. “Data is key from a commercial perspective, because it’s a way for us to offer to our clients additional innovative solutions, going broader and deeper as we accompany them on their E&S trajectory.”
With this in mind, Societe Generale explores opportunities with some key fintechs which can bring distinctive and value-added ESG data services and which complete the bank’s set-up.
A broader dataset is also vital in helping banks monitor progress towards commitments that they have taken on ESG. “Net-Zero Banking Alliance (NZBA) marks a huge transformation for our portfolio,” notes de Drouas. “We need current data to enable us to see not only that we are where we need to be now but also that we are heading in the right direction in what is still a rapidly developing space.”
Indeed, with a further need to meet increasingly stringent regulatory requirements, and to answer more probing questions from investors, the volume of data required is substantial and rising, she continues. “We use a mix of information shared broadly across the group, and data gathered at a client transactional level, complemented by third-party data. It all must be complete and reliable.”
As de Drouas observes: “We’re working hand in hand with different stakeholders. We’ve moved far from where we began years ago, but the journey only begins”.
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