New research shows the majority of banks and financial services organisations in the main European trade finance hubs of the UK and Switzerland are missing out on significant opportunities that meet the decarbonisation agenda.
Almost nine out of 10 UK banks or financial services organisations (89%) and 56% in Switzerland admit to having lost out on green finance opportunities.
Although banks are not currently compelled to incentivise greenhouse gas (GHG) emissions reductions arising from global trade activity, they may soon be. Vessels in the global shipping industry are now held responsible for nearly 3% of global GHG emissions and the pressure to reduce that contribution to climate change is growing. It is, therefore, likely that trade finance organisations will have to show they are not funding vessels that use high-sulphur fuel, or that follow routes and schedules that increase emissions.
The research, conducted among 350 heads of trade, compliance, and finance working in banking organisations in the UK and Switzerland, however, reveals a lack of capability. Despite almost all respondents saying sustainability is a medium or high priority, only 31% of respondents from UK trade finance organisations and 27% from their Swiss equivalents can screen vessels engaged in commodity transactions for emissions reductions, for example. As a whole, the research conducted for maritime intelligence technology firm Pole Star and published in June 2022 indicates that Swiss organisations have fewer screening capabilities, which may indicate greater conservatism or less urgency about green finance than in the UK.
Still stuck with manual monitoring
The findings reveal there is a continued reliance in both countries on manual or ad hoc processes for screening vessels and operators. This is time-consuming and prone to inaccuracy, given there are more than 100,000 vessels currently under the leading flags of registration (and only 18 on biofuel according to the United Nations Conference on Trade and Development (UNCTAD) Review of Maritime Transport 2021)
The research found, on average, that Swiss trade finance organisations’ compliance departments spend 43% of their time screening for sustainability, while in the UK the figure is 50%.
Increasing pressure to decarbonise trade finance
The pressure to incentivise trade emissions reductions through finance (and for banks to prove they are doing so) is set to increase. The EU, the UN and the International Maritime Organization (IMO) have demanded reductions in the shipping industry’s GHG emissions.
Last year’s COP26 Climate Change Conference also pressured the maritime sector to act, as did UN Secretary-General António Guterres Gutteres. The EU, meanwhile, aims to reduce GHG emissions from transport by 90% and is regulating to encourage alternative fuel use. The International Chamber of Shipping also wants to see net-zero carbon outputs by 2050 and has gone so far as to propose a carbon levy.
Lack of sustainability screening
But the research also shows banks in the UK and Switzerland remain way behind in their capability to screen for the broader sustainability concerns relating to extraction or production processes. This will be a significant lack as the ESG agenda increases in importance.
Only 15% of the Swiss organisations surveyed can screen a commodity transaction for modern slavery and workforce wellbeing, for example, with the figure higher in the UK (33%), but still not high enough. And just 14% of the Swiss trade finance businesses canvassed screen commodity transactions for deforestation compared with 29% in the UK. There is perhaps a degree of complacency about all this.
Investment in technology is a must
The message from these findings is that unless banks upgrade their screening and monitoring capabilities, they will continue to lose business to their rivals that have invested in the right technology. This is an era of advancing digitisation, when a multiplicity of global trade bodies, including the various International Chambers of Commerce and the UN are trying to settle on data standards and digital document formats.
The aim is, of course, to remove time-consuming paper processes, and to introduce greater efficiency and transparency through end-to-end processing and visibility. Yet only 36% of Swiss-based trade finance organisations and 31% of those surveyed in the UK say end-to-end screening of transaction ecosystems for sustainability is one of their three biggest challenges. This is another instance where complacency or lack of awareness is all too prevalent.
There are some positive signs about technology, however, indicating it needs to be easy to use and well-integrated. An average 43% of respondents from the UK and Switzerland want sustainability screening integrated into solutions they use to monitor their compliance with KYC, AML, and sanctions requirements.
Although the results of the research are something of a mixed bag, it has shown that, despite differences, the trade finance sectors in the UK and Switzerland will both be in a weak position in the event of environmentally driven trade finance regulation. And they will continue to lose out on the growth in green finance revenues that will inevitably arise if they continue to conduct business as usual.
Admittedly, banks and finance platforms are currently hindered by poor screening capabilities in the shipping industry, but that should not act as a barrier to progress. The entire trade finance ecosystem needs to invest in advanced screening technology as both a business and compliance priority. Otherwise, the loss of green finance opportunities will continue.