By Simon Ring, Global Head of Maritime Trade Technologies & ESG, Pole Star
While the heat is on marine transport industries to reduce the greenhouse gas emissions from shipping, the trade finance sector knows it cannot escape responsibility. No bank wants to be exposed as the enthusiastic funder of carbon-emitting vessels running on dirty fuel.
Whether trade finance organisations welcome it or not, global banking is increasingly part of the battle against climate change. At the end of last year, for example, the UN-led Net-Zero Banking Alliance unveiled itself, representing 40 per cent of global banking assets. It is committed to the adoption of lending and investment “aligned” with net-zero emissions by 2050, with “intermediary targets” set every five years from 2030.
As more initiatives emerge, banks and institutions financing trade transactions will be expected to incentivise the maritime industry to cut its 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 pumped up the pressure for trade finance banks to offer preferential terms to transactions using greener carriers. 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.
Assessing each trade transaction for its greenhouse emissions may seem straightforward to outsiders, but in reality it is complex, covering vessels, fuels, cargoes, routes and operational practices. Banks’ compliance departments are already tasked with anti-money laundering and sanctions requirements. By adding another layer of time-consuming due diligence processes they risk incurring the displeasure of exporters and importers who have 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 as newer, more agile financing platforms adapt more swiftly and to greater effect.
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) considerations 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 use the best tools available to be as environmentally-friendly as possible. It means banks need to see what and who is involved in a trade transaction, including charterers and operators.
The pressure on maritime trade to reduce emissions constantly increases. 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 that once a transaction is under consideration they need accurate, real-time information about the compliance and sustainability status of vessels involved 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 will also become an important factor.
Benchmarking and automated environmental impact 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.
These kinds of benchmarks that rely on annual evaluations are fine, but in the era of 24/7 finance and blockchain platforms, the banking industry needs information that is pretty much real-time. It requires detailed data about the current status of a vessel and the proven and monitored ESG credentials of all the main organisations involved in a transaction.
Using manual means to achieve this will 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 to check sanctions and money laundering compliance. Such integration enables them to use the high quality data produced to demonstrate compliance and best practice to governments and regulators.
Comprehensive monitoring and new due diligence practices
The availability of this technology enables banks to screen the environmental impact of each of their commodity transactions, using a range of real-time indicators that includes climate effect, human exploitation, soil erosion, deforestation, and water productivity.
This level of screening, covering vessels, carriers, and charterers for ESG compliance is set to become 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 so they can spur on the growth of green, sustainable trade finance. The only effective way of achieving this without imposing a near-intolerable layer of bureaucracy is through automation and the integration of ESG monitoring into systems and workflows. This is a technology integration that trade banks cannot ignore. They need it so they can demonstrate to the world they are playing a major part in the battle to increase sustainability and reduce climate change.
