By Simon Ring, Global Head of Maritime Trade Technologies & ESG, Pole Star
Pressure for banks to incentivise a reduction in world trade’s contribution to greenhouse gas emissions is almost certain to increase.
The entire global commodities supply chain emits a vast amount of carbon, but the immediate focus is likely to be on the shipping industry and its 2.5 per cent to three per cent share of global emissions. That includes vessels, their owners, operators and charterers. As such, banks should be seeking to distance themselves from dirty shipping.
The EU, the UN and the International Maritime Organization (IMO) have demanded reductions in the shipping industry’s greenhouse gas emissions. Last year’s COP26 Climate Change Conference also put pressure on the maritime sector. The EU, meanwhile, aims to reduce greenhouse gas emissions from transport by 90 per cent and is regulating to encourage alternative fuel use. The next phase of its Emissions Trading System (ETS) is only months away involving full disclosure of routes, fuels and speeds.
For banks, incentivisation of more sustainable shipping should be a business opportunity as well as an obligation on the environmental, social and governance agenda. Exporters, importers and growing numbers of carriers and forwarders will be seeking out preferential terms and a seal of approval from the world of trade finance in exchange for greener operations.
Missed opportunities
Research, however, shows most banks and financial services organisations in the main European trade finance hubs of the UK and Switzerland are missing out on opportunities for green finance because they are unable to sort out which transactions they finance use low-emissions shipping.
Almost nine-in-ten UK banks or financial services organisations (89 per cent) and 56 per cent in Switzerland admit to having lost out on green finance opportunities.
The research, conducted among 350 heads of trade, compliance and finance at 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 per cent from UK trade finance organisations and 27 per cent from their Swiss equivalents can screen vessels engaged in commodity transactions for emissions reductions, for example. The research indicates Swiss organisations have fewer screening capabilities, which may indicate greater conservatism or less urgency about green finance than in the UK.
There also appears to be 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 UNCTAD Review of Maritime Transport 2021).
On average, Swiss trade finance organisations’ compliance departments were found to spend 43 per cent of their time screening for sustainability, while in the UK the figure was 50 per cent.
Lack of sustainability screening
Banks in the two nations, neither of which is an EU member, 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 of capability as the environmental, social, and governance agenda increases in importance.
Just 15 per cent of Swiss organisations can screen a commodity transaction for modern slavery and workforce wellbeing, for example, with the figure higher in the UK (33 per cent) but still not high enough. And only 14 per cent of Swiss trade finance businesses screen commodity transactions for deforestation compared with 29 per cent in the UK.
Investment in technology is the obvious move
The lesson of these findings is that unless banks acquire better screening and monitoring capabilities, they will continue to lose business to rivals who have invested in the right technology. This is an era of advancing digitisation, when a multiplicity of global trade bodies, including the 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 transparency through end-to-end processing and visibility. Yet only 36 per cent of Swiss-based trade finance organisations and 31 per cent 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 lack of capability may have consequences as ESG concerns increase.
There are some positive signs about how technology will make a difference, however. An average of 43 per cent of respondents from the UK and Switzerland want sustainability screening integrated into solutions they use to monitor their compliance with Know Your Customer (KYC), Anti-money laundering (AML), and sanctions requirements.
Room for improvement
Although the research is not definitive in all areas, it revealed that despite differences, the trade finance sectors in the UK and Switzerland are poorly positioned to take advantage of environmentally driven trade finance regulation if, and when, it arrives. Even before then, they will lose out on the inevitable growth in green finance revenues.
The shipping industry too has poor screening capabilities, but that should not prevent progress in the finance sector. The whole trade finance ecosystem should invest in advanced screening technology as a business and compliance priority. Otherwise, Swiss and UK institutions will lose out on green finance.