Francisca Michielsen, Divisional Director, Trade & Supplier Finance, Corporate & Commercial Banking, Santander UK, Wendy Whewell, Head ESG & Climate Change, Corporate & Commercial Banking, Santander UK
Why are sustainable Trade Finance standards important to SMEs and global value chains?
Small and medium-sized businesses (SMEs) are the motor of any economy, being a significant contributor to the economic landscape. With the number of SMEs still rising, covering all sectors across all regions, and often trading internationally, they can become the key enabler towards achieving the 17 United Nations Sustainable Development Goals.
SMEs that trade internationally will likely require an element of trade finance to support their business. If banks want to support their SME customer bases transitioning towards a more sustainable economy, this can be encouraged by providing sustainable trade finance solutions.
ESG Standards for trade finance, and the ability to measure against these standards, are important to demonstrate true sustainable trade finance and avoid greenwashing. As SME trade finance is often of transactional nature, this gives the advantage of being able to measure various components of ESG such as a SME’s respective country exposure, its supply chain, as well as its company level scores based on the products or services that it provides. These can then be combined into an overall score and compared to the standard.
Trade finance will provide the importer/exporter with the benefit of having the underlying transactional documentation reviewed by the bank, such as supplier invoices, transport documents, and purchase orders, which can provide insight into the SME’s sustainable scoring. You can then deploy sustainable trade finance for SMEs.
What are the latest sector developments and initiatives?
We have seen the deployment of sustainable linked loans across lending solutions including trade finance. But these are easier for larger corporates to apply for that have the resources, often a designated team, to set these sustainable targets and measure against them, which will either involve a sustainable credit rating or setting stretching and ambitious sustainability performance targets. An example product would be sustainability linked supply chain finance, which integrates material ESG considerations into a regular supply chain finance (SCF) programme, and links supplier sustainability performance to the supplier terms offered. This enables companies to influence its supply chain and accelerate decarbonisation and sustainability across its indirect operations and activities.
Increased ESG due diligence and monitoring can also act as an “early warning” system to enhance a company’s risk management function. But it’s not just the company that benefits, suppliers can access more attractive terms and pricing, which can offset potential costs related to transitioning to low carbon/ESG requirements. Companies can set a ‘minimum standard’ for supplier assessment and/or participation in the SCF programme either by promoting supplier engagement, by adding additional features or by incentivising material ESG improvements, all of which will impact the supply chain.
However, sustainability linked facilities are not viable (yet) for most SMEs, who often lack the resources. For now, targeted green or social, rather than sustainable trade finance solutions, is where we expect the most significant developments for SMEs in the next couple of years. Having said that we are seeing sustainable product development accelerating, and we expect SME trade finance propositions to adapt quickly to facilitate a faster transition.
What will the opportunity be in 2022?
As the journey to Net Zero 2050 gains traction, there will be a substantial opportunity for the industry to come together and develop an overall SME sustainability rating to give real insight to companies about its ESG score, but also to support it in improving its sustainable strategies. This should also in turn facilitate the move to either green or social dedicated purpose trade finance, or sustainability linked trade finance for SMEs.