Market expectations around sustainability are changing and, in the absence of established market standards for sustainable transaction banking, corporates are looking to quantify the impact of their transactions and fulfil corresponding reporting requirements themselves.
That was the rationale behind Societe Generale’s decision to develop a framework to help its clients assess and monitor the environmental, social and governance (ESG) impacts of products such as working capital loans, trade facilities, guarantees and letters of credit, and factoring services – including receivable finance and forfaiting.
“For sustainable financial products, impact reporting is as crucial as the reliability of the approach used to label these products,” says Marie-Gabrielle de Drouas, head of ESG for Societe Generale’s global transaction banking business. “However, transaction banking relates in many cases to flow business, where deals need to be processed rapidly and any additional requirements can pose significant challenges.”
The bank has developed a methodology for classifying transaction banking products as sustainable, which has been externally verified by ISS Corporate. For reporting, the required information and the frequency of reporting are agreed on before the transaction is labelled.
“We rely as much as possible on information that is easily available to our clients and, in some cases, information that is already available to us,” adds de Drouas.
Banks can follow frameworks such as the Loan Market Association’s sustainability-linked loan principles, but Marta Palacios, global co-head of supply chain finance product management at JPMorgan payments, says these frameworks are not exactly fit for purpose for trade finance.
“There is significant work ongoing within the trade finance industry to develop ESG standards, definitions and white papers, and I think it is crucial to allow that work to continue to consolidate best practices and approaches,” she adds.
Palacios notes that her bank is collaborating with other financial institutions on frameworks and data reporting standards and says regulators should be encouraged to consider the need for disclosure regulation to support clients’ ESG transition.
Sustainability claims for supply chain finance, loans and export finance are being scrutinized more closely than ever says Ahmed Benraissi, head of strategic advisory, trade finance competence centre at BNP Paribas.
“We expect client ESG diligence to become more thorough as ensuring transparent disclosure and accurate measurement remains a focus,” he says. “We also expect further standardization and alignment across ESG sectors. The effects of the green taxonomy and CSRD [EU corporate sustainability reporting directive] are spreading beyond Europe and reaching into corporate value chains.”
Without clear standards and comparability, measuring and determining ‘success’ is complex at best. As banks and their clients address carbon reduction and sustainable targets there must be uniform standards to support actions – and the expenditure needed.
Gwynne Master, managing director of lending and working capital at Lloyds Bank, says that while clear standards are set for financial reporting, this is not the case for any component of ESG.
“Approximately 80% of all trade worldwide is bank intermediated finance, meaning that trade finance has the capacity to shift the dial if the correct standards, regulations and legal structures are put in place,” she says. “Ideally, regulations will reward transition projects and ensure that the cost of capital is proportionately lower.”
Master notes that a flexible approach to sustainability assessments is required given the existence of multiple scoring providers, each using a different methodology. “Although it is not clear that upcoming regulations for ESG ratings providers will lead to greater uniformity, at a minimum they will enhance transparency,” she says.
With investors being increasingly selective about the sectors and corporates they lend to, the regulatory scrutiny of sustainability claims and the rigour banks may add in structuring ESG-linked solutions, many treasurers are waiting for market and regulatory issues to be clarified, explains Nicolas Bouvier, head of sustainability transaction banking, Europe, Middle East and Africa at BNP Paribas.
“Sustainability performance targets may be easily captured in transaction banking products by leveraging the existing green or sustainability-linked loan framework used for loans or bonds,” he says. “Transaction banking products can be a catalyst for strategic ESG initiatives such as collecting key data from supply chains and sustainable sourcing.”
Bouvier refers to a trend for client departments such as sourcing, finance, IT and sustainability joining up to help drive the creation of ESG solutions with their banks. “They are also seeking partnerships with sector peers to share best practices as well as ESG specialists to access reliable data and sector-specific expertise,” he says.
