What is green trade finance?

Interview with

What is green trade finance?

Sebastien Halley des Fontaines. "There currently aren’t any standards for green trade finance like there are on capital markets with the Green Bond Principles issued by ICMA in 2012 or on the debt market with the Green Loan Principles defined by the Loan Market Association in 2018. Societe Generale’s approach was to set up a working group with representatives of our trade finance business and our environmentalist colleagues who developed the Group’s offering in this segment of capital and debt markets. The goal was to work together on a framework contract and eligibility criteria for green trade finance transactions. This framework is based on the first two standards already existing for market products as well as a number of elements specific to Societe Generale, given its experience and its track record with its customers.

We now define a green trade finance transaction as the issue or receipt of a trade finance instrument, such as a contract guarantee or letter of credit, associated with an underlying project meeting strict guidelines. This project must take place in one of the four selected major industrial sectors and contribute to the advancement of the United Nations Sustainable Development Goals¹.

These four industrial sectors are currently:

• renewable energy, which includes the wind, photovoltaic, and hydroelectric industry;
• clean transport, such as rail infrastructure, electric trains, trams, and electric or hybrid cars;
• waste management: collection, treatment, recycling, waste-to-energy transformation, cogeneration, etc.
• water management, which includes, for example, desalination and sanitation, interconnected with waste management as part of clean city or smart city projects in emerging countries as well as OECD countries.

In addition to these guidelines, monitoring indicators are created for each project. These indicators are often technical and defined by project: for example, for a wind farm project, the volume of carbon emissions that the project will reduce compared with a carbon-intensive solution."

Marie-Laure Gastellu. "This initiative concerns customers who are “new entrants”, those operating directly in sustainable activities from the outset. But it also applies to more traditional players, since their projects will allow us to move from a fully carbon-intensive world to a world that will gradually go carbon-free. Because you can’t just snap your fingers and go from a carbon-intensive world to a clean world. The transition will inevitably take place over time, and traditional players have an important role to play in supporting it.

However, regardless of the nature of the project, we are bringing customers into this initiative only if they meet our own CSR requirements as well as all our sector policies."

Some NGOs believe that we should be moving faster and that financial institutions should be more insistent with their customers…

M.-L.G. "That’s a real point of contention. A few weeks ago, explorer Mike Horn² said on a national radio show³ that the energy transition is an evolution that can only happen gradually and will take years. The support of traditional players involved in this transition should be valued just as much as new entrants who start from scratch and reach the target more easily. Societe Generale and banks in general have long been invested in this energy transition. The bank’s management has made quantified commitments in terms of amounts of financing to support this transition . It’s true that some NGOs believe that this change isn’t happening quickly enough and want more radical changes. It isn’t that simple though. We have commitments that we’re certainly keeping, such as our commitment to the phase-out of coal by 2030, but there are other sectors where it would be unreasonable to believe that we could pull out overnight."

There are discussions about green trade finance in international bodies at the EBRD and the ICC. How are you positioned in relation to these more global initiatives?

S.H.F. "We’re part of several working groups, including one involving the ICC and another involving multilateral institutions such as the Asian Development Bank. The goal of these working groups is to define a common denominator of what constitutes a sustainable trade finance or green trade finance transaction. Trade finance can involve a wide variety of players in very different sectors: from small importers of fertilisers to large exporters of European aircraft. Establishing a definition is especially difficult in this world with various players, activities, and needs, unlike in the capital or debt markets, which are already more standardised."

M.-L.G. "However, these transnational initiatives are important because it’s also thanks to them that perhaps we’ll succeed in creating standards for green trade finance. Being an early player in this segment and a stakeholder in these initiatives is also a way to be able to participate in the development of these standards."

How is the EU taxonomy project useful in establishing eligibility criteria for your green trade finance initiative?

S.H.F. "That’s one of the Bibles that our environmentalists are using to work with us on our framework contract. But as I said before, at the limits of this taxonomy, there are certain elements that our environmentalists will adapt to our specific needs. When we’ve had bad experiences in a particular sector or industrial process, we can adapt the criteria."

Why did you launch this green trade finance initiative?

M.-L.G. "It started with one of our customers who was already directly positioned in clean energy. It was very important for this customer to prove that all its actions, including its financial management, were carried out with the concern of having a positive impact on the environment. This customer’s need was a catalyst for formalising our green trade finance initiative. And when we started talking about it with our other more traditional customers, they were very interested in having us help them, through this financial aspect of green trade finance, certify some of their projects as having a positive impact on the environment. This enthusiasm and the demand from both “new entrants” and more traditional customers took us a bit by surprise."

When was this initiative launched?

S.H.F. "It was launched about 12 months ago. But Societe Generale has been incorporating sustainable development goals into its trade finance activities for much longer, even if the projects in question aren’t always eligible for the criteria set specifically for this structured green trade finance initiative. For example, we support our customers to issue guarantees for the construction of vessels that run on liquefied natural gas. Although this transaction wouldn’t be eligible for green trade finance, it reduces the carbon footprint of vessels substantially. We are therefore still an important player in this sector, because this development is going in the right direction. Also remember that Societe Generale is a signatory to the Poseidon principles, which aim to cut greenhouse gas emissions in maritime transport by 50% by 2050. Another example is that some customers are building platforms for the oil industry, but today they are embarking on their energy transition by developing a new business model: they are selling their expertise in the construction and management of floating facilities to the renewable energy sector, especially to install marine wind turbines.

Although these companies engage in an activity that is originally very carbon-intensive, being proactive in designing green solutions allows the guarantees that we issue on their behalf to fit the into framework of our green trade finance initiative."

M.-L.G. "A distinction must be made between this highly structured, well-documented approach to green trade finance and what we’ve been doing for years, particularly in our project finance activity, which supports positive-impact projects. If we looked at our portfolio of contract guarantees issued over the past two or three years, we’d certainly already have a significant share of infrastructure projects that make a positive contribution to protecting the planet."

Who was involved in your first certified green trade finance transaction?

M.-L.G. "The first green trade finance contract guarantee was issued for Siemens Games Renewable Energy (SGRE), one of the largest suppliers of turbines to wind farms, by Societe Generale in Madrid for €230 million.

We’ve also identified a pool of customers potentially interested in this initiative, and we’re working on an electric car project."

Do these transactions involve additional constraints for the customer?

S.H.F. "The customer approach for green trade finance is not quite the same as for a traditional trade finance transaction: this initiative touches on important topics for our customers and has a very significant advisory aspect. As a result, we don’t meet with the same representatives as in our regular negotiations. We often meet with CFOs to explain how this approach could make sense for their group.

Then there are some special constraints: the customer must define indicators that often need to be retrieved from other industrial teams of the company. This process means that the customer is transparent and committed to documenting its CSR project and ensuring that this project will allow these indicators to be achieved. There’s a bit of due diligence work to be done on engagement and transparency, which makes the transaction a little more complex."

M.-L.G. "This also means that the company must have a relatively high CSR maturity level to start this process. These companies have moved from seeing these green initiatives as burdensome, time-consuming, and costly to being fully integrated into their offering and their ability to stand out."

S.H.F. "These companies often demonstrate their willingness to be transparent and to identify eligible transactions in a context of global financial communication but also communication on certain indexes such as the Dow Jones Sustainability Index. With regard to investors, they don’t want to limit themselves to the two most prominent segments of the capital and debt markets, between green bonds and green loans, but to complete the process with an approach that involves all aspects of their financing, including trade finance. Also remember that rating agencies and banks including Societe Generale are increasingly developing and adding value to CSR practices in their ratings."

M.-L.G. "Regulation will also go in the direction of placing value on the impact of a bank or corporation on the planet. Today, that isn’t the case yet. But a number of players want to put themselves in a position to anticipate this demand. This means establishing a KPI , an ability to analyse its data. It’s very likely that, in the long run, both companies and banks will have to be able to identify in their portfolios specifically the projects or activities that respond to all these issues.

And while being green is our focus today, we’ll undoubtedly talk about positive impact in trade finance tomorrow. Environmental targets are only part of the positive impact that also includes education, social, and diversity. Today we’re producing green guarantees and letters of credit with specific criteria discussed with our customers according to their activity, but we believe that this initiative will apply in the future to types of concerns other than the environment and the energy transition."

1. “The 17 Goals were adopted by all UN Member States in 2015, as part of the 2030 Agenda for Sustainable Development, which set out a 15-year plan to achieve the Goals”. Source: www.un.org.
2. South African explorer Mike Horn, whose most recent ski expedition across the North Pole encountered serious difficulties due in particular to the effects of global warming, which ultimately led to his emergency repatriation.
3. https://www.rtl.fr/actu/debats-societe/ecologie-on-ne-peut-pas-arreter-de-vivre-dit-l-explorateur-mike-horn-sur-rtl-7799969527
4. Societe Generale committed to raising €100 billion for the energy transition. This includes funding for “clean” projects, but a substantial part also involves supporting customers in their own transition. https://www.societegenerale.com/en/newsroom/Societe-Generale-accelerates-its-commitments-in-favour-of-a-responsible-ecological-transition
5. Key Performance Indicator
Interview by E. C.
Source: Banking & Strategy no. 388, Universwiftnet, Banks-Corporates Relations, 16 February 2020 (in French only)