Banks are increasingly focusing on ESG (Environment, Social and Governance) and are demanding those businesses which make up their supply chains, and those they invest in to follow suit.
A new report by supply chain finance platform Demica reveals that ESG has been, and still is, a priority for those within the trade finance industry, with ESG still dominating corporate agendas, as most respondents say that they’ll be prioritising it in the next 12 months.
Demica’s 2023 Benchmark Report for Banks in Trade Finance surveyed nearly 200 trade finance bankers globally and revealed that most respondents (54%) said that they were offering favourable rates based on ESG ratings, in order to drive ESG in trade finance transactions.
That ESG focus is spreading to the banks’ investment decisions. A third of respondents (33%) also said that they are focusing on improving SME access to finance and 32 per cent said that they’re focusing on negative screening and refusing to fund certain industries.
However, when it comes to individuals and their involvement with ESG, over half of respondents (55%) said that they haven’t been personally involved in any ESG-focused transitions. Out of those who say that they have had involvement, 19% say that they’ve been involved in receivables finance, and 16% have been involved with payables finance.
Respondents were asked about how their risk departments are changing the limits on non-ESG-friendly sectors, and a significant percentage of respondents indicated that they would be making changes to their risk limits on non-ESG-friendly sectors.
One factor that is likely to have the greatest impact is the plethora of government policy and ESG regulation being proposed or implemented globally. In addition to EU Member State specific legislation, the Corporate Sustainability Due Diligence Directive (CSDD) and the Corporate Sustainability Reporting Directive (CSRD) will work together to provide a corporate due diligence and reporting/disclosure framework for ESG.
The UK has also implemented measures requiring listed companies to make certain ESG-related disclosures in their annual reports, while regulators in the USA have proposed rules to expand the scope of ESG-related disclosures required from SEC registrants.
Following this, industry bodies are also proposing standards to be introduced in this area. In 2021, the International Financial Reporting Standards Trustees announced the creation of the International Sustainability Standards Board to help provide high-quality, transparent, reliable and comparable reporting by companies on ESG matters for investors.
In 2022, the International Chamber of Commerce launched two pilot programmes with the aim of understanding how the implementation of their proposed standards for sustainable trade and sustainable trade finance should best work in practice and identify any potential improvements.
Matt Wreford, CEO of Demica explained: “The slightly slow adoption of definitive measures could be explained by the volatile macro political and economic environment in 2022. While inflation and other events have had a somewhat positive impact on asset growth in the industry, the effect on ESG has been less beneficial. Rising inflation, higher interest rates and economic uncertainty mean that organisations are facing budgeting challenges, perhaps resulting in less resources for ESG programmes.
“When it comes to prioritising ESG internally, our survey shows that banks are responding to new regulation by prioritising ESG more generally across their businesses. Most respondents reported that their banks are prioritising environmentally focused office initiatives and including ESG measures in their supplier selection process. There is also a significant number of banks investing in socially focussed office initiatives, demonstrating a commitment to more than just the environmental side of ESG.
“Despite some setbacks this year, ESG continues to evolve and redefine how companies operate, invest and treat their people. We look forward to tracking the progress in this area through our benchmark survey over the coming years.”