Citi Perspectives Spring 2020

The need for market standards in green trade finance Today, ESG-linked loans and green bonds are readily available based on well-recognized market standards that define sustainable activity. However, no such market standards exist for trade finance, which creates a challenge for the marketplace and a risk that any offering by financiers is seen as little more than “greenwash.” Right now, if a company wishes to issue a green bond, or a corporation takes out a green loan, there are reasonably well-recognized market standards; however, there are no specific market standards for trade finance, and it is not easy to “lift and drop” the existing rules to apply to treasury and trade transactions yet. For example, if a bank writes a guarantee facility, allowing for the issuance of a series of individual guarantees to support the construction obligations of a contractor for a wind farm, does this qualify? Even though the end application of those funds is for renewable energy, a guarantee is a contingent instrument so it will not meet the green loan standard for use of funds, and there are many nuances which could factor into how this may or may not be considered sustainable financing. What is needed is the development of accepted industry standards that meet the core principles of sustainable purpose, independent accountability, and transparent reporting, demonstrating that the green benefits of these solutions are authentic. The creation of an ICC trade finance committee to work on international standards for sustainable trade finance is a step in the right direction; so are other initiatives, such as the green trade frameworks developed by multilateral institutions like EBRD and IFC. And this is far from being a trade-specific problem; the corporate treasurer must deal with similar issues in many areas of his/her responsibility. “For example, in the money market fund industry there is not yet a consistent or common set of criteria on what qualifies a fund as an ESG investment option,” said Michael Berkowitz, Citi’s Global Liquidity Product Head. “Across asset managers there are an array of different strategies, and it can be challenging for clients trying to make an apples-to-apples comparison across different funds.” Banks, such as Citi, are at the forefront of building a foundation of standards around green trade finance for the future. Now it is incumbent on the industry to provide better solutions to enable corporates to meet their ESG goals.