Letters of credit (L/Cs), guarantees and supply chain finance (SCF), have the potential to contribute disproportionately to new volumes in sustainable finance according to research by McKinsey.

Most banks across the world have taken only preliminary steps toward incorporating sustainability features within global transaction banking (GTB) products, the global management consulting firm says in an insight piece published on its web site.

Growth potential

Based on its research, McKinsey estimates that revenue from sustainable trade finance and cash management products will grow by 15-20 per cent annually to total combined revenues of US$28-35 billion in 2025, with market penetration reaching approximately 25 per cent in trade finance products and 5 per cent in cash management products.

Diverse banks offer sustainability-linked solutions, including deposit accounts backed by investments in sustainability-rated assets and L/Cs issued for transactions in which the underlying asset - such as batteries for electric vehicles - contributes to efforts to mitigate climate change the researchers say.

They add that the number of requests for proposal for trade finance projects involving sustainability criteria is also increasing, especially in the US and Europe.

Qualified transactions

McKinsey concludes that basic products of trade finance and cash management should incorporate sustainability features such as a basic rating methodology for qualified transactions.

In terms of documentary trade finance, for sustainable buyers or sustainability-linked transactions, banks could offer documentary trade finance, including L/Cs or guarantees, at better pricing and improved access according to the consultants.

As an illustration, they say an L/C for the delivery of solar panels would qualify as a sustainable transaction, offered at a preferred rate to the buyer - and transferable as a sustainable trade asset.

McKinsey's insight, Sustainability in global transaction banking: A market imperative, can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.