While earlier efforts to link sustainable trade finance principles with letters of credit (L/Cs) failed to gain traction, L/Cs in financings with clear climate targets are gradually emerging.

But unlike the capital markets that have the Green Bond Principles and the debt markets have the Green Loan Principles to guide best practice, sustainable trade finance lacks common standards and market definition.

Banks are nevertheless finding ways to close the sustainable trade finance gap by adopting sustainable principles developed by industry or other areas of banking, or by introducing their own standards and definitions.

Early moves

In 2014 a group of international trade finance banks alongside leading commodity buyers, trading houses, development banks, trade finance industry bodies and international NGOs led by the Cambridge Institute for Sustainability Leadership (CISL) announced its documentary trade finance solution, the sustainable shipment L/C.

While it was well supported by banks, the solution failed to gain traction for a variety of reasons, for example it was developed as a paper-based solution making it vulnerable to fraud and was introduced at a time when the market was generally focused on other trade finance offerings.

In September CISL, along with banks and corporates including Barclays, BNP Paribas, Rabobank, Standard Chartered, Sainsbury's and Unilever, launched Trado, a blockchain-based digital "track and trace" solution that provides parties in the supply chain with reliable data about the supply chain's sustainability properties.

L/Cs emerging

But L/Cs are increasingly featuring in financings with clear climate targets that take into account sustainability objectives. A documentary L/C issued by CaixaBank to Acciona Energía for a US$129 million solar farm in Mexico was certified in 2019 as the first green L/C in the European market.

Standard Chartered launched its first green trade export letter of credit (L/C) programme earlier this year with multinational food processing and commodities trading corporation ADM in Singapore, London, and New York (DC World News, 26 August 2022).

Adopting standards

Six international banks - Citi, Crédit Agricole CIB, ING, Standard Chartered, Société Générale and UniCredit - have signed up to an agreement to measure and disclose their steel-related loan emissions via the Sustainable STEEL Principles, the first climate-aligned finance agreement for the steel industry - although their application to L/Cs), bank is voluntary (DC World News, 3 October 2022).

Some energy intensive firms such as Heidelberg Cement meanwhile are incorporating L/Cs in credit lines linked to sustainability objectives. Its new syndicated credit line takes into account sustainability objectives in accordance with the Sustainability-Linked Loan Principles (SLLP) of the Loan Market Association. The credit line can be used for cash drawdowns as well as for L/Cs and guarantees.

Defining standards

Sustainable trade finance lacks common standards and market definition, but most serious efforts to incorporate green trade finance in environmental, social and governance (ESG) targets clearly define the guidelines being used.

For Société Générale, the project must take place in one of four selected major industrial sectors - renewable energy, clean transport, waste management and water management - and contribute to the advancement of the UN's Sustainable Development Goals.

The bank defines a green trade finance transaction as the issue or receipt of a trade finance instrument, such as an L/C or contract guarantee, associated with an underlying project meeting strict guidelines.

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