Financing a better trade environment

01 July 2021
Rising emphasis on environmental, social and governance (ESG) and supply chain resilience in the wake of Covid-19 will redefine trade finance

Across the region – and the wider world – individual consumers and corporates of all sizes are increasingly focused on a variety of environmental and sustainability concerns when making decisions.

This, in turn, has led to businesses placing a stronger emphasis on environmental, social and governance (ESG) factors as part of their wider trade and finance decision-making processes. 

The pressure is coming from consumers, but also – vitally – from investors.

A recent report from Forbes found that more than 80 per cent of mainstream investors now take ESG into account when making decisions, with more than $22.8tn in assets being managed under responsible investment strategies. This is a jump of 25 per cent from 2014.

The ongoing Covid-19 pandemic has accelerated these changes and helped push the world in a positive direction, embedded sustainability along the entire value chain and significantly increased the focus on transparency – beginning with sourcing and production methods.

Looking ahead, underwriting decisions can be expected to increasingly take into account client attitudes towards environmental issues, including resource depletion, climate change and waste management.

Just as importantly, these factors will take human and social factors into account. Are employees and local communities in the value chain making enough money to put food on the table?

Underwriters and financiers will have to make clients aware of ESG-related risks and take steps to find them find solutions.

The financial sector will have a deeper, more meaningful role to play, particularly in the carbon market
Peter Maerevoet, Tradewind Middle East

Balancing priorities

With the Covid-19 pandemic still very much ongoing and with countries at different stages in their vaccination drive, survival remains a priority for most firms.

In the mid-term, we are likely to witness a consolidation of industry – across a wide variety of sectors – as well as order sizes coming down, even as the number of transactions has increased. While businesses of all kinds will rebound, many will take a cautious and mindful approach to their sourcing practices.

In this environment, businesses models are being scrutinised in their entirety, with reforms on the horizon and rules being rewritten as a new generation of entrepreneurs and investors adapts to new realities. Whoever embraces these changes the fastest will have a distinct edge over their competitors.

This new approach is more holistic than that of the past. We must now look beyond logistics and company facilities and examine the entire life cycle, as well as how supplier codes of conduct will be enforced even in cases where certain markets are characterised by uncertainty as to what are the best, and most sustainable, practices.

The responsibility will ultimately fall on larger companies, as well as financial markets, to push, while reporting and disclosure practices will have to be enforced by government entities. Overall, the financial sector will have a deeper, more meaningful role to play, particularly in the carbon market.

Already, we have seen some of the world’s most prominent lenders push towards green financing, which, while still a relatively new concept, will continue to play a huge role in how businesses quality for funding.

As specialists in trade finance, our experience at Tradewind is reflective of this exciting new environment. We extend financing to manufacturers and suppliers who remain committed to globally accepted ESG integration and undertake a compliance and credit risk assessment that involves looking at a variety of environmental, safety and personnel safety requirements.

What we do not do is fund firms that are involved in questionable practices, or those that do not otherwise qualify for funding as a result of industry certifications.

Supply chain changes

The other major trend is regionalisation and diversification of supply chains. The entire ecosystem of logistics is shifting, and more agile financing is becoming increasingly important.

The evolution of smart infrastructure and logistics has led to supply chains catering to buyers' efforts to replenish stock on demand in ever smaller orders and shorter lead times.

Once the shock of the pandemic passes, it is possible that the world’s most prominent economies will work towards increased cooperation rather than a crisis-induced push towards national self-reliance.

We believe that this eventual push towards open markets will force a mobilisation of global capacity and innovation to meet renewed demands, new business opportunities and a rapid evolution of products and services as companies of all kinds work to access new markets.

Moving beyond the pandemic, there will still be a mismatch between supply and demand as some economies continue to face disruption to their production and demand.

The recovery will not be even across all economies, and global companies must make sure that they have the right product mix to be able to cater to those demands.

Yet although there remains considerable uncertainty as to how the immediate future will play out, what is certain is that those investors and firms with ESG principles in mind will succeed in the long run.

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