According to a survey of those working in the trade finance industry, carried out by supply chain finance platform Demica, most respondents (85%) say that they expect to prioritise ESG in the next 12 months, with 39% saying they expect to do so ‘significantly’.
More than half (54%) say they are focusing on offering favourable rates based on ESG scoring criteria in order to drive ESG in trade finance transactions. There is also support for improving SME access to finance (33%), with a similar amount of support (32%) for the use of ‘negative screening’, such as refusing to fund certain industries.
However, less than half (45%), say they had been personally involved in ESG-focused transactions in the past year.
According to Demica, the 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 resource for ESG programmes,” the report says.
Although Demica reports that there has been a “slight” increase in the number of respondents using ESG rating services when evaluating or structuring transactions, more than three quarters (77%) still do not do so. However, the report says that the small increase reflects broader trends such as including greater adoption of ratings services by participants in the industry, and the push for regulation of ratings services, including the FCA’s proposed development of a code of conduct for ESG data and ratings providers.
Among the other findings of the report, bankers expect changes to disclosure rules by accounting boards to impact demand for payables finance products. While not a top challenge, 26% of respondents do think the changes will impact the demand for payables finance and lead to fewer payables transactions. More than half (53%) say they do not expect any change.
“Our view is that increased transparency is a positive for the market and so side more with the 21% of participants forecasting increased demand,” the report says.
However, the report finds that that 92% of respondents do not expect any need to change their product offering, but adds it is worth considering that there may be some necessary changes to data reporting, as funders will need to provide information such as the number of the assets funded or current outstanding assets annually to their corporate clients.
The report also looks at trade receivables securitisation, the process of pooling assets and issuing securities backed by those assets, which is a valuable financing tool for both banks and corporations. The banks report that the top challenge their corporate clients face when setting up securitisation transactions is achieving off-balance sheet treatment for the transaction (41%). Understanding the possible products that are available was thought of as the next biggest challenge (30%).
The full report, 2023 Benchmark Report for Banks in Trade Finance, can be found here.
Philip Smith is editor of The Treasurer
