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Sustainable trade finance

Incentivising the trade of sustainably produced commodities


The BEI’s Sustainable Trade Finance Council has been exploring ways to incentivise the trade of sustainably produced commodities, building on the Soft Commodities Compact and Sustainable Shipment Letter of Credit (below).

A key focus of the Council to date has been to understand how to scale up the role that banks can play in supporting the shift towards sustainable soft commodity supply chains. This question is relatively new to the trade finance industry and, while momentum is visibly growing, many issues remain to be worked through.

The Council has therefore developed the discussion paper Incentivising the trade of sustainably produced commodities to set out the group’s initial ideas and trigger wider debate throughout the industry.

 

Sustainable Shipment Letter of Credit: A financing solution to incentivise sustainable commodity trade


The BEI worked with the International Finance Corporation (IFC) to launch a groundbreaking product model, the BEI’s Sustainable Shipment Letter of Credit (LC). This model for new trade finance transactions allows banks to reduce the cost of importing sustainably produced palm oil into emerging markets, incentivising sustainable production.

An LC is an undertaking from a bank, on behalf of an importer, to pay the exporter a given sum provided that the exporter presents documents which comply with the terms of the LC. The BEI determined that internationally recognised sustainability standards associated with individual commodities, such as the Roundtable for Sustainable Palm Oil (RSPO) standard for palm oil, can be integrated into LC transactions. This allows banks to identify, in a practical manner, whether individual shipments relate to sustainably produced palm oil.

The International Finance Corporation (IFC) has confirmed it will offer preferential terms for this type of shipment to its partner banks, offering potential reductions in the cost of capital. 

CISL authored a paper explaining how this product model works, on behalf of the BEI’s sustainable trade finance working group. The paper was launched at WEF’s Davos meeting in January 2014.

 

The Banking Environment Initiative’s Sustainable Trade Finance Council


Building on the pilot Sustainable Shipment Letter of Credit for palm oil, the BEI has now formed a ‘Sustainable Trade Finance’ Council.

The Council’s aim is to leverage banks’ role as facilitators of international trade and thereby accelerate the transition to a world where importing sustainably produced commodities, at scale, is a new market norm.

Four roles have been agreed for the Council:

1. Technical – to explore how to expand the trade finance solutions available to customers beyond the Letter of Credit and to other commodities

2. Market education and awareness – to equip the market with the knowledge of how banks can help to operationalise importers’ sustainability commitments

3. Advocacy – to work with major emerging import markets, starting with China, to see how the Council can support them increasing demand for sustainably produced commodities

4. Leadership – to explore what it would take for the banking industry as a whole to set goals to promote the trade of sustainably produced commodities


The Council includes representatives from the following organisations and is open to further expressions of interest for membership: BEI Member banks including Barclays, Deutsche Bank, Santander, Standard Chartered Bank and Westpac; major commodity importers and traders such as Olam, Unilever and Wilmar; trade finance industry bodies BAFT and the ICC Banking Commission; and civil society organisation, WWF.