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

January 2014 – The first tangible result of the ‘Soft Commodities’ Compact has been produced. The BEI’s Sustainable Shipment Letter of Credit is a financing solution that can be used by banks to incentivise the international trade of sustainably produced commodities. The International Finance Corporation (IFC) has confirmed it will offer preferential terms for this type of shipment to its partner banks, offering the potential reductions in the cost of capital.

The Banking Environment Ini

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The Chief Executives of the world’s biggest buyers of agricultural commodities, through the Consumer Goods Forum, have made public commitments to transforming supply chain practices. By 2020, their palm oil, soy, pulp and paper, and beef supply chains will be helping to achieve zero net deforestation. To deliver this goal, these companies have set deadlines by which they will be procuring only commodities that were produced in line with certain sustainability standards. The banking industry, through the Banking Environment Initiative (BEI), has been working with these companies to establish how, in practice, banking services can be aligned with this major client-led transformation.

The Cambridge Institute for Sustainability Leadership (CISL) has authored a paper describing a documentary trade finance solution developed by a group of leading commodity buyers, trading houses, international trade finance banks, development banks, trade finance industry bodies and international NGOs, convened by CISL. The paper details the simple means by which internationally recognised sustainability standards associated with individual commodities can be integrated into Letters of Credit (LCs) that support the international trade of commodities.

By allowing trade finance banks to differentiate between ‘Sustainable Shipments’ and conventional ones, the ‘Sustainable Shipment’ LC opens up the opportunity for banks to incentivise growth in the trade of sustainably produced commodities.

The BEI is now working with the International Chamber of Commerce Banking Commission and BAFT to explore how these incentives mechanisms could be taken to scale.

To participate in this initiative or to request more information, please contact Director, Finance Sector.