Greening trade finance with the right data

Unlike shipowners or charterers, banks are far removed players from data on shipping emissions. And yet, as the financing entities, they are major stakeholders in a greener future. According the latest UN climate report, unless immediate, rapid, and large-scale action is taken to reduce emissions, the average global temperature is likely to reach or cross the 2.7 degrees Fahrenheit warming threshold within 20 years.

Within reason, banks are facing tremendous pressure to take action and establish effective environmental strategies – mainly as it applies to trade finance. Why? The shipping industry is the backbone of global trade. And currently, the industry produces about 3% of all GHG emissions but, according to one study, could represent as much as 10% by 2050. However without accessible emissions data, it can be hard to know where to start.

The state of sustainability

The Poseidon Principles is one of the latest frameworks helping banks promote shipping’s decarbonization. And while the Poseidon Principles is an important first step, it’s not enough. The industry needs a more dynamic and real-time approach rather than a retroactive one.

More banks have started greening their operations by integrating environmental and climate change risks into their risk management. In July, four global banks announced they would launch a pilot platform for buying and selling voluntary carbon credits, the latest sign of growing environmental interest from the financial community.

Sustainability is definitely on banks’ radars. A recent EY and IIF risk management survey highlighted that over 90% of bank CROs view climate change as the top emerging risk in the next five years. However, from this to green financing, there is still a long way to go. In another EY study, participants said there is little agreement on the basic aspects and vocabulary of green finance. One participant said, “perhaps the biggest challenge on the opportunities side is not knowing how to measure the opportunities, or how to price them.”

The power of data

Meaningful change by banks is hampered by a lack of data and relevant metrics to guide them. From a risk perspective, why shouldn’t environmental practices be regarded with the same scrutiny and due diligence as compliance? Environmental NGOs have accused the IMO of a “greenwash deal” – pretending to regulate shipping’s emissions but actually allowing them to keep growing indefinitely. If banks choose to go by the measures set by the IMO, it’s very likely that this could slow down real efforts to keep climate change from spiralling out of control. This could have a serious impact on your business and reputation. As sustainability becomes forefront for customers, financial institutions simply can’t afford this outlook. This is why it’s crucial that they leverage their own tools to set emission standards for each deal or transaction. Rather than depending on third parties, banks need to independently understand their environmental performance.

Our goal is to help trade finance teams benefit from data visibility and actionable insights – without stifling business growth. In this way, financing decisions can influence the move to a lower-carbon future. Once financing entities set a standard for decarbonization, customers will have to follow suit.

Conclusion

Climate risk is rising to the top of banks’ agendas. Some banks will choose to meet the bare minimum; others will try to stay ahead of the game. Regardless, it’s critical that each bank invests in a long-term strategy. This will mean going above the Poseidon Principles and taking actionable steps towards carbon reduction with data to prove it. To learn more about how Windward is helping its partners get there, check out our Data for Decarbonization Program.