Finance under threat? Access to commodity trade lending after COP26

In the wake of COP26, with world leaders doubling down on climate pledges, the urgent transition to a net-zero economy is underway. Commodity traders, operating in the heaviest-emitting industries, need to act now to help us get there faster. 

The business risks of inaction are great: in particular, access to commodity trade finance is under threat, as banks face increasing demands to green their lending practices.

But there are opportunities for commodity traders who plan ahead. By measuring and managing your supply chain emissions, you can tackle hidden carbon risk and attract green finance.

High carbon? High risk. Trade finance rules are changing.

Lending standards are stepping up:

Banks are taking action on climate risk in their portfolios, increasing the cost of capital for high-carbon business. 

shutterstock_796922467 1To protect trade loan portfolios from the rising price of carbon and the risk of stranded assets, financial institutions are scrutinizing their riskiest transactions, setting KPIs to reduce their emissions, and launching green finance schemes to redirect capital towards lower-carbon trading.

At CarbonChain, we’ve observed banks offering interest rate discounts of up to ten basis points for lower-carbon trading, and penalties for traders who fail to demonstrate carbon risk management. Criteria is often set against industry benchmarks across the supply chain, from mine to vessel, and from refinery to port.

These trends are just the beginning. As financial markets respond to increasing regulation, client demand, and stakeholder pressure, trade finance providers are set to further tighten lending criteria. 

Your green credentials, scrutinized:

Portfolio emissions disclosure and climate stress tests are on the rise across key economies. With stakeholders probing for signs of greenwashing, financial institutions need to transparently report their financed emissions, and offer verifiably low-carbon products. 

Traders need to meet this demand by accurately measuring their supply chain carbon footprint, avoiding broad-based estimates, and providing certifiable, auditable reports. 

Many are unprepared for this carbon accounting burden. Traders who start the process now will be best placed to prove they meet green finance criteria, and can comply with reporting demands.

Climate resilience strategies, for the long term:

Mask Groups

Sustainability is an essential part of future-proofing business; it’s the new succession plan for C-Suites. As more set net-zero targets, financial institutions don’t just want to see isolated actions for individual trades. 

To be a viable loan recipient for the long term, you need to embed climate action into your long-term strategy, showing you’re serious about using your leverage in supply chains to decarbonize commodity trading and tackle carbon risk. 

Some pioneering commodity traders are already measuring their supply chain emissions with precision, and finding opportunities to reduce them immediately and over time. These traders are sending a clear signal to banks that they can help them build resilient, competitive portfolios for the net-zero transition.

Out with the old: What risk-exposed commodity trading looks like

  • You don’t know the carbon intensity of your suppliers. Without understanding your emissions sources across your supply chain, you cannot find opportunities to reduce them or accurately report to financiers.
  • You haven’t started a conversation with your banks about securing finance longer term. If you take one immediate action, let it be this. Financiers want to de-risk their portfolios to get ahead of new and changing ESG legislation. You need to proactively reach out and show you can support this journey and enable compliance (through, for example, green sourcing strategies, emissions tracking, and target-setting).
  • You don’t have CEO support for sustainability leadership outside the trading floor. If climate change and Scope 3 emissions aren’t a priority for your C-Suite, banks may offer better lending terms to commodity traders showing executive-level carbon awareness and governance.

In with the new: Opportunities for greener commodity trading

In the rapidly changing ESG landscape, there are business benefits for prepared commodity traders - especially for first movers:

  • Access interest rate discounts from banks. We’ve seen firsthand how accurate carbon footprinting and asset screening can lead to immediate emissions reductions, loan interest rate discounts, and spark long-term collaboration between financiers, clients, suppliers, and traders.
  • Get ahead of the trend for low-carbon products. Gain a competitive edge upstream and downstream. Offer buyers low-carbon products; and secure long-term arrangements with green suppliers before increased demand creates a market premium.
  • Know the impact of carbon regulation. Quantifying your supply chain emissions lets you prepare for new and changing legislation, such as the European Union’s Carbon Border Adjustment Mechanism (CBAM).
  • Get your carbon credit offset plan in order. With accurate emissions data, use offsets credibly under increased scrutiny, and generate verified credits in the markets in which you operate.

COP26 is a warning. Now’s the time for action

COP26 has set the stage for increased climate action in the coming decades.

With steel on the main agenda for the first time, new pledges to tackle agricultural and extractive industry emissions, and more proposed rules for financial institutions to publicly set net-zero plans, it’s increasingly risky for banks to finance commodity trading. 

Rectangle 59The COP26 agreement explicitly commits to phasing down coal and fossil fuel subsidies. 20 countries (including the US) and the European Investment Bank will end foreign financing of fossil fuels by 2022, and 40 countries (including Poland and Vietnam) have made a pact to phase out coal

Meanwhile, rich countries have committed $8.5 billion to help South Africa move away from coal and create green jobs in mining areas, and nations representing 32% of steel production agreed to make net-zero steel preferred by global markets in 2030. This comes alongside unprecedented pledges to halt and reverse deforestation by 2030 and scale up sustainable agriculture.

What does this mean for commodity traders? Put simply: business as usual is not an option. If you don’t start embedding carbon management into your business strategy, you risk significant disruption in the net-zero transition.

Get ahead with CarbonChain

At CarbonChain, we’ve built a carbon accounting platform with the needs of commodity trading at the forefront. 

Our AI-powered software automatically calculates and tracks the carbon footprint of your commodity trade portfolio in near real-time, so you can find ways to reduce emissions across the entire supply chain, and access green finance with auditable and certifiable reports.With accurate asset-level carbon insights, you can show financiers you meet their criteria, demonstrate ESG leadership, get ahead of regulation, and mitigate risks early.

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Picture of Adam Hearne
CEO and Co-Founder, CarbonChain