How trade finance can decarbonize the commodities sector

Published on
November 22, 2021
How trade finance can decarbonize the commodities sector

With value chains that reach 75% of global emissions combined, commodity trade finance providers have the power to drive emissions reductions at scale. Read on for three vital actions to reduce your carbon risk, cut your loan portfolio footprint, and decarbonize commodity supply chains.

The climate challenge for commodity trade finance

The latest IPCC report was a final warning. Limiting global warming to 1.5°C is still possible, but only with rapid, large-scale emissions reductions across the global economy. 

With no time to waste, financial institutions have a key role to play in catalyzing climate action. 

But how do we meet the challenge of sustainable financing in high-polluting industries — particularly those providing resources that livelihoods and economies worldwide continue to rely on?

Commodity trade finance providers are major levers in climate-critical sectors (metals and mining, oil and gas, and agriculture). They must harness the power of lending decisions to decarbonize global commodity supply chains. 

This goes hand-in-hand with building resilient portfolios, protected from carbon risks: the financial, logistical, reputational, and regulatory shocks that the extractive and agriculture sectors face in the net-zero transition — from stranded assets to carbon pricing — will affect the whole value chain.

Meanwhile, financing practices linked to high-emitting industries are under increasing scrutiny. Regulation is growing, from climate risk disclosure to stress tests, with more set to follow. 

Early action brings rewards. By decarbonizing and preparing for these risks and regulations now, you can gain ESG leadership recognition, meet customer demand with competitive low-carbon products, benefit from the potential financial returns of greener portfolios, and smoothly comply with legislative burdens. 

Here are three vital actions for every responsible commodity trade financier:

1. Offer sustainability-driven lending

Use sustainability-linked loans and client-supported KPIs to incentivize commodity traders to cut emissions, and attract existing low-carbon trading to your portfolio. 

Your lending portfolio’s carbon risks cover the whole supply chain of your financed trades. The emissions reduction potential is waiting to be unlocked — such as sourcing from lower-carbon oil and gas producers or mines, cleaner energy sources for aluminum smelters, and increased efficiency in cargo loading and freight.

Pioneering banks are offering green finance schemes such as sustainability-linked loans to incentivize traders to seize these opportunities. This can involve loan interest rate discounts for lower-carbon supply chains, and penalties for high-emitting trades. Your incentives need to be competitive to attract traders who already have green sourcing strategies in place, and make your portfolio more resilient.

The roll-out of green trade finance is still nascent, with no well-recognized market standards. This provides a significant opportunity for leadership. 

Moreover, green finance schemes can potentially be cheaper than offsetting, per tonne of carbon dioxide emissions (CO2) reduced. At CarbonChain, in our work with commodity traders and financiers, we’ve observed that a bank offering a relatively small interest rate discount (for example, 0.1%) can create a tenfold decrease in CO2. Sustainability-linked finance mobilizes traders to find the most effective lower-carbon sourcing opportunities. These schemes can be a fast mechanism for reducing commodity sector emissions.

A successful lending strategy that gets client buy-in is underpinned by measurable, evidence-based KPIs. KPI-setting should be based on up-to-date industry benchmarks, so your criteria for traders are ambitious and effective, while pragmatic. 

2. Use portfolio heatmaps to mobilize supply chain action

Start carbon accounting to identify emissions hotspots and reduction opportunities. 

Sustainability-linked lending decisions drive action up the supply chain. As traders compete for green finance, their suppliers will need to offer competitively low-carbon solutions, triggering system-wide change. 

However, without accurate supply chain carbon footprinting, you can’t set robust KPIs or enforce low-carbon lending criteria; and traders cannot make measurable emissions reductions. And global supply chain emissions — especially in the extractive and agricultural industries — are notoriously difficult to calculate.

You can remove these barriers inexpensively, by integrating automated supply chain carbon accounting into your lending activities. By making it easier for traders to understand and reduce their supply chain footprint, and with visibility of your most critical carbon hotspots, you can boost the impact of your green finance strategy. 

With real-time emissions tracking, you're able to influence traders’ and suppliers’ immediate decisions (for example, screening and swapping vessels to reduce emissions in a planned consignment). 

For high-impact sourcing decisions that need more time to implement (for instance, in extraction, mining and processing), ongoing carbon accounting and benchmarking let you collaborate with clients and traders on long-term strategies that tackle the biggest emissions sources.

Amidst heightened scrutiny of greenwashing, supporting the traders you work with to meet your criteria shows you’re serious about decarbonizing commodity trading. 

3. Report your emissions to prepare for climate stress tests and mandatory disclosure

Stakeholders want to understand the hidden risks in your portfolios, to know you’re managing them, and to see evidence of progress as you tackle them.

By responding to the demand for disclosure, climate scenario analysis, and stress testing, you can accelerate action in your trade portfolio, track progress, improve green finance strategies, and give clients auditable reports.

Your carbon accounting processes and software should align with globally-recognized frameworks and standards, such as the Greenhouse Gas Protocol and CDP disclosure, to prepare you for regulated reporting. 

Voluntarily and publicly disclosing your emissions data also contributes to a global pool of information that enables better decision-making across the global economy, to build the net-zero future we urgently need.

CarbonChain helps you seize first-mover benefits

CarbonChain helps you immediately start reducing the carbon footprint of your portfolio, and drive systemic change to decarbonize the commodities sector.

If you don’t take action, the greenest traders will soon turn to the banks offering sustainability-linked incentives, and your portfolio could be left with the riskiest transactions. 

Our carbon accounting platform automatically tracks emissions in your individual trades, quantifies your entire lending portfolio’s footprint, and provides actionable insights about carbon hotspots: 

  • CarbonChain lets you set, agree and roll out KPIs with client buy-in, based on automated continuous benchmarking. We independently rate trades in near real-time.
  • Get accurate, end-to-end supply chain carbon footprinting, asset screening, and integrates into your lending workflows.
  • CarbonChain is aligned with the Greenhouse Gas Protocol and an official TCFD supporter, so you can trust our software to help you prepare for regulation.

Ready to start decarbonizing your trade finance portfolio? Book a free demo; we’ll provide a sample trade emissions report and help you identify transactions immediately at risk. 

Take control of your net-zero transition with CarbonChain

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Adam Hearne
Written by
Adam Hearne
Chief Executive Officer, CarbonChain

Need help measuring your Scope 3 emissions for your reporting? Get in touch with CarbonChain today.

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