Reimagining financing, the green way
Commodity trader Trafigura has been making waves in recent months. The bold moves they have taken in the environmental, social and governance (ESG) space – including the sealing of an ESG-linked derivatives trade with Standard Chartered and, separately, the closing of a US$203.5 million private placement1 – have garnered considerable attention.
According to Trafigura, the private placement is the largest sustainability-linked financing on record in the US private placement market and was designed to support Trafigura to hit greenhouse gas emissions targets and further align its responsible sourcing programme with international standards for sustainable procurement.
Market watchers2 have called the private placement “a clear signal” that the private placement market is taking ESG financing more seriously.
Sustainable financing is also finding its foothold in Singapore.
Trafigura’s ESG-linked derivatives trade is the first time Standard Chartered has priced a commodity hedge linked to ESG benchmarks.
Standard Chartered is one of the most innovative banks among our core group of financing institutions partners and they were ready to engage with us. From the we started discussing the terms of the trade, there was close collaboration between the two companies.
The transaction involves combining conventional derivatives risk management with sustainability-linked key performance indicators (KPIs) that are linked to reducing greenhouse emissions – from owned or controlled sources – and to sustainable sourcing in the base metals business.
It is structured to offer a premium or discount to Trafigura on its hedging rate based on fulfilling the pre-agreed ESG KPIs. The KPIs are independently monitored and reported on regularly by a third-party certification and verification company.
Chin Hwee Tan, Trafigura’s Asia Pacific CEO, said: “We are committed to embedding sustainability into our day-to-day operations in a consistent and coherent way. A key pillar of our responsible business practices involves minimising adverse impacts on the natural environment. This sustainability goals-linked derivative transaction with Standard Chartered is an important step forward on our journey.”
Breaking new ground
Trafigura, which is one of the world’s leading independent commodity trading companies, started producing a Responsibility Report in 2015.
The 2020 report sets out Trafigura’s policies on and approach to responsible and sustainable business practices. It presents the group’s performance, measured against objectives set in previous years, with regard to managing specific ESG concerns. It also outlines their future areas of focus.
Trafigura set their performance targets around five key responsibility objectives: conduct and compliance; society, health and safety; environment and climate change; and people.
Trafigura published its emissions reduction target in the “2020 Responsibility Report”. Specifically, they intend to reduce operational greenhouse gas emissions by at least 30 per cent by the end of its financial year 2023.
This will translate to a reduction of over one million tonnes of carbon dioxide equivalent from its group operations. It includes direct emissions from its own operations as well as indirect emissions from the generation of purchased electricity.
To get there, Trafigura has taken a number of steps, including the external verification of greenhouse gas data and internal tracking of emissions intensity. This will allow them to set a meaningful scope 3 emissions reduction target (scope three emissions refer to all other indirect emissions that occur in the company’s value chain) within the next three years, it said.
Finding like-minded partners
For Trafigura, finding a financing partner that was aligned with them and willing to explore new ways of pricing was key.
“Standard Chartered is one of the most innovative banks among our core group of financing institutions partners and they were ready to engage with us,” said Mr Tan.
From the moment Standard Chartered and Trafigura started discussing the terms of the trade, there was close collaboration between the two companies, said Mr Tan, adding that the constant dialogue helped their relationship to flourish while fostering a deeper collaboration between the two institutions.
“Many hours were poured into designing this product. It was not just by senior managers but also across different departments including legal, operations, and accounting,” he said.
“We also had to reach a consensus on how to value, track and report the ESG-linked instruments. It was challenging and time-consuming but Standard Chartered was always available. We really appreciate how they took the time to allow sufficient discussion around issues that were important, such as identifying clear deliverables and the mechanism of verification.”
In this transaction, the KPIs are linked to Trafigura’s key corporate ESG targets, encompassing group-level emission reductions and the further development of the group’s responsible sourcing programme to align with internationally recognised reporting standards.
Notably, the Monetary Authority of Singapore (MAS), Accounting and Corporate Regulatory Authority, Enterprise Singapore (ESG), and the Association of Banks in Singapore have been working together to strengthen Singapore’s resilience, relevance and competitiveness as a global commodities trading hub3.
The initiative sees banks take a collaborative approach to develop a set of best practices for the commodities industry, in consultation with trading companies, and is something Standard Chartered is actively involved in. This will not only strengthen Singapore’s attractiveness as a commodities trading hub, it will also help set standards for the region.
Standard Chartered has also led, together with DBS, a workgroup of 12 other banks to create and conduct a proof-of-concept for a digital Trade Finance Registry4 to enhance lending practices and improve transparency in commodity trade.
Announced in October last year, the proof-of-concept was developed on a blockchain network supported by technology provider dltledgers.
Such a digital trade registry can enhance cross-border transparency even while ensuring client data confidentiality. The bank is pushing this, with the recognition that such attributes can help advance sustainable trade finance growth and effective risk management.
Standard Chartered is also involved in the set-up of a new global carbon exchange to be headquartered in the city-state. Announced in June this year, Climate Impact X (CIX) will be jointly established by Standard Chartered, DBS Bank, Singapore Exchange and Temasek. It is expected to be launched by the end of the year.
Driven by corporate climate commitments, global demand for high-quality carbon credits in the voluntary carbon market is estimated to increase by at least fifteen-fold by 2030, up to 1.5 to 2 gigatons of carbon dioxide annually.
CIX is expected to provide an effective solution for corporates to offset unavoidable carbon emissions in the near term and propel the development of new carbon credit projects worldwide through high-quality carbon credits.
Leading the way
Trafigura is not just active in the financing space. It has also been a driving force on the decarbonisation front, especially in the maritime industry.
The firm has been a strong supporter of establishing a sustainable long-term framework for decarbonising shipping by creating a level playing field between current high-carbon fuels and zero or low-carbon alternatives. It went so far as to propose the concept of a carbon levy on shipping in September last year, an idea which has garnered mainstream appeal.
Separately, Mr Tan is a member of the 17-member strong Emerging Stronger Task Force in Singapore, which was set up to help the country deal with the longer-term impact of the coronavirus pandemic.
He co-leads the Alliance for Action on Supply Chain Digitalisation together with PSA International group chief executive officer Tan Chong Meng. This specific alliance, in which Standard Chartered is among its members, seeks to secure Singapore’s competitive advantage by enhancing supply chain agility, transparency, intelligence, and platform interoperability, through a concerted push toward digitalisation to the core and the establishment of a Common Data Infrastructure (CDI).
This is expected to improve trade financing integrity and the productivity of logistics-dependent players, enhance regional market access through improve e-marketplace integration, and facilitate freight exchange and financing for SMEs and traders.
Said Trafigura’s Mr Tan: “In the third and fourth quarter, under the Supply Chain Digitalisation project under Emerging Stronger Taskforce, Trafigura has been actively involved in working with the ecosystem in e-documentation and trade finance registry under a Common Data Infrastructure.
“This will enable us to trace goods from the source, which is a key starting point for any sustainability strategy.”
A commitment to ESG
For Trafigura, pushing the envelope on their ESG goals is baked into their DNA. As Mr Tan explains, their stakeholders range from financial institutions, governments and regulators, to industrial customers and consumers, across both developed and developing regions. Maintaining their trust, by “working responsibly and engaging openly” is key to building a successful relationship.
As for Standard Chartered, this is an exciting time.
This year, the bank launched its Sustainable Trade Finance Proposition designed to help companies implement more sustainable practices across their ecosystem and build more resilient supply chains.
“Standard Chartered sees tremendous opportunities to support our clients’ transition towards more sustainable operation and supply chain activities. We executed our first Green Banker’s Guarantee in Singapore and ASEAN this year, and are in discussions with our clients to facilitate more sustainable finance transactions that make financial sense and will have a positive impact on our communities and the environment,” said Kingshuk Ghoshal, Head of Global Subsidiaries, Singapore & ASEAN, Corporate, Commercial and Institutional Banking, Standard Chartered.
According to a study by Standard Chartered, almost eight in 10 (78 per cent) of multinationals intend to remove suppliers that endanger their carbon transition plan by 2025. These data points are playing out on the ground.
Mr. Ghoshal continued: “To reap the potential benefit of sustainable financing, the whole ecosystem needs to work together. With an industry leader like Trafigura taking active steps to embrace sustainability and incorporating it in their day-to-day operation, it sends a strong message to their suppliers and other players that a sustainability-focused business will create long-term value for its stakeholders.”
2 News publication EuroWeek, which is part of the Euromoney Institutional Investor PLC group, said this is the largest ESG-linked US PP.