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Financial sector spotlight: The sustainable shipment letter of credit

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IN this installment, I adapt for the Financial Sector Spotlight column an article on the Sustainable Shipment Letter of Credit (SSLC) that first appeared in GTR Magazine, but which I thought was also quite relevant for the local trade finance market.

By Omen Muza

Even though banks consider themselves primarily as service providers whose actions are merely a reflection of their clients’ demands, they are expected to play their part in nurturing sustainable business practices.

Developments in the soft commodities space are set to usher banks into a more central/influential role in that regard if work done by the University of Cambridge Institute for Sustainability Leadership (CISL), the Consumer Goods Forum (CGF) and the Banking Environment Initiative (BEI) in the United Kingdom is anything to go by.

This ongoing work has the potential to drive important change in the way in which trade finance influences the planet.

As industry leaders are seized with efforts to look for ways in which to direct capital towards environmentally-responsible activities, hopes are high that the banking sector could help rollout sustainability standards and provide finance through cogs on the commodity supply chains.

Questions are being asked about how the banking sector can align its services with the requirement on the consumer goods side and within that context; a very specific focus on documentary trade finance has emerged.

There is a realisation that operationally, it’s quite feasible for a bank handling a letter of credit (LC) for a soft commodity such as palm oil to differentiate between one that has come from a sustainable source and one that hasn’t.

These questions about the banking sector’s role have led to the development of a product called the sustainable shipment letter of credit (SSLC), a mechanism which is to be piloted with palm oil, and eventually rolled-out across soya, beef as well as paper and pulp although no timescales have been set.

Under this arrangement, the issuing bank would issue an SSLC at the request of a buyer and on the proviso that the supplier meets pre-existing standards set by the Roundtable on Sustainable Palm Oil (RSPO), which are designed to ensure the product isn’t made to the detriment of any forests, people or communities.

An LC that meets these standards would bear the Certified Sustainable Palm Oil (CSPO) stamp.

The IFC has been involved in the working group for the SSLC and the expectation is that in the early stages it would offer a preferential rate of coverage for banks confirming SSLCs.

However, there are concerns by insiders about sustainability since this preferential coverage is viewed as a form of subsidy which can’t last forever.

Encouragingly, momentum is building steadily across the commercial spectrum about the need to make sure that one’s product is what it says it is and is safe not only in the sense that consumers won’t be poisoned, but also that it isn’t damaging the environment in which we live.

This is seen as the bedrock for the future of the SSLC. As momentum builds, the commercial imperative becomes stronger since people won’t buy products if they don’t satisfy environmental concerns.

For banks, the pressure will also grow stronger in the sense that unless they can match the principles of their clients, they stand to lose business. Given its potential impact, there are already calls for those behind the SSLC to aim to make it an industry-wide standard instead of just a niche offering.

There is general agreement that the commercial imperative of sustainability must be its major driver, of which the rollout of the SSLC is an integral part.

If it can be proved that the SSLC is commercially attractive, that banks and companies will secure more business through acting sustainably, then the potential is there to embed similar products in supply chains.

However, environmental stakeholders such as Greenpeace, while welcoming the advent of the SSLC, go on to argue that the banking sector in particular should be focusing on restricting other damaging areas of their business, rather than embarking on entirely new ventures.

“On paper an initiative that increases the ease with which commodities producers can get access to credit if they do the right thing may be a good thing, but we’d much rather banks spent their time reviewing their balance sheets, reviewing who they’re lending to.

We don’t see the problem being getting more money for good things, like sustainable commodities. The problem for us is that there’s far too much money for bad things,” says Richard George, a UK forest campaigner.

George commends the efforts of companies such as Unilever, which he says “have responsibility to demand commodities that are produced in a way that meets the values of the people that buy their products”, but views the gesture as being hollow if the banking sector is not willing to insist on such products being used everywhere in the world, on all transactions.

He balks at the idea that banks should only be client-led and calls for banks to take the initiative on sustainability issues.

Finbarr Bermingham of GTR Magazine notes that every time a bank makes an announcement around climate change or sustainability, it is greeted with cynicism and sees the SSLC as the perfect chance for trade financiers to prove the cynics wrong.

With influential players such as Barclays Bank and Unilever on the forefront of sustainability efforts and promoting the SSLC, it would not be surprising if these trends make their way into Zimbabwe where these companies both have operations.

In the meantime this whole debate on sustainability and the SSLC is perhaps an opportunity for our own institutions such as Institute of Sustainability Africa (Insaf), the Consumer Council of Zimbabwe (CCZ) and the Bankers’ Association of Zimbabwe (BAZ) to show some resolute leadership.

Send feedback to omen.muza@gmail.com

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