Jacques Levet, BNP Paribas' Head of Transaction Banking EMEA, discusses the growing importance of sustainability in finance.
Today, the concept of green bonds, green loans and positive impact loans are well known, clearly defined and broadly distributed. Has there been similar progress in the working capital financing space?Jacques Levet: Although we have already put in place some working capital financing structures, on an ad hoc basis, to address specific client requests, it is only nascent in the industry. Thus far there are indeed no existing regulations or standard framework attached to the sustainable financing of working capital.
At BNP Paribas we have clearly committed to contributing to the achievement of the UN Sustainable Development Goals (SDG) by making our offering evolve to finance the real economy in a more sustainable way, and incentivising clients to evolve themselves. As such, creating a truly sustainable working capital offering is one of our key objectives today and, beyond those previously mentioned one-off structures, we are about to deliver a complete framework for our clients.
To achieve this goal, we started by very concrete financing of flows, meaning supply chain, traditional trades and even some more specialised commodity trades.
What does this mean in terms of sustainable supply chain finance?JL: Supply chain financing, in essence, requires the support of parts of corporate organisations that go beyond financing matters, including procurement for instance. This also applies to the sustainability element.
An increasing portion of our client base shares our own dedication to sustainability and wants to embed it in all their processes, including, and sometimes primarily for, their supplier base.
Incentives through the cost of a supply chain finance programme can be an efficient way to promote such changes. It obviously requires a bank and funding partner ready to play this game and capable of operating it, like we did for Puma's supplier financing programme.
"An increasing portion of our client base shares our own dedication to sustainability and wants to embed it in all their processes, including, and sometimes primarily for, their supplier base."
What do you consider as the main features for sustainable trade?JL: To start with, we do not only look at so-called 'green underlying' but we also consider the broader and overall impact of an activity. In order to ensure a concrete action towards the achievement of the SDGs, we also do not only accompany those of our clients which are already best in class, but moreover those clients that demonstrate a true willingness to evolve towards better practices. Our responsibility is to be completely inclusive.
In terms of the main features of sustainable trade loans, we would look at the following:
- The underlying goods must qualify as sustainable by matching a number of common criteria verified by our specialists who are in regular contact with UNO and a number of NGOs. We have eight sectorial policies that are publicly available on our website, and, if for example we take our palm oil policy, it is clear that we would only finance palm oil matching Roundtable on Sustainable Palm Oil (RSPO) criteria, as we are a member of RSPO.
- The flow must also be consistent with a real need and not simply undertaken by a company only to highlight a green behaviour which would be sporadic at best and purely for communication purposes. We are very cautious of the risks of greenwashing.
Our vision of sustainability includes a number of Environmental, Social and Governance (ESG) standards. For example, we are unquestionably strict about the exclusion of child labour.
Finally, the total impact of the trade on both the environment and society should also be assessed. Based on this analysis, we then validate the qualification of a sustainable trade loan, and give incentives to the clients to make use of this financing to help them shift towards a more sustainable activity. Incentives can materialise through differentiated pricing, tenor, loan amount or specific quality of service.
Can your methodology be challenged?JL: The likelihood of being challenged is indeed always high. However, thanks to the extensive experience of our CSR and industrial engineers teams, we have strong expertise within the bank.
We have also surrounded ourselves with independent specialised companies and consulting firms to corroborate our findings and policies. On top of that, depending on the level of risk of a sector or geography, we are able to develop ad hoc partnerships with recognised third parties whose know-how is unconditionally recognised. For example, we sometimes partner with the IFC. We also work with The Forest Trust and other experts.
Finally, as a company with investors, we are also scrutinised and submitted to ESG ratings, and therefore quite at ease with the definition of high ethical standards.
What are the benefits for a client to opt for a sustainable offering? Isn't it more expensive?JL: There are several benefits for clients, but a prerequisite will be the implementation of proper governance, specific reporting, and sometimes even systems.
First, by controlling their supply chain, and specifically their suppliers, to ensure they do not participate in unethical flows, our clients reduce potentially associated reputation risks.
Next, it allows corporates to respond positively to now common expectations from their own clients to provide sustainable goods. This is notably a frequent request in the food industry, a trend that is driven by the end consumers.
Entire industries are being challenged and are potentially at risk due to environmental factors which trigger an overall conscience and call to action.
Lastly, some clients just want to be more responsible but, due to their size for instance, might not have the full capacity to do so on their own. Partnering with a financial institution, which benefits from the sectorial knowledge, the technical expertise and a deep network in sustainability, has proven to be one of the most efficient solutions to tackle this challenge.
This article was published in Global Trade Review in July 2018.