No escaping ESG requirements
Risk specialist Marsh recently hosted a seminar on ‘Commodities and the Sustainability Transition’ to review the specific challenges that those in the trading sphere must address to meet ESG expectations. They found that not only are commodity traders, who play an integral part in the supply chain as originators and sellers of raw materials, implementing ESG measures to respond to the evolving contract and regulatory landscape, they are also paying more attention to the ESG credentials of their supply chain partners.
During the seminar, speakers suggested the sustainable transition of commodities trading requires “interdisciplinary action, unlocking of finance for smaller players and transitional projects and, at times, a flexible and pragmatic approach”.
This was supported by the view that sustainability could be “a great catalyst for innovation”, present significant commercial opportunity and help future proof the industry.
Four main themes stemmed from the seminar: the need for an interdisciplinary approach; financing; partnership and collaboration; and practical actions. Taken together, these will help enable commodities trading to move to a more sustainable future, said Marsh.
Examining each strand in turn, the first – the need for an interdisciplinary approach – acknowledges that there is no standard definition of ESG terms, nor of what “good” looks like, although there are moves to create a standard taxonomy. There is, however, alignment that environmental, social, and governance aspects need to be addressed coherently across the three topics, rather than separately. The issues are interdependent and a single-minded focus in one area could have negative effects in another.
Speaking at the seminar, Suzanne Scatliffe, global sustainability director at AXA XL, said: “ESG is interconnected. Sometimes, there is a danger of thinking they are distinct components. If we think about climate change, which is probably the most prolific ‘E’ topic, actually that’s a social one as well.”
The second theme – financing the supply chain – explains that unlocking capital for small and medium-sized enterprises is going to be key in the transition. Marsh states that finance needs to be made available to all layers of the value chain, not just the larger players. It points to figures from the Carbon Disclosure Project that calculate that Scope 3 upstream carbon emissions (which result from activities of assets not owned or controlled by the reporting organisation) are on average 11.4 times higher in the supply chain than in operations themselves. “Therefore, companies can reduce their carbon footprint significantly by focusing on their supply chains,” said Marsh.
Access to finance will dictate how quickly physical supply chains can transform. N L N Swaroop, director of alternate and ESG distribution at HSBC, commented: “This is not just about trading patterns and human behaviour — it’s a fundamental change in the way goods are manufactured, the way they are consumed, and how businesses trade goods and services.”
The third strand – partnership and collaboration – highlights the value in working together towards common goals. Some of the more mature companies in shipping and logistics are supporting transformation throughout, rather than just helping themselves. Trafigura, head of corporate responsibility, James Nicholson, said the multinational commodity trader is investing in people on the ground, who are from local communities to help it understand how to navigate the transition.
He said it is concerning that some financiers and receivers are planning to rule out particular developing countries from their supply chain due to social and environmental concerns. To focus only on the environment element and ignoring societal changes will still have a great impact on communities.
But while partnership is to be welcomed, just as pressing is a need for data and greater transparency. As service providers, those in the commodity business need to provide information and assurances regarding their ESG credentials when required. “This is not only necessary to meet environmental targets but also to ensure the long-term sustainability of the supply chain,” said Marsh.
The fourth theme – time for practical actions – stresses that change needs to proceed in a “progressive manner”. “There needs to be a fine balance, so we do not get into another crisis while solving for one,” Swaroop said. “There needs to be a balance between the credit risk approach and the climate risk approach.”
The panellists suggested that rewarding good ESG behaviour could be an effective strategy. “For example, more nuanced restrictions on underwriting for carbon intensive industries could be appropriate to support companies who are making headway on their ESG transition.” Marsh reported. Also, philanthropy could be employed to act as a bridge to longer term financial solutions, while policies and regulations were deemed necessary.
Taking ESG in the round, Marsh sees the commercial world as facing the greatest challenge when it comes to measuring and meeting ESG requirements. Nick Robson, Marsh’s global head of Credit Specialties, concluded that it was now incumbent on the financial sector to transform “great discussions into practical actions”.
Source: Baltic Exchange