Sustainability in Trade Finance: Making a genuine difference

“It’s about finding a true purpose, which ultimately drives you through all the ups and downs of a career.”

With a 25-plus-year career in trade finance, former banker and now founder and CEO of fintech startup Halotrade, Shona Tatchell believes that no trade should be done in a way that isn’t sustainable. In this interview she outlines current sustainability-linked initiatives in trade finance, and why it’s a part of the industry that is ripe for change.

Q: The growth and importance of sustainability in finance is a relatively new concept. What has led to this awakening?

Tatchell: Green finance as such is not a new thing – it’s a wave that has been building in the financial sector for a long time. It started with some of the ‘green’ project finance-type deals, which I would say were probably done on the basis of banks looking for opportunities for new business, rather than necessarily being motivated by wanting to do something good for the planet. 

What’s really been driving this movement is the corporates: they’re looking to try to change the way in which they trade, source and produce, and this has been driving the demand for more sustainable trade. Banks have then come along behind the corporates and looked to see how they can help, and it’s now become much more of a modus operandi for banks – a way to help their clients and green their own businesses, because they want to be lending more responsibly. 

The asset management industry and the institutional investors, meanwhile, have been driven by shareholder pressure, and have been investing in businesses that are doing the right thing. This has also got banks’ attention: they’ve realised that that is moving a lot of capital, influence and power into this sector, that there must be a good opportunity there, and so they’ve followed suit. 

There has traditionally been more of a lens around sustainability in long-term export finance deals. This is where the export credit agencies and development banks have been very focused – particularly the International Finance Corporation (IFC), European Bank for Reconstruction and Development (EBRD) and Asian Development Bank (ADB) – they’re all trying to drive the green agenda.

In the broader finance sector, a few dedicated green banks have been established – mostly on a country and regional basis. In all honesty, I don’t think the global banks are there yet. They’re trying, but they are still suffering the repercussions of the financial crisis, literally 10 years later, and it’s quite difficult to suddenly take a leap of faith and do something untried and untested.

Nevertheless, there are some banks that are committed to sustainability and are allocating resources to developing it. 

For example, Barclays has its Green Banking Council, which has developed and launched many green products. BNP Paribas is also very committed. It is in the process of putting all of its senior managers through a Cambridge Institute for Sustainability Leadership (CISL) programme that combines sustainable finance and innovation. Lloyds Bank is doing the same for its senior managers. Elsewhere, Rabobank is funding the Farmfit Fund, being led by the IDH Sustainable Trade Initiative, aimed at boosting access to finance for smallholder farmers. So there are pockets of activity.

The divesting of fossil-fuel linked assets is still a big area for banks. I think many of them are stuck halfway on that: they want to come out of it, but don’t think they can yet. 

Q: What does ‘responsible lending’ actually mean, and what are some of the challenges around it?

Tatchell: Exactly, and who decides this? My belief has always been that it’s up to the corporates to decide – because it’s their trade business. And a bank should decide if it believes in the way that a corporate is doing its business, and making a decision at the client level. So, having investigated – through an enhanced due diligence process – the way that a corporate does business, does a bank decide to take that corporate on as a client, or do they screen everything on a transactional basis? 

If so, you would then need the tools to be able to analyse every single transaction, and to decide whose criteria you are going to use to make those decisions. 

Everyone works to different sustainability standards, and there are so many certification bodies, it’s pretty confusing for anyone to decide what is right and what is wrong and which is the best. Is there really a gold standard? The banks at this point really don’t know what to do. 

For example, some corporates are interested in Rain Forest Alliance certification, and the long list of checks that have to be complied with for that – and banks can get behind that. But then, what are the real differences between this and a Fairtrade certification, for example? And who’s going to decide which one banks should choose to align with? 

Where the market is right now is that everybody knows what they’d like to do: banks would like to be able to say they’ll give preferential trade finance and/or pricing terms to those companies that have got the right certificate, but they’re struggling to decide what the right certificates are. And currently prudential capital regulations don’t make any allowances for green finance, so the capital doesn’t change and so any preferential pricing becomes a subsidy, which in itself is not sustainable – it only lasts until the bank changes strategy or management.

Then you also have the whole issue around the lack of trust by the NGO sector in the auditing process. At the core of this is the fact that it’s the suppliers who pay for the audits in order to be certified. So, what is their incentive to be completely honest and transparent when, if they don’t pass the audit, they can’t sell to that client? Keeping in mind that – especially if selling to a larger brand – these suppliers are continuously being squeezed on margin. In a dishonest environment they may be tempted to bribe the auditor. It really needs to be the buyer who pays for that audit process. 

The whole system today is pretty nascent and opaque. You don’t yet have data that you can trust, and there’s a real need to be able to link trustworthy, transparent data with incentive systems to properly drive the change that is needed in the way products are produced. 

Q: What are some of the sustainability-related trade finance products and initiatives that have evolved over the last few years? 

Tatchell: The Cambridge Institute for Sustainability Leadership has done some really good work in terms of laying the foundations of this whole idea of linking the achievement of sustainability standards to preferential pricing. It was involved with the launch of the sustainable shipment letter of credit (SSLC), an approach that, with the support of the IFC, enables banks to reduce the cost of exporting certified sustainably sourced commodities. 

Unfortunately it was quite a flawed model, because it just consisted of a stamp on a bill of lading, which is easy to forge.

But it was the right idea. As technology has evolved, and we have been able to move away from paper and make use of digital certificates, we have really been able to implement these sorts of standards and the rigour that you need around all of this. 

The digitisation of trade is enabling more transparency and better ways to verify data in a trusted way. Decentralised systems are also allowing multiple parties to validate and verify each other’s data – so we’re no longer relying on one single entity to do so. We’re also now able to view transactions in real time, so decision making can happen more quickly. And, because the data is arriving in a digital format, you can do something with it; you can build applications around it to allow automated decision making. For example, does the transaction meeting certain criteria, and if so, can lending happen?  

More broadly, there have been a few interesting facilities in the supply chain finance space in the last few years. About four years ago, Levi’s – in conjunction with the IFC – started offering a financial incentive to suppliers in Bangladesh to meet environmental, labour and safety standards. 

A year later the IFC replicated that programme with BNP Paribas for Puma’s suppliers. It saw the bank discount the supplier’s invoices – based on Puma’s own credit standing, and the rating of its suppliers in terms of their adherence to social and environmental standards through an auditing process. 

In the commodity finance space, there have been a few facilities for commodity traders. Food and agribusiness company Olam last year secured a sustainability-linked revolving credit facility with 15 banks, the pricing of which is reduced if Olam itself meets certain performance criteria. 

More recently China’s Cofco International closed a deal where if it meets certain sustainability targets, including for example the sustainable sourcing of soybeans in Brazil, it will get interest discounts that will then be reinvested in further improving its performance across sustainable supply, health and safety, and so on. 

The International Chamber of Commerce has been doing some important work in this space. Earlier this year the ICC Sustainable Trade Finance Working Group launched a questionnaire to help guide banks on the implementation of sustainable policy and standards as well as promote industry-wide consensus on the definition of sustainable trade finance. 

Q: What is Halotrade doing to make trade more sustainable?

Tatchell: Halotrade links the tracking of goods from production to destination to the financing of the transactions that support them. On the back of this data – the physical traceability of products, the identity of producers and the trade documents for the transactions, verified on the blockchain – Halotrade then facilitates access to finance which is linked to sustainable business practices.

We have built algorithms that are essentially decision-making processes – deciding whether a trade gets financed under preferential terms – that are run autonomously in a decentralised way.

We work with the suppliers, the buyers and the banks. Our system links those three parties in a way that they’re not currently linked other than through lots of manual processes. 

But we’re not a platform, we are an application that sits on top of the physical and financial flows – we take that information, produce data that’s useful and turn it into a decision.

In June we completed a pilot in partnership with Unilever, Sainsbury’s, the Department for International Development, Cambridge University, a number of banks and startups Provenance (a blockchain tracking platform) and Meridia (which provides a land documentation solution). It’s called Project Trado, and it’s about sustainable supply chain financing of the Malawian tea supply chain, which we then replicated for Brazilian coffee and tea in Rwanda. There’s going to be an open paper on the project published by the University of Cambridge in September, which will show what we did, how we architected the system and how it can be replicated. 

As I mentioned before, the business models around sustainable finance need to change. With Halo, what I am really trying to do is to demonstrate that it is possible to flip that whole situation around and ensure that the profit isn’t all accumulating in one place, but rather more fairly shared back through the supply chain, which then encourages and incentivises suppliers to be able to produce more sustainably.

Q: How has your career in trade helped get you to where you are today, as the CEO and founder of your own company? 

Tatchell: I’ve been in trade for a very long time. I love it, and have covered all aspects of it: origination, distribution, multilateral corporations, SMEs, financial institutions, non-bank financial institutions –  the whole lot.

What I’m doing now really brings together all the strands of my career.

I’ve always been involved in emerging markets – that’s where my deep interest is, maybe because I was born in an emerging market [St. Lucia in the West Indies].  

And I’ve always been interested in technology. Case in point, I tried to build a digital trade platform in 1996 using floppy disks! This was when I was working at Chase in Singapore – and I think it evolved into a means for companies to present their documents digitally.

In terms of the ‘green’ angle, I’ve been a member of Greenpeace since I was 22. 

A supportive environment is important and I got the idea for Halotrade in 2015 while working at Barclays as Head of Trade Finance Innovation. One day on my way to work I heard about the Modern Slavery Act and how companies would now have to provide transparency statements about their supply chains. I realised that a technology solution, using the blockchain for trust, transparency and automation, combined with trade finance, might be part of the solution. I entered an internal intrapreneurship competition in Barclays, won funding to develop a prototype of the idea and then, with the help of the bank, spun out the company so that we could join the Malawian tea project as an independent fintech startup. The rest is history!

Q: What is the most exciting and rewarding aspect of your work in trade finance?

Tatchell: The work that I’m doing with Halotrade now is where I feel that we can make a difference. We had a meeting recently with a Brazilian coffee co-operative who we’ve been working with. We were talking about the money that we’ve been able to generate out of the system, and he told us that they have already decided how they’re going to allocate those funds – they’re going to turn a local disused sports centre into an education centre for all of the homeless kids in the community, so that they can be educated and become good farmers. 

It’s our system efficiencies that are creating these savings. When you hear stories like that you realise you are genuinely making a difference to people’s lives through trade finance. 

It’s about finding a true purpose, which ultimately drives you through all the ups and downs of a career. For me, trade has always been very important, but when you add in that extra element of why you’re doing it, and the fact that even if you just do one transaction that enables someone to produce more sustainably, and you get closer to helping a smallholder farmer, or ensuring that deforestation isn’t happening, or that biodiversity is being maintained, or that labour is not being exploited, this is what makes the difference. Doesn’t everyone want to do that?

To me, the very exciting thing about it is that we’re just at the start of this journey. Although people have been looking at sustainability for 30-odd years, it’s only really now that it’s taking off. You’re getting this convergence of everything at the same time: pressure around climate change and the Extinction Rebellion movement really bringing it to people’s attention in a way nobody else has before, as well as the moves by the UN in bringing in the Sustainable Development Goals as a framework for doing business, and the City of London setting up the Green Finance Institute on the same day that the UK government published its green finance strategy. 

Doing one thing like banning single-use plastics, or shining a light on the issue, can have such a massive effect on the way people live their lives and the way businesses can be built around it. Why can’t the trade business be built around this? In my opinion there should be no trade that isn’t sustainable trade. 

Q: What advice do you have for young professionals interested in getting involved in sustainability initiatives and green finance? 

Tatchell: There’s a huge world of people out there with incredible knowledge, and who are looking to share that knowledge in order to try to drive forward their objectives. One of the big issues is that all these people haven’t been able to understand each other enough, so it’s not yet come together in a way that can really drive the change that’s needed – not yet.

It’s more than about education, and it should never be just about CSR being a tick box activity. It’s about understanding the drivers around sustainability, that it makes good business sense to want a business to produce responsibly, not to exploit the environment and to be there for the long term. We should be demonstrating the commercial business case for sustainability. It’s about understanding that you can do good and make money at the same time. 

For a young person coming in to the industry, it has to start with understanding what it’s all about. Because then they will come up with much better ideas than the ones I have had! Everybody has ideas all the time and it’s about turning those ideas into something meaningful and bringing them into mainstream business. 

My view on all of this is you can be an innovator and you can be out there – but I don’t want to be the lonely one trying to do something out here as the pioneer all by myself. Working with Cambridge and Provenance, what we are trying to do is build an ecosystem of many partners, and those partners are going to be other tech companies, NGOs, banks, corporates, governments, funds, multilaterals – everyone. There’s such a need for everyone to cooperate and collaborate. And above all it’s going to need real talent and energy. 

Young people have grown up being educated around green issues in a way that certainly my generation wasn’t. We didn’t learn this stuff at school, but now it’s second nature to young people, which is why they can come in and really make the change happen that they want to see. It is their generation who are going to be the ones that solve this.