As COP26 continues and climate change initiatives fill the headlines, it is becoming increasingly apparent that green financing is essential to unlocking a sustainable economy and future. But, for progress to be made, it is not just governmental regulations that need to be put in place. Clear sustainability standards must be laid out, and companies from all industries must report on their ESG position and environmental impact going forwards.
“A sustainable financial system is… one that creates, values, and transacts financial assets in ways that shape real wealth to serve the long-term needs of an inclusive, environmentally sustainable economy.” - UNEP Inquiry into the Design of a Sustainable Financial System.
What is Green Financing?
Green finance, also referred to as sustainable finance, is the term used to describe financial investments motivated by environmental social governance (ESG). Essentially, it is a strategic financial activity that has been created to ensure a better, more responsible environmental or social outcome.
Green financing incorporates a wide range of industries and services, from banking, investment, and insurance, to trade financing, transportation, and the maritime industry. As a result, ESG initiatives require the participation of a multitude of industry players to be successful.
Building a Green Economy with Maritime trade supply chain
Global economies are urging players within the maritime supply chain to implement ESG initiatives and monitoring. The expected Sustainable Finance Disclosure Regulation (SFDR), due to come into effect early next year, will require financial market participants to perform sustainability risk screening checks before issuing finance. The objective is to identify unsustainable areas across the supply chain, and for this practice to be included in supplier due diligence.
Transparency, open communication, and clear expectations are key to managing supply chain sustainability goals, and to collecting and reporting sustainability metrics. For example, a ship applying for financing must continuously measure its emissions to ensure that it remains under the emissions intensity threshold throughout a voyage, as well as its operational life. Similarly, the financier must ensure that it is reporting those measurements, to determine the emissions output of its investments and supply chain, to ultimately understand the climate impact of itself.
What is ESG Reporting?
ESG reporting, or ESG disclosure, refers to the declaration of data relating to an organisation’s environmental, social, and governance performance. Financial institutions can use such data to make environmentally and socially-conscious decisions regarding their supply chain, or those they invest in or finance. With emerging regulations, financial institutions will soon be required to use ESG reporting to gain an insight on whether a prospect will positively or negatively impact their sustainability targets.
Pole Star’s streamlined digital compliance solution, PurpleTRAC, offers a 360 degree view of sanctions and sustainability risk relating to global maritime trade. By partnering with Vasanda and CarbonChain to integrate environmental impact and vessel emissions data, the solution covers each element of ESG. The Environmental pillar is met through CarbonChain’s greenhouse gas emissions data on over 130,000 vessels; the Social aspect is met with Vasanda’s data on deforestation, biodiversity threats, water scarcity and productivity, and labour exploitation;the final Governance element is met using PurpleTRAC’s supply chain screening and compliance tool.
Learn more about the complete end-to-end solution here.
The Need for ESG Reporting in Trade Finance
Trade finance plays a crucial role in ensuring that companies position sustainability at the core of their business. Financial institutions must ensure their sustainability risk due diligence is based on the guidance offered by the ICC Banking Commission’s Working Group on Sustainable Trade Finance to stay ahead of emerging regulations. Environmental regulations are expected to increase dramatically over the next 2 years, with stringent guidelines on reaching sustainable goals and ESG reporting likely to become mandated. For financial institutions to remain compliant, implementing best practice processes now, will save them time and money going forwards.
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