Recent Developments:
We have seen an increase in the number of trade finance instruments being labelled by Banks as Green including different types of guarantees ie. performance guarantees, Letters of Credit (LC’s) and others.
Whilst we welcome innovation in the market, we believe that only certain types of guarantees can be green and in the main they enable and support green activities but are largely indirect supports.
We do believe that guarantees can have a sustainability link connected to them and that this is a more credible approach to ensuring that Guarantees have a place in Sustainable Finance.
In this regard the Sustainability Linked Loan Principles also explicitly state their application extends to contingent instruments (which we read as guarantees).
Characteristics to be Green:
Overall, as per Green Loan/Bond Principles key characteristics are:
- Use of proceeds or monies
- Ensuring the monies/funding is applied to eligible assets/expenditures; and
- Contingent instruments are not covered by these principles as they are about assets and expenditures
Type of Guarantees
In the below we explain the key rationale for the various types of guarantees not being Green with Letters of Credit as an exception:
- Bid Bond/Guarantee: Support bidding for a contract, if called monies can go anywhere;
- Customs Bond/Guarantee: To support payment of fees, if instrument called monies dont go to a green asset;
- Rental Guarantee: Even if renting in a green building the guarantees is to support payment (or to cover non-payment). The beneficiary of the guarantees can use the money for anything if called;
- Performance/Warranty Bond/Guarantee: Similar to the above, really to support the non-performance of a specific contractual item and if called the money doesn’t necessarily go to a green asset or expenditure;
- Stand By Letter of Credit: To support a loan or else support imports– more general support and really a credit enhancement with no direct funding going to green assets or expenditures; and
- Letter of Credit (LC’s): This is the one exception, while LC’s are contingent, once documents are presented by the beneficiary the LC’s is funded and payment made under this to the exporter, therefore there is use of proceeds for a specific item such as wind turbine, wind turbine blade etc. This can be controlled and is very specific, therefore can be called Green in our view.
Future Developments
- Only selective instruments being labelled as green ie. LC’s.
- We see strong rationale and scope for long dated guarantees and guarantee lines being linked to sustainability outcomes.
- Different types of trade instruments will be labelled green and see Sustainability links.
- This will do doubt be an innovative area to watch.
- We will see more instruments that enable green activities to become more popular.
