Trading firms feel greener financing heat

Banks are starting to play an important role in steering the world's largest independent trading firms towards an accelerated adoption of greener business models — a move that could increase the pressure on traders to cut their exposure to oil.

Activist investors have engaged with publicly listed oil and gas companies, such as Shell and Total, in drawing up their ambitions to sharply reduce emissions. For BP, this has translated into a headline-grabbing business plan to cut upstream output by 40pc and increase low-carbon investment tenfold by 2030. But independent trading firms Mercuria, Gunvor, Trafigura and Vitol are privately held, leaving it down to market dynamics and the banks that they work with to shape their energy transition thinking.

Banks themselves are under pressure to apply environmental, social and governance (ESG) principles to their transactions "in a way that resonates with our stakeholders, which includes our employers, our investor groups, our customers", US bank Citi's global head of commodity and energy trade sales and client management, Christine McWilliams, told the FT Commodities Global Summit. "There will continue to be some unique financing opportunities designed to encourage more of an environmental or social viewpoint."

Trading firms are already investing in renewables as they plan further growth in this area. And they insist they have not been pressured by banks on green metrics so far. "We have a constructive dialogue with our banks," Trafigura chief financial officer Christophe Salmon says. Trafigura is working with its banks to define some sustainability-linked criteria that will affect the cost of borrowing, he says. Mercuria chief financial officer Guillaume Vermersch says "it is a very constructive learning curve we are going through, to make sure we do not have a ‘one size fits all' type of metrics and measurements".

Gunvor, which has launched sustainability-linked borrowing facilities in the past two years and stopped trading coal, says that banks now have "pretty high expectations" regarding capital allocation. "If you have a strong business model with clear targets around the energy transition, your access to capital is increased and pricing can also be slightly decreased," chief financial officer Muriel Schwab says.

French bank Natixis has introduced a "green rating factor" in deciding who to lend to. "We wanted to put together a very operational tool, to steer our capital allocation towards greener assets," global head of green and sustainable finance Orith Azoulay says. And at Japan's Sumitomo Mitsui Banking, managing director and global head of structured trade and commodity finance Nigel Scott talks about working with trading firms that have been "agilely changing their business model".

Robust or bust

With some banks pulling out of or reducing their exposure to commodities, it is difficult for trading firms to ignore the ESG push by those that remain. But the leading trading companies say they are actually benefiting from "the flight to quality", which intensified after a string of Singapore-based trading companies collapsed this year — including one of the biggest firms, Hin Leong — leaving banks facing hundreds of millions of dollars in losses.

A lot of the banks' focus is now on transparency and corporate governance, which are usually "more established and up and running" at larger firms, Natixis' Azoulay says. Natixis has "selectively reduced" its exposure to oil, but with "reinforced risk control" and a decision to keep working with clients that it considers "robust", she says. Citi's McWilliams takes a similar view, saying that the greater client transparency will build more confidence. The bank has had "some robust conversations with our clients", she adds.

By Konstanton Rozhnov