Marc Naidoo Pens Article on How Trade Finance Instruments Can Help Realize ESG Value

McGuireWoods London debt finance partner Marc Naidoo wrote an article for Finance Digest that pinpoints trade finance as the best medium for leveraging environmental, social and governance (ESG) ideals for better accountability and socially conscious value.

In the May 16, 2022, article, titled “Trade Finance: The Small Brush to Paint the Big Picture,” Naidoo noted that the ESG stamp of approval tends only to be applied to a business as a whole, rather than specific elements across operations. But even businesses that produce a “harmful” or “unsustainable” end product, like fossil fuels, can engage in ESG-friendly practices throughout their supply chains, Naidoo explained.

“The ever-present conundrum is the approach to finance where there is an element of unsustainability in the underlying product or business. My view is that by mitigating harmful actions across a structure, the less desirable ESG outcomes of a business’ operations may be mitigated as well,” Naidoo wrote.

He noted, “Trade finance is a method of working with these businesses to create value across a supply chain as well as accountability. By introducing ESG financing terms and technology into the supply chain, businesses are incentivised to ‘clean up’ their respective supply chains, which would mitigate ESG concerns on the entire structure, as opposed to a ring-fenced solution which isolates one component of a supply chain and disregards the rest.”

Several trade finance commercial terms are important in providing true value to the end consumer, he wrote:

• the inclusion of technology-related terms within financial instruments as the world moves to a digitized method of information validation and recording, especially through blockchain technology;
• inclusion of more robust due diligence measures within a trade finance instrument as they relate to the borrower’s business and counterparties; and 
• allowing borrowers to do the right thing while still conducting business in less fashionable sectors. 

“ESG is not binary, and doing the perceived ‘wrong’ thing should not preclude one from also doing the ‘right’ thing,” wrote Naidoo, a member of the executive committee leading McGuireWoods’ ESG task force.

He added that trade finance is the perfect landscape to create value and understanding, “as no other sector within finance offers more exposure to a supply chain and the nuts and bolts of how end consumers interact with goods. With trade finance instruments acting as the lens under which the finer details can be monitored and mitigated, it allows the sustainability landscape to start painting the bigger picture.”